1. The point involved in this Reference is a short point, but not tor the matter of that a very easy point to decide.
2. The assessee is tire Royal Calcutta Turf Club whose business is to hold race meetings in Calcutta on a commercial basis. It holds two series of meetings during two different seasons of the year. The Club does not own any horses, nor does it employ any jockeys. It only holds race meetings. At those meetings, horses are run by persons who own them and they are ridden by jockeys who are employed by the owners. The Club has thus no direct concern with horses or jockeys. Nevertheless, it is important to the Club that jockeys of the requisite skill and experience should be available to the owners, because no horses can be run unless there are Jockeys to ride them and no races can be held unless there are jockeys to ride horses at the races.
3. It appears that some time before 1948, the Club came to think that there was a risk of a serious decline in the number of jockeys available in Calcutta and that if such a decline did in fact occur, races to be held under the auspices the Club might have to be abandoned and its business closed down. It was, therefore, thought expedient to take some steps for providing against that contingency. The step taken was to establish a school for the training of Indian boys as jockeys so that, when they passed out and got their riding licenses, they might be available to the owners desiring to race their horses at meetings held by the Club.
4. It has been found that the school did not prove a success and was closed down after a brief existence of three years. It has also been found that the young men trained at the Club's school would be under no obligation to serve owners entering their horses for races held by the Club. After obtaining their riding licenses, they would be at complete liberty to accept employment under anyone they liked and anywhere in any country.
5. During the year ending on the 3lst of March, 1949, the Club spent a sum of Rs. 62,818/-on the running of its riding school. In the course of its assessment to income-tax for the year 1949-50 and assessment to Business Profits Tax for the chargeable accounting period ending on the 31st of March, 1949, the Club put forward a claim that in computing the business profits, the sum of Rs. 62.818/-, spent by it on the school, should be allowed as a deduction under Section 10(2) (xv) of the Income-tax Act. In other words. It claimed that the amount was expenditure, not in the nature of capital expenditure and that it had been laid out or expended wholly and exclusively for the purpose of its business.
6. The Income-tax Officer disallowed the claim. He held that the running of the school could in no way be related to the business of the Club, which was merely to hold race meetings and had nothing to do with the training of jockeys. If the purpose for which the expenditure had been made was totally outside the proper purposes of the Club's business, no other question could obviously arise but the Income-tax Officer also held that even assuming that the Club might derive a benefit from the keeping of the school, because trained riders, passing out of it, might supply a possible deficiency in the number of jockeys locally available, it would be a very indirect benefit and could not, therefore, be the proper objective of any proper business expenditure. A third ground for rejecting the Club's claim was also given. The Income-tax Officer held that even assuming that the indirect benefit which the Club might derive from the keeping of its school could be a proper objective of expenditure, the deduction asked for could not still be claimed, because the benefit would be a benefit of an enduring nature and, therefore, any expenditure incurred for procuring it would be capital expenditure. To the third reason thus given, the Income-tax Officer added a corollary which is by no means clear to me and which Mr. Meyer, appearing for the Commissioner, was also not able to explain. It was said that since the benefit, assuming there would be a benefit would be a benefit of an enduring, nature, no part of it could be attributed to the year in respect of which the deduction had been claimed. Though the Income-tax Officer's meaning is obscure, I think I can hazard a guess as to what he really intended to say. What he meant probably was that since the benefit would be a enduring benefit, spread over an incomputable or, in any event, a large number of years, the whole of the expenditure incurred for procuring it could not be claimed in rcspect of any one year, because that year would receive only a fraction of the benefit and, therefore, nothing in excess of the expense incurred for purchasing that fraction could he an admissible deduction in respect of that year. Whether that is what he really intended to say or not I am not sure, but since nothing turns upon this additional reason, I may leave It as it is.
7. Against the decision of the Income-tax Officer, the Club appealed to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner upheld the Income-tax Officer's order, but only on the first of the grounds given by him. On further appeal to the Appellate Tribunal, the Income-tax Officer's order was again upheld but this time on the first and the third of his reasons, including the obscure corollary to the third.
