Govindan Nair, C.J.
1. The following two questions have been referred under Section 256(1) of the I.T. Act, 1961.
'(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the losses incurred by the assessee in the assessment years 1963-64 to 1966-67 in the maintenance of horses and in horse racing are referable to the head 'Other sources' and that these should be set off against income from other heads of income
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the surplus from the sale of plots of land arising in the assessment years 1965-66 and 1966-67 was not includible in the income as profits from an adventure in the nature of trade or any other kind of business '
2. The assessee was assessed as an individual and his source of income over the years included salary, income from property, etc. He owns a bangalow at Vepery, Madras, and resides therein. He also owns race horses which are entered for various races and sent to stud on occasions. There were two disputes relating to the assessment for the assessment years 1963-64 to 1966-67. One of them related to losses incurred by the assessee in each of the years in connection with the maintenance of race horses and the activity connected with racing.
3. It is seen from the affidavit filed by the assessee as also the order of the Tribunal in the appeals relating to assessment to expenditure-tax for the assessment years 1964-65 and 1965-66 which have been made part ofthe record, that the assessee was maintaining race horses during the assessment years and incurred in the assessment year 1964-65 expenses to the extent of Rs. 1,05,909 and in the assessment year 1965-66 the expenses were Rs. 1,19,856. The expenses related to insurance of race horses, entry forfeits, mount fees, jockey expenses, horse feeding charges, stable rent, medical expenses, transportation of horses and miscellaneous horse expensed. He had received during the assessment year 1964-65 a sum of Rs. 67,808 and in the assessment year 1965-66 a sum of Rs. 45,450 on stakes won. He had stated in his affidavit that the race horses were maintained ,by him for the purpose of running them at races, winning stakes money and breeding race horses. The horses are run and maintained as a business proposition; the said horses were fed and trained in training establishments which are run commercially and the feeding charges, training fee and other expenses have been paid by him to the trainer. The trainer trains the horses to run at races and he does all things that are necessary in keeping the horse in a trim and fit condition so as to be fit to run in races and win. The horses had run for several cups and plates at various race centres at Madras, Bangalore, Ooty and Hyderabad. Sometimes his horses have won stakes money and plates. The assessee also sends his horses to the stud and rear them up. He occasionally bet at horses but he had no accounts for such betting. But he stated that the result of such betting was a loss of a few thousands of rupees and such loss has been included in the general expenses for the assessment years 1964-65 and 1965-66.
4. He had incurred losses in respect of these racing activities to the extent of Rs. 13,590, Rs. 38,301, Rs. 9,407 and Rs. 975 during the assessment years 1963-64, 1964-65, 1965-66 and 1966-67, respectively. The contention of the assessee before the taxing authorities was that the activity relating to race horses was in the nature of a business and that, therefore, the losses referable to this activity should be considered for set off against his other income. According to the revenue the assessee suffered the losses only because he was indulging in a hobby or sport and they could not be considered for set-off. The Tribunal was of the opinion that the income referable to this activity, if any, would be income from ' other sources ' and that the relative losses may be set off as arising under 'other sources' in each of the years. The first question referred to this court relates to this finding of the Tribunal.
5. The assessee purchased on October 19, 1961, a plot of land measuring 14 grounds 629 sq. ft. for a sum of Rs. 85,583. It was a layout plot and the vendors had incurred charges for the roads, drainage and improvement, etc. The assessee had paid stamp charges amounting to Rs. 4,578 and brokerage of Rs. 4,599. Thus, the total amount spent by him for the property wasRs. 94,670. The assessee divided these plots into three parts and sold the same under three sale deeds dated January 23, 1965, May 3, 1966, and June 16, 1965, for Rs. 72,500, Rs. 42,200 and Rs. 20,000, respectively, realising a total sum of Rs. 1,34,700. The total surplus was (Rs. 1,34,700--Rs. 94,670) Rs. 40,030, which was allocated between the assessment years 1965-66 and 1966-67 at Rs. 25,209 and Rs. 14,801, respectively, in proportion to the sale price realised in the respective years.
