Per Shri T. N. C. Rangarajan, Judicial Member - This appeal is directed against the sustention of an addition of Rs. 1,51,150 as the income of the assessee from other sources.
2. The assessee is a HUF consisting of Shri M. Ct. Muthiah and his wife Mrs. Muthiah. For the previous year ended on 31-3-1978 corresponding to the assessment year 1978-79, the assessee filed a return on 28-7-1978 declaring a total income of Rs. 25,480. The assessee also claimed loss of Rs. 19,870 under the head Winnings from horse races to be computed separately and carried forward. While considering that return, the ITO made a draft assessment order on 27-3-1981 by which he proposed that an addition should be made for unexplained investment of Rs. 1,53,250 for purchase of the horses - Well-connected for Rs. 35,000 and More Over for Rs. 92,500 and expenditure in maintenance of the horses leading to a loss of Rs. 25,750. The assessee gave his objections dated 14-4-1981 annexing a receipt and expenditure statement in respect of his horses racing activities and also explaining the sources of the investment referred to by the ITO. By a letter dated 18-4-1981 the ITO required further particulars and the assessee replied giving such information by his letter dated 11-7-1981. After hearing the assessee, the IAC, to whom the matter was referred under section 144B of the Income-tax Act, 1961 (the Act,), gave his directions by order dated 25-9-1981. By that order, he stated that the explanation given by the assessee with reference to the sources of funds for the investment in the purchase of the horses and the maintenance of the horses was reported by the ITO to have been fully explained. However, he further noted that the activities of the assessee with relation to the maintenance of the race horses and the winnings therefrom could be fully scrutinised only at that stage and he came to the conclusion that such activities amounted to a regular source of income. He overruled the objection of the assessee that it was only a hobby and directed that the income that source computed at Rs. 1,22,500 as well as the excess of income over expenditure in the statement of accounts relating to the racing activities given by the assessee totaling Rs. 1,51,152 should be added to the total income of the assessee. On appeal, the Commissioner (Appeals) confirmed the addition except with the direction to verify the figures and allow relief in respect of Rs. 46,125 which was a double addition.
3. In the further appeal before us, the assessee has taken a preliminary objection relating to the jurisdiction of the IAC to give a direction regarding the assessment of income from horse racing as a source when no such proposal has been made in the draft assessment order. Reliance was placed on the decisions of the Bombay Bench of the Tribunal in the case of PQR Co. [IT Appeal No. 3321 (Bom.) of 1977-78, dated 30-4-1981] as well as the Cochin Bench in the case of N. Krishan [IT Appeal Nos. 741 and 746 (Coch.) of 1977-78, dated 3-2-1981]. It was submitted that when the ITO had only proposed an addition for unexplained investment and the IAC found that the investment has been completely explained, there was nothing more that could be done by the Commissioner (Appeals) and no direction could be given for adding any amount to the total income of the assessee. On the other hand, it was pointed out on behalf of the revenue that the subject-matter was not at all different from what was proposed by the ITO. According to the revenue, the ITO had proposed to have the funds untilised for meeting the expenses as the income of the assessee in the absence of any explanation. When the explanation showed that the funds were in fact the income of the assessee from a source, it was only a question whether it was to be assessed as income from undisclosed sources or as income from a known source and the proposal to tax that fund remained unchanged. We agree with this contention of the revenue for we find that what was the controversy was only the nature of the funds utilised by the assessee for meeting the expenses as to whether it was to be treated as income from undisclosed sources or knowing the nature of that fund whether it should be assessable to tax. Since the amount in question, after the nature of that amount was revealed, still remained the amount in respect of which the taxability was in dispute, it cannot be said that the IAC had given directions in respect of any amount which was not proposed to be taxed by the ITO. We, therefore, overrule his preliminary objection.
4. On the merits of the appeal, the contentions put forward on behalf of the assessee were as follows : The activities of purchasing, raising, grooming and running the horses in races constituted a hobby of the assessee. The activities of racing or sale of the horses were incidental to the hobby and any receipts arising from these hobbies were only incidental to the hobby which was only for pleasure and not for making any money. Such receipts could never be taxed as income. It was only by a definition that the 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 the winnings were to be taxed, the scope of the expression winnings could not include income by way of lease or sale of horses which was outside the ambit of the definition of Income. Even assuming that the entire receipts from the activities relating to the race horses were to be taxed, there were inaccuracies in the computation of such income because the lease income should be taxed only on an accrual basis and not on receipt basis and the income relatable to the wife of the karta had to be excluded. In case the entire activity was not considered as a hobby, it should be considered as a business in which case the computation had to be completely revised and the assessee would also be entitled to the deduction under section 80JJ of the Act with reference to the breeding of the horses which was a business of raising a livestock. Besides, the capital gains arising from the sale of foals could not be taxed because they were personal effects and further there was no cost attributable to the acquisition of the foals which the assessee obtained only by natural causes of the mares giving birth to the foals. For all these reasons, it was submitted that either the entire addition should be deleted or in case it was to be assessed, the entire compassion had to be reworked.