8. After thus failing before all the authorities, the Club asked for a reference of the question to this Court and by a single reference in respect of both the income-tax and the Business Profits Tax assessments, the following question was referred: --
'Whether in the facts and circumstances of this case, the Appellate Tribunal was right in holding that Rs. 62. 818 spent by the assessee to train Indian boys as jockeys, did not constitute expenses of the business of the assessee allowable under Section 10(2)(xv)?'
I share Mr. Meyer's view that the Tribunal might Lave made a fuller investigation into the relevant facts and might have stated their findings to this Court in a more positive form. Too often have I found in dealing with References during the current session that the Tribunal had decided questions of fact as questions of law, merely upon a consideration and comparison of different probabilities. Nevertheless, we have to perform our function of answering the question referred to us on the facts stated, unless we find it impossible to do so. I do not think that in order to examine the correctness of the grounds of the decision of the Appellate Tribunal on the facts found by them, it is necessary to ask for any further findings of fact.
9. I do not find it difficult to hold that on the first of the grounds given by the Income-tax Officer and finally by the Appellate Tribunal, they were clearly wrong. It is true that the expense was not an expense of earning profits in the accounting year, but for that reason it was not prevented from being an expense or expenditure laid out for the purpose of the business. The facts are that the Club came to apprehend that there would soon be a serious dearth of jockeys available for the races held under its auspices and consequently it was filled with the fear that if that eventuality came to happen, its business would come to an end. Mr. Meyer complained that no evidence had been given that the authorities of the Club had in fact come to entertain such an apprehension and that it was under the influence of that apprehension that the riding school had been started. It is quite true that the relevant facts have been stated in the form of a contention put forward by the Club, but that. I have found with regret, has become the Tribunal's habit of stating facts to this Court and, in any event, in stating that contention, the Tribunal have not expressed any disbelief in its truth or their rejection of it as a fact. There can be no doubt that if Jockeys or a sufficient numberof them cease to be available to persons desiring to race their horses at meetings held by the assessee Club, its business would be seriously affected. If with a view to averting such a contingency, the Club spent money out of its funds in order to establish a source from which jockeys could be supplied, I am unable to see for what purpose the money was spent, If it was not for the purpose of safeguarding the business interests of the Club. As I have already pointed out, the expense was certainly not the expense of earning the profits of the year, but expenses incurred for the purpose for earning or ensuring the earning of future profits in a business is equally expenditure incurred for the purpose of the business. When an expenditure is made by a person, carrying on a business, in order to avert a threat to it or in order to rid himself of an embarrassment or in order to procure a fair field of operations it has always been held that he makesthe expenditure for the purposes of his business.The language in which this view has been expressed has differed in different cases, but ineffect what the Courts have said has been the same. In connection with this question, the famous words of Lord Davey in Strong and Co. v. Woodifleld, (1906) AC 448 at P. 453 (A), are always recalled and they are that the meaning of the expression for the purposes of the trade is 'for the purpose of enabling a person to carry on and earn profits in the trade,' It appears tome that, in the facts of the present case, the expenditure made by the Club was an expenditure for the purpose of enabling it to carry on its trade and to earn profits therein. The words of Lord Davey Were referred to by Jenkins L. J., in the case of Morgan v. Tate and Lyle Ltd., (1953) 1 Ch 601 at P. 640 (B). when it was in the Court of Appeal and the learned Lord Justice observed that Lord Davey's formula included 'expenditure-for the purpose of preventing a person from being disabled from carrying on and earning profits in the trade. It appears to me that, in the facts of the present case, the expenditure incurred by the Club was incurred for the purpose of preventing itself from being disabled from carrying on its trade and earning profits therein. If I may attempt to state the position in language of my own, I would say that the expenditure with which we are here concerned was incurred by the Club for maintaining conditions which would preserve for it its opportunities for making profits in its business. If such was the nature of the expenditure, it cannot, in my view, be said that it was not expenditure laid out or expended for the purpose of the business carried on by the assessee.
10. But it was contended that the benefit which the assessee Club might derive from the keeping of its riding school would only be a very indirect benefit and, therefore, expenditure incurred for the purpose of procuring such benefit could not properly be regarded as expenditure incurred for the purpose of its business. That contention does not appear to me to be correct and I would dispose of it by referring to the oft-quoted pronouncement of Viscount Cave made in the case of British Insulated and Helsby Cables, Limited v. Atherton (1926) AC 205 at p. 212 (C). 'A sum of money', said the learned Lord,
'expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade.'