6. According to the assessee, he was residing in a small house and felt that he should have a more comfortable and suitable house in a better locality and that he had purchased the plots with a view to construct a residential house. But he had to abandon the plan as the liquid resources available were not sufficient and in the meanwhile the cost of construction also rose steeply. The case of the assessee, therefore, was that the amount spent on purchasing the plots was an investment and the surplus realised by him should be considered as a ' capital gain '. This was rejected by the ITO and the AAC on the ground that since the assessee had his own house to reside at Vepery, there was no need to construct another house elsewhere in Madras and that the assessee had not produced any material at all to show that he had purchased the plot with a view to construct a house. It was also pointed out that the prices of land had risen since 1961 and the assessee's motive in acquiring the plot must have been to earn a profit. In that view, the taxing authority had come to the conclusion that the assessee had made a profit in the course of an adventure in the nature of trade. The Tribunal held that the normal presumption in the acquisition of such property was not for the purpose of business and it would be difficult to presume that it was an adventure in the nature of ' trade ' solely on the ground that it is generally known that prices of immovable property like vacant lands had been going up in the City of Madras. After consideration of the various facts, the Tribunal held that the transaction relating to the purchase and sale of the plots of land could not be considered as an adventure in the nature of trade or any kind of business. The second question relates to the correctness of this view of the Tribunal.
7. The Tribunal in coming to the conclusion that the income referable to the racing activity of the assessee would be income from ' other sources ' relied on the decision of this court in Syed Jalal Sahib v. CIT : 39ITR660(Mad) and that of the Allahabad High Court in Lola Indra Sen, In re : 8ITR187(All) . But the view taken by the Tribunal is contrary to the ratio of those decisions. In Syed Jalal Sahib v. CIT : 39ITR660(Mad) the assessee, who was carrying on business of manufacture and sale of beedis, attended horse races regularly every year and indulged in betting and also entering the race horses, some of which were his own and some ofwhich he owned in partnership with others. In respect of the assessment years 1947-48 and 1948-49 the excess of receipts over expenditure in the racing activities was assessed as income of the assessee from his business. This was confirmed by the AAC to whom the assessee appealed. The contention of the assessee was that both his activity of betting and racing constituted his hobby or pastime and the receipts were casual and nonrecurring in nature and exempt from tax under Section 4(3)(vii) of the Indian I.T. Act, 1922. This court held, following the decision in Lala Indra Sen, In re : 8ITR187(All) and after a review of some other cases, that the receipts of the assessee from his racing and betting activities in the two years in question constituted his income, that it was not income from any business, profession or vocation of his, but it was ' income from other sources ' within the scope of Section 6 of the Indian I.T. Act, 1922, and that it was not taxable income as it was income of a casual and nonrecurring nature within the scope of the exemption granted by Section 4(3)(vii) of the Act. This decision squarely applied to the facts of the present case and the decision of the Tribunal is against the view taken therein.
8. The learned counsel for the assessee tried to distinguish this case on the ground that while in the decision in Syed Jalal Sahib v. C1T : 39ITR660(Mad) the income of the assessee included income from entering his horses in races as also income received by his betting on his horses as also on others' horses, in the instant case the income received by the assessee was only from racing activities. He also relied on certain passages in this judgment, wherein the learned judges have repeatedly pointed out that they shall not be understood as holding that gambling could never be organised on a commercial basis and could never be constituted as a ' business ' and under no circumstances betting from the point of view of the punter could ever constitute a 'business'. But we may note the following observations of the learned judges (p. 674):
' All we need say, and do say in this case, is that prima facie at least gambling by betting on horses cannot be viewed as a business, though a person indulges in it habitually and even makes money by it. Strong evidence would be needed to establish that racing and betting activities constituted a business or one of the lines of business of a person.'
9. This observation was made by the learned judges in spite of the fact that in that case the assessee's activity of betting and racing was viewed as constituent parts of a whole transaction and there was no scope for separating betting from racing and they proceeded to consider the question whether such a composite set of activity was business as determined by the department or whether it was a hobby as claimed by the assessee. But the decision was certainly not based on this composite nature of the activity. It was on the basis that racing and betting are prima faciegambling and cannot be treated as business. We may also point out that the facts in our case on this 'aspect are not in any way different from the facts in Syed Jatal Sahib v. CIT : 39ITR660(Mad) .
10. Both the affidavits filed by the assessee before the Tribunal in the expenditure-tax proceedings, the facts stated in the remand report and the order of the Tribunal in the expenditure-tax proceedings, clearly show that even in the present case the assessee was both betting and racing but the losses incurred by him in betting were included in his general expenses, though not shown in the accounts relating to his racing activities. We are also of the view that the evidence available in this case is no better than the evidence that was before the learned judges, who decided Syed Jalal Sahib v. CIT : 39ITR660(Mad) , to hold that the racing activities of the assessee constituted his ' business '. Even the Tribunal did not say that the racing activities of the assessee constituted his business. It only held that the income of such activity would be income falling under ' other sources '. While following the decision of this court in Syed Jalal Sahib v. CIT : 39ITR660(Mad) for the proposition that the income referable to the racing activity would be income from 'other sources' the Tribunal had not kept in mind that this court in the same decision and the Allahabad High Court in Lala Indra Sen, In re : 8ITR187(All) also held that such income is of a casual and non-recurring nature and, therefore, exempt from taxation under Section 4(3)(vii) of the Indian I.T. Act, 1922. We are in respectful agreement with these two decisions.
