M.CT. MUTHIAH, HUF v. INCOME TAX OFFICER
[Citation -1984-LL-0427-2]

Citation 1984-LL-0427-2
Appellant Name M.CT. MUTHIAH, HUF
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 27/04/1984
Assessment Year 1978-79
Judgment View Judgment
Keyword Tags receipts by way of stake money • unexplained investment • computation of income • winnings from betting • income from business • cost of acquisition • specific provision • draft assessment • movable property • accrual basis • capital asset • receipt basis • sale of horse • capital gain • other source • personal use • lease income • karta
Bot Summary: Under the scheme of the Act, every income has to be taxed, if not under any one of the heads, at least under the residuary head of 'Income from other sources'. Once the income is assessed under the head 'Income from other sources' it would not be eligible for deduction under s. 80JJ apart from the objection of the Revenue that the raising of race horses would not amount to the business of raising live- stock. Once the activities resulted in regular income taxable under the head 'Income from other sources' every income that arose by way of lease or sale of horse, etc. With reference to the inclusion of the wife's income it was a matter of verification and if proved that it actually belonged to the wife, the amount in question should be left out of the computation of the income. Under s. 10 of the Act, any income falling within any of the clauses therein shall not be included in the total income. Under s. 14 of the Act, all incomes shall be classified under several heads of income and under s. 56 of the Act income of every kind which is not to be excluded from the total income shall be chargeable to income-tax under the head 'Income from other sources'. In the circumstances, we are of the opinion that the income to be computed under the head 'Income arising from horse racing' has to be computed only with reference to the expenditure incurred for maintaining the horses and the receipts by way of stake money and the winnings from bettings on the horses.


This appeal is directed against sustention of addition of Rs. 1,51,150 as income of assessee from 'other sources'. assessee is HUF consisting of Shri M. Ct. Muthiah and his wife Mrs. Muthiah. For previous year ended on 31st March, 1978 corresponding to asst. yr. 1978-79, assessee filed return on 28th July, 1978 declaring total income of Rs. 25,480. assessee also claimed loss of Rs. 19,870 under head 'Winnings from horse races' to be computed separately and carried forward. While considering that return, ITO made draft assessment order on 27th March, 1981 by which he proposed that addition should be made for unexplained investment of Rs. 1,53,250 for purchase of horses Well-connected for Rs. 35,000 and More Over for Rs. 92,500 and expenditure in maintenance of horses leading to loss of Rs. 25,750. assessee gave his objections dt. 14th April, 1981 annexing receipt and expenditure statement in respect of his horses' racing activities and also explaining sources of investment referred to by ITO. By letter dt. 18th April, 1981 ITO required further particulars and assessee replied giving such information by his letter dt. 11th July, 1981. After hearing assessee, IAC, to whom matter was referred under s. 144B of IT Act, 1961 ('the Act'), gave his directions by order dt. 25th Sept., 1981. By that order, he stated that explanation given by assessee with reference to sources of funds for investment in purchase of horses and maintenance of horses was reported by ITO to have been fully explained. However, he further noted that activities of assessee with relation to maintenance of race horses and winnings therefrom could be fully scrutinised only at that stage and he came to conclusion that such activities amounted to regular source of income. He overruled objection of assessee that it was only hobby and directed that income from that source computed at Rs. 1,22,500 as well as excess of income over expenditure in statement of accounts relating to racing activities given by assessee totalling Rs. 1,51,152 should be added to total income of assessee. On appeal, CIT(A) confirmed addition except with direction to verify figures and allow relief in respect of Rs. 46,125, which was double addition. In further appeal before us, assessee has taken preliminary objection relating to jurisdiction of IAC to give direction regarding assessment of income from horse racing as source when no such proposal h s been made in draft assessment order. Reliance was placed on decisions of Bombay Bench of Tribunal in case of PQR Co. [IT Appeal No. 3321 (Bom) of 1977-78, dt. 30th April, 1981) as well as Cochin Bench in case or N. Krishnan [IT Appeal Nos. 741 and 746 (Coch) of 1977- 78, dt. 3rd Feb., 1981). It was submitted that when ITO had only proposed addition for unexplained investment and IAC found that investment has been completely explained, there was nothing more that could be done by CIT(A) and no direction could be given for adding any amount to total income of assessee. On other hand, it was pointed out on behalf of Revenue that subject-matter