It is thus not merely direct benefit to the trade which can be the objective of expenditure made wholly and exclusively for the purpose of the trade Expenditure incurred for securing ends which will indirectly facilitate the carrying on of business can also be expenditure laid out wholly and exclusively for the purpose of the business. The fact that the benefit derived by the Club from the keeping of its riding school would be an indirect benefit does not, therefore, make it impossible to hold that the expenditure incurred in keeping the school was expenditure laid out wholly for the purposes of the business carried on by the assessee.
11. I do not think I need say more on the first ground given by the authorities below for rejecting the Club's claim. I shall only refer to the recent decision of the House of Lords in Morgan v. Tate & Lyle Ltd., (1955) AC 21 (D), whereexpenses incurred by a company engaged in sugar refining business, on a propaganda campaign to oppose the threatened nationalization of the Industry were held to be expenses wholly and exclusively laid out for the purposes of the company's trade and, therefore, an admissible deduction in the computation of its profits for income-tax purpose. In the present case too the Club incurred expenses in founding and keeping a school as a measure of protection against an apprehended decline or extinction of its business by reason of a probable dearth of jockeys. On principle, as well as on all the authorities which are traceable, the expenses must be held to have been laid out for the purposes of the business.
12. No question was raised as to whether the expenditure so laid out was laid out for the purpose of the business wholly and exclusively. I need not, therefore, deal with that aspect of the question.
13. The next ground given by the authorities below in support of their decision and urged before us on behalf of the Commissioner of Income-tax is a slightly more difficult one to deal with. It was contended by Mr. Meyer and after him by his learned junior. Mr. Pal, who followed him this morning, that even assuming that the expenditure had been laid out for the purposes of the Club's business and laid out wholly for that purpose, it was still an expenditure incurred with a view to bringing into existence an asset or advantage for the enduring benefit of the Club's business and, therefore, it was not a revenue but a capital expenditure. I am unable to accept the contention.
14. What was said was this : The assesseecould claim the expenditure to have been laid out for the purposes of its business only if it could show that by or from such expenditure the business had benefited or was expected to benefit. That indeed was the assessee's own case. It was accordingly said that if procurement of a benefit was the objective of the expenditure the source of that benefit, namely the school was obviously an advantage which the Club had been securing to establish and since the school was expected to turn out a regular succession of trained riders who would be available for service as jockeys at race meetings held by the assessee, the benefit expected or aimed at was clearly an enduring benefit. If so, the case came under the proposition laid down by Viscount Cave in the case (1926) AC 205 at p. 213 (C), in the following words :
'But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade. I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating Such an expenditure as properly attributable not to revenue but to capital.'
15. As has been explained in Simon's 'Income-tax,' Viscount Cave's proposition is an amplification of the proposition laid down earlier by Lord Dunedin in the case of Vallambrosa Rubber Company v. Farmer, (1910) 5 Tax Cas 529 (E), where the learned Lord then lord President of the Court of Session, had said that, normally, expenditure made once and for all would be capital expenditure and exoenditure which would recur year after year would be expenditure on revenue account. Lord Cave pointed out that the test of the expenditure being made once and for all would not always suffice to mark out a particularitem of expenditure as expenditure of a capital nature. He added two additional factors, one of which was that the expenditure must be with a view to bringing into existence an asset or advantage and the other of which was that it must be made for an enduring benefit of the business. It will be noticed that he did not discard the test that an expenditure, in order to be a capital expenditure, would have to be an expenditure, made once and for all. He merely pointed out that two-further requirements would have to be satisfied. Applying the test of Lord Dunedin, subsequently adopted by Viscount Cave as a part of his own test, I should think that the expenditure in this case cannot be said to have been a capital expenditure for the simple reason that it was not an expenditure made once and for all. The assessee Club had founded and was running a school for the purpose of safeguarding its business interests and the expenditure was only a year's portion of the recurring expenditure that was being incurred, year after year for the maintenance of the school. It was not as if the assessee had spent a single and definite sum either in a lump or in instalments for the purpose of securing an asset or an advantage, even assuming that an asset or an advantage was intended to be secured. The expenditure being only the running expense of keeping the school, was of the nature of expenditure which is incurred for meeting a continuous demand in connection with one's business. Even judged by the first part of Viscount Cave's test, it appears to me. The expenditure with which we are concerned cannot be said to have been a capital expenditure.