11. As pointed out in these decisions, the success of a horse or that of a bet is obviously uncertain and wholly a matter of chance and the receipt dependent on such chance can never be anything but casual. In this respect, whether it is a racing activity or a betting activity, in our opinion, makes no difference. The horse winning a race and the individual winning a bet are both equally uncertain and wholly a matter of chance. The distinction pointed out by the learned counsel for the assessee is, therefore, of no consequence--whether it is racing of horses or betting on horses. Both are gambling and the chances of a horse winning and the person winning a bet are so uncertain that the receipt of any income thereon could not but be treated as casual. The mere fact that a person makes more than one successful bid or gamble could not also make the prize as of a recurring nature and cease to be a chance. We are, therefore, of the view that though receipts from racing and betting would be income falling under ' other sources ', since they are of casual and non-fecurring nature, are exempt from taxation under Section 10(3) as it stood in the relevant assessment years.
12. The provisions of Sections 70 and 71 relating to set off of loss from one head against income from another contemplate loss from a source, the incomefrom which is liable to tax. If income from a source is altogether exempt from tax, loss from that source cannot be set off against income from a different source or income under a different head.
13. The result of our foregoing discussion is that the receipt of income referable to the activity of racing and betting would be income from ' other sources ' but it is of a casual and non-recurring nature and, therefore, exempt under Section 10(3). Since the income is not taxable the loss incurred in such activity also could not be set off against income from other heads of income.
14. On the second question, we are of the view that the Tribunal is right in holding that the surplus from the sale of plots of land was not includible in the income as ' profits from an adventure in the nature of trade or any other kind of business'. In CIT v. Kasturi Estates (P.) Ltd. : 62ITR578(Mad) , this court held that developing land into building sites with a view to realise the best price, without anything more, is consistent with realisation of a capital investment. If a landowner developed his land, expended money on it, laid roads, converted the land into house sites and, with a view to get a better price for the land, eventually sold the plots for a consideration yielding a surplus, it could hardly be said that the transaction is anything more than a realisation of a capital investment or conversion of one form of asset into another. The surplus in such a case will not be trading or business profit because the transaction is one of realisation of assets in investment rather than one in the course of trade carried on by the assessee or an adventure in the nature of trade.
15. In Michael Kallivayalil v. CIT : 102ITR202(Ker) , a Division Bench of the Kerala High Court, to which one of us was a party, laid down the principles that have to be kept in mind in deciding whether a transaction of purchase and sale amounts to an adventure in the nature of trade and they are, in the words of the learned judges, as follows (p. 210):
'(1) The commodity purchased plays an important role in deciding whether a person was indulging in an adventure in the nature of trade or was making an investment, (2) whether the transaction was an isolated one or formed part of a series of transactions showing a tendency to indulge in trade is another important factor, (3) the fact that the property bought has been sold within a short time does not by itself indicate that the transaction was in the nature of trade, (4) if land has been purchased or a commodity which normally is not treated as a stock-in-trade has been purchased, the presumption is that the intention was to make an investment and not to indulge in an adventure in the nature of trade, and (5) if the property purchased was capable of yielding income then again the inference was that an investment was intended and not an adventure.'
16. Thus, the decision on a question whether a profit made by the assessee by selling land is profit from ' business ' or merely ' capital gains ' will depend on the cumulative effect of all the facts and circumstances. In this case the assessee had entered into a solitary transaction for the acquisition of the plots of land and sold them after four years. He has not purchased any such immovable property at any time before or after. He has also not developed even the plots which he purchased. He had only divided the same and sold as smaller extents and the development of the plots, such as laying roads, etc., were done by the assessee's vendors. There is no evidence to show that there was any increase of prices of immovable property during that period. But even assuming that such general rising trend in prices were there, we are unable to hold that that is enough to rebut the presumption that the property could not be treated as purchased for the purpose of business. The facts in this case could only lead to one conclusion and that is the one reached by the Tribunal that the transaction was not an adventure in the nature of trade or any kind of business.
17. We, accordingly, answer the first question in the negative and in favour of the revenue and the second question in the affirmative and against the revenue. No order as to costs.