was not at all different from what was proposed by ITO. According to Revenue, ITO had proposed to have funds utilised for meeting expenses as income of assessee in absence of any explanation. When explanation showed that funds were in fact income of assessee from source, it was only question whether it was to b e assessed as income from undisclosed sources or as income from known source and proposal to tax that fund remained unchanged. We agree with this contention of Revenue for we find that what was controversy was only nature of funds utilised by assessee for meeting expenses as to whether it was to be treated as income from 'undisclosed sources' or knowing nature of that fund whether it should be assessable to tax. Since amount in question, after nature of that amount was revealed, still remained amount in respect of which taxability was in dispute, it cannot be said that IAC had given directions in respect of any amount which was not proposed to be taxed by ITO. We, therefore, overrule this preliminary objection. On merits of appeal, contentions put forward on behalf of assessee were as follows: activities of purchasing, raising, grooming and running horses in races constituted hobby of assessee. activities of racing or sale of horses were incidental to hobby and any receipts arising from these hobbies were only incidental to hobby which was only for pleasure and not for making any money. Such receipts could never be taxed as income. It was only by definition that winnings from such activities alone were treated to be income and even such income would be exempt if it was casual and non-recurring. Even assuming that winnings were to be taxed, scope of expression 'winnings' could not include income by way of lease or sale of horses which was outside ambit of definition of 'income'. Even assuming that entire receipts from activities relating to race horses were to be taxed, there were inaccuracies in computation of such income because lease income should be taxed only on accrual basis and not on receipt basis and income relatable to wife of Karta had to be excluded. In case entire activity was not considered as hobby, it should be considered as business in which case computation had to be completely revised and assessee would also be entitled to deduction under s. 80JJ of Act with reference to breeding of horses which was business of raising livestock. Besides, capital gains arising from sale of foals could not be taxed because they were personal effects and further there was no cost attributable to acquisition of foals which assessee obtained only by natural causes of mares giving birth to foals. For all these reasons, it was submitted that either entire addition should be deleted or in case it was to be assessed, entire computation had to be reworked. On other hand, contentions on behalf of Revenue were as follows: activities of assessee constituted business because activities were dependent on well organised race clubs and associations and must be regarded as commercial venture of assessee. Even if activities were considered to be hobby, there was nothing in law to state that receipts arising from hobby were not in nature of income. Under scheme of Act, every income has to be taxed, if not under any one of heads, at least under residuary head of 'Income from other sources'. Once income is assessed under head 'Income from other sources' it would not be eligible for deduction under s. 80JJ apart from objection of Revenue that raising of race horses would not amount to business of raising live- stock. Once activities resulted in regular income taxable under head 'Income from other sources' every income that arose by way of lease or sale of horse, etc., has also to be included. Even foals though acquired by birth could be capable of ascertainment of cost of acquisition and, hence, just as in case of bonus shares, capital gains arising from sale of such foals would also be taxable. They cannot be regarded as personal effects of HUF either. With reference to inclusion of wife's income, however, it was matter of verification and if proved that it actually belonged to wife, amount in question should be left out of computation of income. On consideration of rival submissions, we are of opinion that crux of question is whether receipts of assessee from activities relating to maintenance of race horses and participation in horse races amounted to income or not. As we have noted at outset, all activities of assessee were inter-connected. main activity was betting in horse races for which purpose assessee has maintained horses. main receipts were winnings from bets as well as stake money being prizes received on winning horses. incidental receipts were by way of lease of race horses as well as capital gains arising by sale of horses. assessee was man well able to afford pleasure both of keeping race horses as well as betting on them. It has been judicially noticed that men of means take pride in possessing race horses and participating in horse racing events. Such activities can only be regarded as hobby. receipts arising from pursuit of such hobby as from any