1. As required by the High Court of Judicature at Bombay by their order dated 20th March, 1961, in Income-tax Application No. 22 of 1959, we hereby draw up an agreed statement of the case and refer it to the High Court under section 66(2) of the Indian Income-tax Act, 1922, with reference to the following questions of law :
'1. Whether the Tribunal erred in law and/or acted without any evidence or contrary to the materials on record, in holding that in running the club house and the kiosks, the applicant was not carrying on a business activity
2. Whether the loss sustained by the applicant in running the said club house and the kiosks, and the depreciation on the fixed assets of the club house and the kiosks, were allowable while computing the applicant's profits from the business of running the race course
3. If the answer to the above question is in the negative, whether the said loss and depreciation could be set off or adjusted the said profits under section 10 of Income-tax Act, as loss and depreciation of a different business ?'
2. The assessee is a limited company incorporated in 1926 under the Indian Companies Act, 1913. The assessments under reference are excess profits tax assessments for the chargeable accounting period ended March 31, 1946, and income-tax assessments for the year 1948-49 to 1952-53 (both inclusive). The accounting period for the excess profits tax assessment is the year ending March 31, 1946, while the accounting period for the income-tax assessments are years ended June 30, 1947, June 30, 1948, June 30, 1949, June 30, 1950, and June 30, 1951.
3. The objects for which the company was incorporated were, inter alia, as follows :
(1) to carry on the business of a race course company;
(2) to establish any clubs, hotels and other convenience in connection with the property of the company;
(3) to carry on the business of hotel keepers, tavern keepers licensed victuallers and refreshment purveyors.
4. The company was running a club house in Poona and refreshment kiosks both at Bombay and Poona race courses. Up to December, 1956, the club house was open to the members and their guests and boarding and lodging was provided and available exclusively for members, their wives and unmarried daughters. The company suffered a loss of Rs. 15,374 in the chargeable accounting period ending March 31, 1946, Rs. 60,982 in the assessment year 1948-49, Rs. 94,244 in the assessment year 1949-50, Rs. 79,203 in the assessment year 1950-51, Rs. 94,244 in the assessment year 1951-52 and Rs. 45,351 in the assessment year 1952-53. In the earlier years also it had suffered losses but it did not claim the deduction of those losses because its claim was that it was a mutual concern and, therefore, none of its activities yielded income that was taxable. The matter went up to the Supreme Court for the assessment year 1940-41, and the Supreme Court held that the amount received by the company from its members in respect of the season tickets, daily admission gate tickets and the use of the private boxes by members were assessable to tax. It is, thereafter, that the company raised this claim for the deduction of loss in the running of the club house at Poona and the kiosks at Bombay and Poona from its profits chargeable to tax under section 10 of the Act.
5. In the excess profits tax assessment for the chargeable accounting period ending March 31, 1946, the corresponding income-tax assessment was completed much earlier and no claim was made by the company before the Excess Profits Tax Officer. The claim was, however, raised before the Appellate Assistant Commissioner when he heard the appeal against the excess profits tax assessment. For the income-tax assessment for the year 1948-49 also the claim was not made by the company before the Income-tax Officer in the course of the original assessment. It was, however, raised before the Appellate Assistant Commissioner for the first time by way of an additional ground. A supplementary assessment for the year 1948-49, however, was made to give effect to the Supreme Court decision referred to in paragraph 4, and in the course of these proceedings the assessee claimed the losses now in dispute, but they were not allowed. For the assessment year 1949-50 onwards the claim was made before the Income-tax Officer.
