P. JAGANMOHAN REDDY C.J. - In compliance with the directions of this court, the Income-tax Appellate Tribunal has referred the following questions namely :
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the activities of the assessee on the New York Cotton Market constituted 'business' within the meaning of section 2(4) of the Income-tax Act, 1922, and the income therefrom taxable under the Act and
2. If the answer to question No. 1 is in the negative, whether the income on New York cotton betting is exempt from tax as 'casual and non-recurring' under section 4(3)(vii) of the Income-tax Act ?'
These questions arise for determination in respect of the assessment years 1954-55, 1955-56 and 1956-57 for which the relevant accounting years are the official years ending with March 31, 1954, March 31, 1955 and March 31, 1956, respectively. The assessee filed a voluntary return in respect of the assessment year 1954-55 and in respect of the other two years he filed returns in response to notices issued under section 34 by the Income-tax Officer. In all these returns, the assessee admitted income from property and from business, which comprise of selling soda water, maintaining 'killi' shop and plying a motor lorry. In addition to this income, he showed in Section D of the return under which an assessee is required to show 'any income, profits or gains which are not included in sections A, B and C but which the assessee claims to be not taxable for any reason such as......' a sum of Rs. 5,850, Rs. 9,400 Rs. 24,460 for the three years respectively. Before the Income-tax Officer it was admitted that the assessee carried on business, commonly known as 'bracket business' which consisted of betting on the New york cotton rates. No accounts were maintained by the assessee in respect of this transaction. In the absence of accounts, the Income-tax Officer determined the income for each year on the basis of investments and property acquisitions in each of the years and arrived at the figures of Rs. 3,580, Rs. 9,400 and Rs. 35,660, respectively, for each of the respective assessment years. In the appeal filed by the assessee before the Appellate Assistant Commissioner also, the assessee challenged the computation though it appears from the Appellate Assistant Commissioners order that the assessee indirectly denied liability on the income, because he included the income in Section D of the return. The Appellate Assistant Commissioner in his order stated, 'any way the question of liability is not pressed in appeal his order stated, 'any way the question of liability is not pressed in appeal and the assessee only objects to the computation of income.' He, however, confirmed the Income-tax Officers estimate and rejected the appeal in so far as the assessment years 1955-56 and 1956-57 are concerned. But, in respect of the assessment year 1954-55, he enhanced the income from Rs. 3,580 to Rs. 5,850, the latter being the income admitted by the assessee himself.
Against this appellate order, the assessee filed an appeal before the Tribunal. The Tribunal in its order stated that the only objection taken in the grounds of appeal was regarding the computation of the income, but at the time of hearing of the appeal, an additional ground claiming exemption from taxation under section 4(3)(vii) was raised by the assessees advocate. Before the Tribunal, the departmental representative objected to this additional ground being raised, on the ground that the assessee should not be permitted at that stage to change his stand and to say that the income itself did not arise from a business, profession or vocation and that the receipts were purely betting receipts, which were casual and non-recurring. The Tribunal, while stating that the department was justified in raising that objection, nonetheless observed :
'Whether the activities of the assessee amounted to a business could have been investigated by the department if any such objection had been raised by him before the department. No such objection was raised. In fact, in was admitted before the department that the income arose from a business which was not permitted by law and that, therefore, the income should not be made liable to tax. Once, therefore, income is admitted, if the assessee must change the source from which it arises, the onus would be upon him to prove that it is from one particular source and not the other. If that is not done and if the assessee is to be permitted to contend that the income does not arise from business, income having once been admitted to arise, it must be held as income from an undisclosed source. In that view, therefore, we think we must accept the contention of the department that if the income is not from business as originally admitted by the assessee, it must be held to be income from an undisclosed source........ Therefore, in our view, on this short ground alone the assessees contention in respect of his additional ground that the income is exempt under section 4(3)(vii) would fall to be dismissed.'