16. Nor, it seems to me, can it be said that what the Club was trying to bring into existence was an asset. By 'asset' as the word is used in Viscount Cave's proposition, cannot be meant a business asset in the sense of the stock in trade, but can only be meant a capital asset. If training of jockeys was no part of the assessee's business, and no one days that it was such part, then I am unable to see how, even on the basis that a benefit would result to the assessee's business from the maintenance of the school such benefit could be a capital asset of its business.
17. I am not forgetting that Viscount Cave did not say that the benefit would be the asset, but spoke of bringing into existence an asset for the benefit of the business. I am examining whether the benefit itself could be an asset, because it was not said before us what the asset was which was being brought into existence by the expenditure which was not expenditure for Founding the school but only the expenditure oft running it, and when the school was for training jockeys which was no part of the assessee's business. When expenditure Is made by or on behalf of a business to secure a capital asset, it is made for acquiring something which will be added to its capital structure. A capital asset of a business which is outside the structure of the business altogether, appears to me to be a contradiction in terms. Whether a particular expenditure is looked at from the point of view of its result and what is seen is if it has brought some addition to the capital or it is looked at from the point of view of its source and what is seen is if it was paid out of the circulating or the fixed capital, in each case, the capital regarded is the capital held by the business as a part of its holdings on the asset side. I am entirely unable to see how some extraneous advantage, standing wholly outside the scope of a business, can be a part of its capital assets, although it may direct-ly or Indirectly benefit the business or facilitatethe carrying on of it.
18. The line of cases where the owners of a business sought to remove competition by means of a covenant in restraint 01 trade entered into with other businessmen, was referred to on behalf of the Commissioner and it was said that, even in those cases, there was no acquisition of a capital asset, but the expenditure had, nevertheless, been held to be capital expenditure. It was pointed out by me in the course of the argu-ment that the agreement by which competition would be excluded or a wider field of operation acquired for business would itself be an asset and an asset of a capital nature. Mr. Pal tried to contest the proposition by relying on two cases. He first referred us to the Australian case of Sun Newspapers Ltd. and Associated Newspapers Ltd. V. Federal commissioner of Taxation, 61 ILR 337 (F) and contended that, in that case, the agreement with a rival organisation had been entered into by one company, whereas the payment in question was made by another company which was not a party to the agreement and yet it was held that the company which had made the payment had acquired a very real benefit or advantage of the nature of a capital asset, although it might not be a capital asset of a material nature. The point sought to be made was that if the company which had made the payment was not itself a party to the restrictive covenant, it could not be said that it had acquired an asset in the shape of that covenant. It appears to me that Mr. Pal altogether overlooked the structure of the case on which he was relying. The company, the Associated Newspapers Ltd., which had entered into the agreement held nearly all the shares in the other company. Sun Newspapers Ltd., which had actually made the payment. The payment was made for preventing the publication of another newspaper which was being sought to be published and which, if published, would prove a serious rival to the paper of Sun Newspapers Ltd. The actual benefit was thus acquired by the Sun Newspapers Ltd.. taut it would appear that no question as between that company and Associated Newspapers Ltd., was at all raised or placed before the Court. The claim made In the income-tax assessment was a claim made by both the companies and it was a claim that the deduction asked for should be allowed in the assessable income of one or the other of them. It was in those circumstances and further on the finding that the publication of the newspaper published by the Sun Newspapers Ltd.. was anenterprise, alike of that company and of the Associated Newspapers Ltd., that the Court held that the expenditure had been made for the purpose of acquiring an enduring benefit for the assessees. No special case was made on behalf of Sun Newspapers Ltd., and no decision regarding the position of that company, as distinguished from the position of Associated Newspapers Ltd., was given.