5. On the other hand, the contentions on behalf of the revenue were as follows : The activities of the assessee constituted business because the activities were dependent on well organised race clubs and associations and must be regarded as a commercial venture of the assessee. Even if the activities were considered to be a hobby, there was nothing in law to state that the receipts arising from a hobby were not in the nature of income. 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 section 80JJ apart from the objection of the revenue that the raising of race horses would not amount to the business of raising livestock. 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., has also to included. Even the foals though acquired by birth could be capable of ascertainment to cost of acquisition and, hence, just as in the case of bonus shares, the capital gains arising from the sale of such foals would also be taxable. They cannot be regarded as personal effects of the HUF either. With reference to the inclusion of the wifes income, however, 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.
6. On consideration of the rival submissions, we are of the opinion that the crux of the question is whether the receipts of the assessee from the activities relating to the maintenance of race horses and participation in the horse races amounted to income or not. As we have noted at the outset, all the activities of the assessee were inter-connected. The main activity was the betting in the horse races for which purpose the assessee has maintained the horses. The main receipts were the winnings from the bets as well as the stake money being the prizes received on the winning horses. The incidental receipts were by way of lease of the race horses as well as capital gains arising by sale of the horses. The assessee was a man well able to afford the pleasure both of keeping the race horses as well as betting on them. It has been judicially noticed that the men of means take pride in possessing the race horses and participating in horse racing events. Such activities can only be regarded as a hobby.
7. The receipts arising from the pursuit of such a hobby as from any other hobby cannot be regarded as income. The classic definition of income is that it is a periodical monetary return coming in with some sort of regularity from a definite source whose object is the production or a definite return. Obviously, a hobby cannot be a source with an object of any return because the carrying on of the hobby is with the object of pleasure and not with the object of making money. A philatelist collect stamps for his own entertainment unlike a stamp dealer who collects them for profit. A gentleman may maintain a garden for pleasure while a florist may do so for profit. In the pursuit of the hobby, it is possible that a philatelist comes across a 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 the object of the pursuit of the hobby. Similarly, a person may write stories as a pastime and it yields pleasure only when it is published. The publication may result in some receipt of money but as long as the story is not written for the purpose of obtaining a receipt it remains an incidental receipt from the pursuit of hobby and cannot at all regarded as income. On the same analogy, when a well to-do person maintains race horses and participates in racing events, the receipts are incidental to the hobby and cannot be regarded income at all.
8. It is perhaps because of this fundamental position that the Act was amended by defining Income in section 2(24) (ix) of the 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 from or nature whatsoever. It is clear that, but for this definition, the winnings from races which are receipts from the pursuit of a hobby could not be regarded as income at all. It would, of course, have been a different matter if the activities were conducted as a business proposition. Whether the activities of the assessee were conducted as a business is a question of fact and depends upon the circumstances surrounding the activities. The fact that it resulted in certain receipts or the fact that he had utilised well organised race clubs or commercial methods to pursue the hobby would not convert it into a business. It is not the case of the revenue that these activities of the assessee constituted his means of livelihood and there is nothing on record to suggest nor is there any finding by the authorities below that these activities were carried on by the assessee as a business. In fact, the receipts from these activities were never attempted to be assessed under the head Profits and gains of business or profession.
9. Under section 10 of the Act, any income falling within any of the clauses therein shall not be included in the total income. Clause (3) refers to any receipts which are of a casual and non-recurring nature, not being winnings from lotteries provided that it shall not apply to receipts arising from business or the exercise of a profession or occupation. Under section 2(36) profession includes vocation. It is clear from the facts of the case that the assessee has not carried on these activities in exercise of a profession, occupation or vocation because there is no material to indicate that the object of carrying on these activities was for the purpose of earning income.