other hobby cannot be regarded as income. classic definition of 'income' is that it is periodical monetary return coming in with some sort of regularity from definite source whose object is production or definite return. Obviously, hobby cannot be source with object of any return because carrying on of hobby is with object of pleasure and not with object of making money. philatelist collects stamps for his own entertainment unlike stamp dealer who collects them for profit. gentleman may maintain garden for pleasure while florist may do so for profit. In pursuit of hobby, it is possible that philatelist comes across rare specimen which could be converted into money to enable him to enlarge his collection but such receipt would not be income because it was not object of pursuit of hobby. Similarly, person may write stories as pastime and it yields pleasure only when it is published. publication may result in some receipt of money but as when it is published. publication may result in some receipt of money but as long as story is not written for purpose of obtaining receipt it remains incidental receipt from pursuit of hobby and cannot at all be regarded as income. On same analogy, when well to-do person maintains race horses and participates in racing events, receipts are incidental to hobby and cannot be regarded as income at all. It is perhaps because of this fundamental position that Act was amended by defining 'income' in s. 2(24)(ix) of Act to include any winnings from lotteries, crossword puzzles, races including horse races, card-games and other games of any sort or from gambling or betting of any form or nature whatsoever. It is clear that, but for this definition, winnings from races which are receipts from pursuit of hobby could not be regarded as income at all. It would, of course, have been different matter if activities were conducted as business proposition. Whether activities of assessee were conducted as business is question of fact and depends upon circumstances surrounding activities. fact that it resulted in certain receipts or fact that he had utilised well organised race clubs or commercial methods to pursue hobby would not convert it into business. It is not case of Revenue that these activities of assessee constituted his means of livelihood and there is nothing on record to suggest nor is there any finding by authorities below that these activities were carried on by assessee as business. In fact, receipts from these activities were never attempted to be assessed under head 'Profits and gains of business or profession'. Under s. 10 of Act, any income falling within any of clauses therein shall not be included in total income. Clause (3) refers to any receipts which are of casual and non-recurring nature, not being winnings from lotteries provided that it shall not apply to receipts arising from business or exercise of profession or occupation. Under s. 2(36) 'profession' includes vocation. It is clear from facts of case that assessee has not carried on these activities in exercise of profession, occupation or vocation because there is no material to indicate that object of carrying on these activities was for purpose of earning income. We are then left with main portion of cl. (3) of s. 10 which exempts income of nature of casual and non-recurring receipts other than winnings from lotteries. Before we come to scope of expression 'winnings from lotteries', we may also rule out possibility of receipts of assessee being treated as 'income from other sources'. Under s. 14 of Act, all incomes shall be classified under several heads of income and under s. 56 of Act income of every kind which is not to be excluded from total income shall be chargeable to income-tax under head 'Income from other sources'. We cannot forget that these sections can apply only if receipt in question is income. If receipt cannot be regarded as income at all, then, it could not be taxed under head 'Income from other sources' merely because it is not taxable under head 'Profits and gains of business or profession'. We are, therefore, of considered view that receipts of assessee have to be considered taxable only to extent that they fall within scope of expression 'winnings from lotteries' which deems such receipts to be income. provisions of s. 74A of Act explains scope of expression 'winnings from lotteries'. That section states that any loss arising as result of computation made with respect to winnings from lotteries which has to be assessed as income from other sources cannot be set off against income from any other sources or income from any other heads. However, under sub-s. (3), loss arising from running of race horses may be carried forward and set off against income from same source in subsequent assessment year. Explanation states that amount of loss incurred in activity of owning and maintaining race horses means difference between expenditure incurred for maintaining race horses and receipts by way of stake money which means prize money received on winning horses. These provisions indicate that maintenance of race horses and running them in horse races is