6. The Income-tax Officer, before whom the claim was made for the first time for the assessment year 1949-50, rejected the claim of the company. His grounds for rejecting the claim are given in paragraph 7 of his order, which is reproduced below :
'In the original return submitted by the club, they had themselves excluded a sum of Rs. 66,460 being loss in the turf club house. After the decision of the Supreme Court, they have now claimed that this amount should be deducted from their total income as the club is doing business of hotel keepers, tavern keepers, victuallers and refreshment bars keepers. A summary of income and expenditure for the 10 years ended 30th June, 1948, shows that the club started having separate accounts for the turf club house from 1944/45 accounting year onwards. The figures of the last four accounting years are as under :
Rs.1944-45 86,1931945-46 23,1771946-47 69,7321947-48 66,460 Earlier to 1944-45 separate accounts of the club house were not prepared. The abovementioned amounts were neither claimed nor allowed, on the ground that the club members did not make loss or profits out of themselves. It was held that there was an identification between the contributors and the participators. The entrance fees received from the members and their annual subscriptions have also been exempted on the basis of complete mutuality between the contributors and the participators. The point regarding turf club expenditure was not in appeal before their Lordships of the Supreme Court and there is no clear indication in the judgment that this loss should be allowed. The club house caters to the needs of the members only both in and outside the racing season. This excess of expenditure over income is therefore not allowed in this assessment.'
For the other assessment years, namely, 1950-51, 1951-52 and 1952-53, the Income-tax Officer rejected the claim on substantially the same ground on which it was rejected by him for the earlier year. The orders of the Income-tax Officer for the years 1949-50, 1950-51, 1951-52 and 1952-53 are made annexures 'A', 'B', 'C' and 'D', respectively, and form part of the case.
7. The Appellate Assistant Commissioner of Income-tax considered this claim for the first time when hearing the appeal against the excess profits tax assessment for the chargeable accounting period ending March 31, 1946. He rejected the claim of the assessee and has discussed it in great detail in paragraphs 2, 3, 4 and 5 of his order, which are reproduced below for facility of reference :
'2. The claim for the loss in running the turf club house is made on the strength of certain observations of the Supreme Court in Commissioner of Income-tax v. Royal Western India Turf Club Ltd. According to the appellant the Supreme Court held that the appellant is carrying on two types of businesses, one, the business of horse racing and the other, the business of hotel keepers, tavern keepers, licensed victuallers and refreshment purveyors. The appellant argues that the loss in running the turf club house was a loss in carrying on business as hotel keepers, tavern keepers, etc., and that the loss should have been set off against the appellant's income from all other sources.
3. The observations of the Supreme Court relied upon by the appellant are found on page 565. They are :
'On the contrary, we have here an incorporated company authorised to carry on an ordinary business of a race course company and that of licensed victuallers and refreshment purveyors and in fact carrying on such a business.'
But with respect the reference to business as hotel keepers is only an obiter dictum as the question before the Supreme Court was whether four items of receipts pertaining to the racing business were to be included in computing the appellant's total income.
4. I have discussed with the appellant's representative the facts regarding the running of the turf club house. In my view, it cannot be said that the appellant in running the club house is carrying on any business. The club house is open only to the members of the club and their guests. The charges from the guests are received from the members and not from the guests. Amenities like billiards, facilities for playing cards, etc., are provided. The club is being run at a heavy loss from year to year. The very fact that the appellant is running the club at a heavy loss year after year shows that this does not form a part of the appellant's business activity. It is only an amenity offered to the members of the club as part consideration of the subscription received from the members.
5. The running of the turf club house cannot also be regarded as an activity connected with the horse racing business. The club house is open not only on race days but also on other days during the Poona season. During some years the turf club was open throughout the year. The opening and the closing of the club house do not coincide in other years with the start or close of the Poona season. Activities like billiards or cards etc., have no connection with horse racing. Part of this expenditure is for running two kiosks in the members' enclosures at Bombay and at Poona. Even the expenditure incurred in running these two kiosks cannot be allowed as an expenditure for carrying on the racing business. It was not necessary for the appellant to incur this expenditure for carrying on the horse racing business. There are restaurant booths in the other enclosures which are not run by the club. These booths were given to contractors for running them. The appellant makes an income from these restaurant booths. The fact that this is not done in respect of the members' enclosures and that the appellant incurred avoidable expenditure shows that the appellant was not thinking in terms of business in conducting the kiosks. Business pre-supposes the existence of profit motive. In this case there is no profit motive in running kiosks. Similarly, the privilege of using these kiosks and the club house is confined to the members of the club and their guests; the same privilege is not given to the members of the public. This privilege is, therefore, referable to the membership of the company for which an entrance fee on election as members and periodical subscriptions are paid, both of which are not taxed. In view of this, I hold that the expenses for running the turf club house and the two kiosks cannot be allowed either as business expenditure or as business loss.'