10. We are then left with the main portion of clause (3) of section 10 which exempts income of the nature of casual and non-recurring receipts other than winnings from lotteries. Before we come to the scope of the expression winnings from lotteries, we may also rule out the possibility of the receipts of the assessee being treated as income from other sources. Under section 14 of the Act, all incomes shall be classified under several heads of income and under section 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. We cannot forget that these section can apply only if the receipt in question is income. If the receipt cannot be regarded as income at all, then, it could not be taxed under the head Income from other sources a merely because it is not taxable under the head Profits and gains of business or profession. We are, therefore, of the considered view that the receipts of the assessee have to be considered taxable only to the extent that they fall within the scope of the expression winnings from lotteries which deems such receipts to be income.
11. The provisions of section 74A of the Act explains the scope of the expression winnings from lotteries. That section states that any loss arising as a result of the 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-section (3), loss arising from the running of race horses may be carried forward and set off against income from the same source in the subsequent assessment year. The Explanation states that the amount of loss incurred in the activity of owning and maintaining race horses means the difference between the expenditure incurred for maintaining the race horses and the receipt by way of stake money which means the prize money received on winning horses. These provisions indicate that the maintenance of race horses and running them in horse races is confined to the earning of stake money and dissociated from the winnings from bets placed in the horse races. Therefore, for the purpose of taxability, the expenditure incurred for maintaining the race horses can be set off only against the receipts of stake money. In the absence of any specific provision in the Act, every receipts by way of leasing of the race horses or by way of capital gain arising from the sale of the horses cannot enter into the competition of income from such a source. We have to apply the well known cannot that there is no room or any intendment in taxation and the receipts cannot be charged to tax unless the 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 the pursuit of a hobby. Though the activities of the assessee are inter-related for the purpose of taxability, we are required to isolate the expenditure on maintenance and set it off against stake money because the charge falls only on stake money. Similarly, we have to isolate the winnings from betting on race horses. Though section 74A provides that a loss from any source shall not be set off against the income from any other source specified in sub-section (2), winnings from race horses happens to fall within clause (c), i.e., race including horse races, because clause (f) refers to gambling or betting of any form or nature whatsoever not falling under any of the other clauses. But for this classification, even winnings from race horses may have to be separated from the stake money. However, the wording of section 74A being what it is, winnings from betting in races and the stake money are to be assessed as income after setting off expenditure incurred for maintaining the horses.
12. We now come to the ancillary question whether the expenditure incurred on maintenance of horses should be determined only after setting off income by way of leasing of the horses and capital gains arising from sale of the horses which would normally be the position if the activities were carried on as a business proposition. But since the activities are not carried on in such a manner and becomes taxable because of the deeming provisions of the Act, we are of the considered opinion that the computation of the income has to follow the provisions of the Act and cannot follow any normal commercial method of accountancy. Hence, the income by way of leasing of the horse or by way of capital gains from the sale of the horses should not go to reduce the expenditure on maintenance of the horses which is to be set off against the stake money and the winning from the bettings on the horses. It must be remembered that but for these provisions on the Act, the lease income from horses or the capital gains arising from the sale of the horses would not be considered income at all since they arise from the pursuit of the hobby and not from any source of the income. It may be recalled that even the Finance Ministers Budget Speech for : 83ITR208(SC) observed that the 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 the intention to tax receipts incidental to the pursuit of the hobby which was never viewed as income at all but the object, was only to tax casual income from betting on horses. In this view, it is unnecessary to consider whether the assessee would be entitled to deduction under section 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 the horses could be considered to be personal effects so as not to be treated as capital asset for the purpose of capital gains and whether such capital gains would not be taxable because the foals which were sold were the bounty of nature and did not have any cost of acquisition.
13. But if it comes to a question whether independent of the provisions of section 74A, the capital gains arising from the sale of the horses were to be assessed under section 45 of the Act, our answer should be in favour of the assessee because the horses were only personal effects and could not be considered as capital asset at all. The authorities below proceeded as if a HUF is artificial entry which cannot have a personal effect. But that view ignores the fact that it is only a body of human being and in any event the definition of capital asset in section 2(14) excludes personal effects, that is to say, movable property held for personal use by the assessee or any member of his family depending on him. Surely, every member of the HUF is dependent upon the HUF and assets held for the pursuit of a hobby cannot but be regarded as a personal effect. 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. We, therefore, set aside the orders of the authorities below and direct the ITO to recompute the income taxable under this source accordingly.
14. In the result, the appeal is treated as allowed.