Mr. Kondaiah for the department also takes the stand that as the assessee while making the return stated that the income was from the business of New York cotton futures, he cannot now say that it was not from business. We cannot accept this contention. The mere fact that the assessee has not raised this contention before the Income-tax Officer or the Appellate Assistant Commissioner would not, in our opinion, bar him from raising the same before the Tribunal. It has been held times without number that there is no estoppel on a question of law. Whether, in fact, the transactions of the assessee in respect of the New York cotton futures, known as 'brackets' are exempt from tax under section 4(3)(vii) or it would amount to 'business' is a question of law. The mere fact that the assessee, not having appreciated his legal rights, failed to raise the contention before the Income-tax Officer or the Appellate Assistant Commissioner, where he was not represented by a lawyer but by his auditor who not being qualified in law, is not competent to appreciate the principles of law or its subtleties, he cannot be denied the right to raise that question at the stage of the appeal before the Tribunal, which is also a forum both on question of fact as well as law. The assessee cannot, therefore, be denied an opportunity to raise such questions as would be open to him under the Act, before the Tribunal. This is a typical case which demonstrates the need and necessity for an assessee to have the services of a lawyer, at any rate before the Tribunal, because after that stage, no question of law which does not arise on facts as found by the Tribunal would arise or could be raised in an application for reference to the High Court. It is, therefore, imperative for the assessee to consider all aspects of his legal rights and liabilities arising under the Act at that stage, which in this case he has done. This is how the two questions which we had directed the Tribunal to refer, arise for our determination.
As stated by the Tribunal, the assessee was regularly dealing in the American Cotton price differences basing on the opening and the closing rates on the New York Cotton Exchange. This, according to the Tribunal was a well known form of speculation. The Tribunal further observed that though it is not permitted to be carried on by law in India it does not, however cease to be business for that reason. Consequently, the Tribunal did not agree with the contention that the winning in the American Cotton futures was accidental, left to chance and fortune and is, therefore, non-recurring in nature.
The first question that would arise, therefore, is whether the regular dealings of the assessee in the American cotton price differences based on the opening and the closing rates of the New york Cotton Exchange, would amount to 'business' within the meaning of section 2(4) of the Act. If the answer to this question is that it is not business, then the other question that arises for consideration is whether the income derived therefrom is of a casual and non-recurring nature as provided in section 4(3)(vii) of the Act. It is necessary to read these two provisions which are as under :
'2. (4) business includes any trade, commerce or manufacturer or any adventure or concern in the nature of trade, commerce or manufacturer.
4. (3) Any income, profits or gains falling within the following classes shall not be included in the total income of the person receiving them;.....
(vii) Any receipts not being capital gains chargeable according to the provisions of section 12B and not being receipts arising from business or the exercise of a profession, vocation or occupation, which are of a casual and non-recurring nature, or are not by way of addition to the remuneration of any employee.'
It may be observed that under section 4(1) of the Act, subject to the provisions of the Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived, while sub-section (3) of section 4 exempts certain incomes from being included in the total income. Section 6 exempts certain incomes from being included in the total income. Section 6 states the heads of income under which the incomes, profits and gains chargeable to income-tax are divided, viz., (i) salaries; (ii) interest on securities; (iii) income from property; (iv) profits and gains of business, profession or vocation; (v) income from other sources; and (vi) capital gains. Thereafter each one of these heads in the subject-matter of separate provisions from sections 7 to 10, and 12B. Section 10 deals with profits and gains of business, profession or vocation. If any of the activities of an assessee or the source of his income properly fall within the heads enumerated in section 6(i) to (iv) and (vi) which are specifically provided for in sections 7 to 10 and 12B they cannot fall under section 4(3)(vii) because they will not be deemed to be receipts which are of a 'casual and non-recurring nature'.