In his orders regarding income-tax assessments for the years 1948-49 to 1952-53 (both inclusive) he has only made a reference to the discussion in his order regarding the excess profits tax assessment. The Appellate Assistant Commissioner's orders for the excess profits tax and income-tax, for the chargeable accounting period ended March 31, 1946, and assessment years 1948-49 to 1952-53 (both inclusive), are made annexures 'E', 'F', 'G', 'H', 'I' and 'J', respectively, and form part of the case.
8. The assessee, thereafter, appealed to the Tribunal raising the following ground :
'1. The Appellate Assistant Commissioner erred in disallowing the expenditure incurred or the loss suffered in running the turf club house and the kiosks. The Appellate Assistant Commissioner ought to have allowed the expenditure incurred or the loss sustained in running the turf club house and the kiosks in computing the business profits of the assessees under section 10 of the Indian Income-tax Act.
2. The Appellate Assistant Commissioner ought to have held that running the club house and the kiosks, or in any event running the kiosks was part and parcel of the business of running the race course, and consequently, the expenditure incurred or the loss sustained on the club house and the kiosks, or in any event on the kiosks, should be allowed as a deduction in computing the profits of the race course business.
3. Without prejudice to the immediately preceding ground and in the alternative it is submitted that the Appellate Assistant Commissioner ought to have held that even assuming the club house and kiosks did not form part of the race course business, the loss incurred in running the club house and the kiosks was a loss incurred in a different business and should be set off under section 10 against the profits made in the race course business.
4. The Appellate Assistant Commissioner erred in holding that the observations in the Supreme Court judgment were obiter and therefore he was not bound to follow them.
5. The Appellate Assistant Commissioner erred in holding that running the club house and the kiosks was not a business activity but was merely an amenity to the members of the club as part consideration for the subscriptions received from the members.
6. The Appellate Assistant Commissioner applied an erroneous test, viz., the test of necessity and avoid ability of expenditure, in deciding whether the expenditure should be allowed as a deduction or not. The test adopted by the Appellate Assistant Commissioner for disallowing the expenditure or loss amounts to a misdirection in law.
7. Following on the above the Appellate Assistant Commissioner should have also allowed depreciation on the fixed assets of the turf club house and kiosks.'
The Tribunal in its consolidated order for all the years also rejected the contention of the assessee in the following terms :
'3. We concur in the view taken by the Appellate Assistant Commissioner that in running the club house and kiosks the assessee was not carrying on any business but merely providing for amenities for its members. The club house and kiosks are not, unlike the business of racing, open to the public. They cater only to the members at less than cost price and thus incur losses every year. Business is a scheme of profit making. If one was always selling goods or services at below his cost it could not be business activity. If the contention were to be allowed it would be open to the assessee to minimise its profits in the racing business and reduce its tax liability by offering extra amenities to its members. Such losses should be met out of the membership fees which are not taxable. The loss shown by the assessee in the club house and the expenditure incurred in running the kiosks cannot, in the view we have taken, be allowed as business loss or business expenses. For the same reason depreciation cannot be allowed on the fixed assets of the club house.'
The order of the Tribunal is made annexure 'K' and forms part of the case.
9. The assessee-company thereafter applied to the Tribunal under section 66(1) of the Act for a reference on certain questions of law to the High Court. But the Tribunal by its order dated December 11, 1958, rejected the applications. The assessee thereupon applied to the High Court under section 66(2) and it is in pursuance of the High Court's order on that application that this case is being stated with reference to the questions of law already set out in the opening paragraph.
10. R. J. Kolah with F. N. Kaka for the assessee.
11. G. N. Joshi with R. J. Joshi for the Commissioner.