Equally unhelpful is the case of Collins v. Joseph Adamson and Co., (1938) 1 KB 477 (G), on which Mr. Pal next relied. There, the asses, see was a member of an Association which purchased the undertaking of another company with a view to closing it down and preventing it from being acquired by persons outside the Association. The Association incurred some further expenditure by making a grant to one of its members in order to enable him to acquire a controlling interest in another competing business and to bring its operations within the rules of the Association. The assessee claimed a deductionfrom his trading profits of his share of the Association's expenses. The Court held that the payment made by the Association had created for its members advantages of an enduring nature which could properly be treated as capital and, therefore, the deduction claimed could not be allowed. Again, the point sought to be made by Mr. Pal was that the dealings with the third parties had been by the Association, whereas the deduction was being claimed by the assessee a member and yet it had been held that even the assessse had acquired an advantage of an enduring nature. It appears to me that in this case also Mr. Pal overlooked the structure of the case on which he was relying. If one looks at the reason of the thing, it becomes obvious that in the Court's view the benefit procured by the Association was a benefit which would in fact be shared by all its members and, therefore, the contribution made by each of the members towards the consideration paid for the benefit was obviously the price he paid for his share of the capital benefit which he was getting. But quite apart from the reason underlying the decision, it is expressly stated in the judgment at page 483 of the report that it was agreed before the learned Judge that no distinction ought to be made between the assessee and the Association. The two were regarded as standing in the same position and not appearing before the taxing authorities in different capacities and in those circumstances there was no occasion for the Court even to consider the point which Mr. Pal thought had been decided.
19. The cases cited by Mr. Pal being out of! the way, I think I can now revert to the facts before us. I have already pointed out that the payment here was not a payment made once and for all. I have also pointed out that an advantage, remaining wholly outside a business, cannot possibly be a part of its capital assets. As regards an advantage as distinguished from an asset, it seems to me that what Lord Cave's formula contemplates is that the advantage also must be an advantage in or inside the business and not an advantage in the shape of surrounding circumstances of a favourable nature. Nor could the benefit aimed at be expected to be an enduring benefit, because the Club did not bind the pupils of its school to any agreement to serve at its races after they had qualified as trained jockeys and therefore what it was spending money for was by no means any benefit of a certain or lasting character but only a chance of a benefit on occasions. I am unable to see that such expenditure could be anything but expenditure of a revenue character, laid out for the purposes of the Club's business. The broad facts here are that the Club thought that some local source in the supply of jockeys in the near future had to be established, if its business was not to be led to a crisis. In that view, it started a school and during the year of account and some other years ran it. The expenditure with which we are concerned was a particular year's expenditure of running that school.
I have already explained why his expenditure was an expenditure laid out for the purpose of the business. As regards whether it was an expenditure of a capital or revenue nature, I think I can do no better than refer to the test laid down by Lord Hanworth in the case of Mitchell v B.W. Noble Ltd.. (1927) 1 KB 719 at p. 737 (H). The test is that if the exnenditure is not to secure an asset but to enable the busi-ness to continue its same course as before andonly to remove a difficulty, present or anticipated, in carrying on the business on the same lines as before, then the expenditure is a revenue, not a capital expenditure. That test is completely satisfied.
20. NO point was sought to be made out of the circumstance that the expectation with which the Club had found the school had not been realised. Failure of the Club's hopes in that regard could not prevent the expenditure laid out for the purposes of the business. As Lord Keith observed in the case of (1955) AC 21 (D), which I have already mentioned.
'If the purpose of the expenditure is to benefit the trade, it is not necessary to show by demonstration that in fact that expenditure has produced, or will produce, profit or has prevented loss of profit or has facilitated or will facilitate the earning of profit'.
The learned Lord, however, added that the expenditure must be laid out for that purpose and with that expectation. It has not been found in this case that it was not with the expectation that the apprehended difficulty would be removed that the expenditure had been incurred. If it was incurred 'with that expectation, the fact that the calculation made by the Club proved to be a miscalculation, does not in any way alter the nature of the expenditure.
21. For the reasons given above, the answer to the question referred must, in my opinion, be in the negative.
22. The assessee will have the costs of this reference.
23. I agree.