confined to earning of stake money and dissociated from winnings from bets placed in horse races. Therefore, for purpose of taxability, expenditure incurred for maintaining race horses can be set off only against receipts of stake money. In absence of any specific provision in Act, every receipts by way of leasing of race horses or by way of capital gain arising from sale of horses cannot enter into computation of income from such source. We have to apply well known canon that there is no room or any intendment in taxation and receipts cannot be charged to tax unless charging section applies expressly or by necessary implication to such receipts. More so when they are deemed to be taxable and would otherwise cannot even be considered to be income since they are only receipts arising from pursuit of hobby. Though activities of assessee are inter-related for purpose of taxability, we are required to isolate expenditure on maintenance and set it off against stake money because charge falls only on stake money. Similarly, we have to isolate winnings from betting on race horses. Though s. 74A provides that loss from any source shall not be set off against income from any other source specified in sub-s. (2), winnings from race horses happens to fall within cl. (c), i.e., 'race including horse races', because cl. (f) refers to 'gambling or betting of any form or nature whatsoever not falling under any of other clauses'. But for this classification, even winnings from race horses may have to be separated from stake money. However, wording of s. 74A being what it is, winnings from betting in races and stake money are to be assessed as income after setting off expenditure incurred for maintaining horses. We now come to ancillary question whether expenditure incurred on maintenance of horses should be determined only after setting off income by way of leasing of horses and capital gains arising from sale of horses which would normally be position if activities were carried on as business proposition. But since activities are not carried on in such manner and becomes taxable because of deeming provisions of Act, we are of considered opinion that computation of income has to follow provisions of Act and cannot follow any normal commercial method of accountancy. Hence, income by way of leasing of horses or by way of capital gains from sale of horses should not go to reduce expenditure on maintenance of horses which is to be set off against stake money and winnings from bettings on horses. It must be remembered that but for these provisions on Act, lease income from horses or capital gains arising from sale of horses would not be considered income at all since they arise from pursuit of hobby and not from any source of income. It may be recalled that even Finance Minister's Budget Speech for 1972-73 (1972) 83 ITR (St) 208 observed that proposal was only to withdraw exemption in respect of casual and non-recurring income in order to remove any temptation that people may feel for neglecting their regular duties in favour of any casual or ephemeral or imaginary pastime. This also indicates that it was not intention to tax receipts incidental to pursuit of hobby which was never viewed as income at all but object, was only to tax casual income from betting on horses. In this view, it is unnecessary to consider whether assessee would be entitled to deduction under s. 80JJ in computing income from business of livestock since these receipts are not being assessed as income from business. It is also unnecessary to consider whether horses could be considered to be personal effects so as not to be treated as capital asset for purpose of capital gains and whether such capital gains would not be taxable because foals which were sold were bounty of nature and did not have any cost of acquisition. But if it comes to question whether independent of provisions of s. 74A, capital gains arising from sale of horses were to be assessed under s. 45 of Act, our answer should be in favour of assessee because horses were only personal effects and could not be considered as capital assets at all. authorities below proceeded as if HUF is artificial entity which cannot have personal effect. But that view ignores fact that it is only body of human beings and in any event definition of 'capital asset' in s. 2(14) excludes personal effects, that is to say, movable property held for personal use by assessee or any member of his family depending on him. Surely, every member of HUF is dependent upon HUF and assets held for pursuit of hobby cannot but be regarded as personal effect. In circumstances, we are of opinion that income to be computed under head 'Income arising from horse racing' has to be computed only with reference to expenditure incurred for maintaining horses and receipts by way of stake money and winnings from bettings on horses. We, therefore, set aside orders or authorities below and direct ITO to recompute income taxable under this source accordingly. In result, appeal is treated as allowed. *** M.CT. MUTHIAH, HUF v. INCOME TAX OFFICER
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