The word 'business' has been judicially considered by highest authorities and it is unnecessary to cite a large number of cases, as we think a reference to the locus classicus decided by the Privy Council in Income-tax Commissioner v. Shaw Wallace & Co. as subsequently approved of by their Lordships of the Supreme Court in Liquidators of Pursa Ltd. v. Commissioner of Income-tax and Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax will be sufficient for our purpose. It the Privy Council case, the respondents carried on business in India as merchants and as agents for various companies. For several years before 1928 they acted as distributing agents in India for two oil companies but without any formal agreements. The two oil companies having combined and decided to make other distributing arrangements each terminated the respondents agency. Some time in the early part of 1928, one of the oil companies, the Burma Company, paid to the respondents a sum of Rs. 12,00,000 'as full compensation for cessation of the agency' and in August of the same year the other oil company, viz., Anglo-Persian Company, paid them another sum of Rs. 3,25,000 as 'compensation for the loss of your office as agents to the company'. The Income-tax Officer, in computing the assessable income of the respondents for the relevant year, took these two receipts into account as profits or gains of their business in the year ending December 31, 1928, but allowed certain deductions therefrom in respect of compensation paid by the respondents to various employees, leaving a balance of Rs. 9,83,361 which he included in the total income of the respondents found assessable for the year 1929-30. The questions which their Lordships had to consider were (i) whether the amount of Rs. 9,83,361 constiuted a capital receipt and therefore not income, profits, or gains within the meaning of the Income-tax Act; and (ii) if it could be said to be income, profits or gains within the meaning of the Act, was it liable to be assessed under either of the sections 10 and 12 of the Act, inasmuch as (1) it was not the profits or gains of any business carried on by the assessees within the meaning of section 10 of the Act, nor (2) income, profits or gains from other sources within the meaning of section 12 of the Act They had also to consider in the alternative whether the payment of Rs. 9,83,361 was not an ex gratia payment in the nature of a present from the oil companies, and was it not, therefore, exempt under section 4, sub-section (3)(vii) of the Act The High Court returned an answer to question (1), viz., whether it was a capital receipt. It though that the other question fell within a decision of that court in In re Turner Morrison & Co. Their Lordships of the Privy Council, while agreeing with the High Court that the real matter for decision fell under question (i), nonetheless though that that question was not happily worded, as it seemed to suggest that it was only if the sum there referred to was 'in the nature of a capital receipt' that it would be exempt from assessment, whereas the more correct proposition seemed to be that it was only if it was it the nature of an income receipt that it would fall to be assessed to tax. Their Lordships stated that the question was, however, re-stated by the learned Chief Justice of the Calcutta High Court in more precise terms, viz., 'whether these sums are income, profits or gains within the meaning of the Act at all, and that for the reasons stated in his judgment he came to the conclusion that they were not'. While the Privy Council agreed with this conclusion, they arrived at the result, according to them, by a slightly different road. After setting the object of the Indian Income-tax Act, which was to tax 'income', which term the Act does not define but in the later sections is expanded into 'income profits and gains', which was more a matter of words than of substance, Sir George Lowndes observed at page 212 :
'Income, their Lordships think, in this Act connotes a periodical monetary return coming in with some sort of regularity or expected regularity, from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. Thus income has been likened pictorially to the fruit of a tree, or the crop of a field. It is essentially the produce of something which in often loosely spoken of as capital. But capital, though possibly the source in the case of income from securities, is in most cases hardly more than an element in the process of production.'
After setting out the sources from which the taxable income under Act was to be derived as enumerated in section 6, one of which was 'business' as defined in section 2(4), it was observed at page 213 :
'The words used are no doubt wide, but underlying each of them is the fundamental idea of the continuous exercise of an activity.'
After referring to section 10, namely, that the tax is to be payable by an assessee under the head business 'in respect of the profits or gains of any business carried on by him' it was further observed :
'Again, their Lordships think, the same central idea : the words italicised are an essential constituent of that which is to produce the taxable income : it is to be the profit earned by a process of production. And this is borne out by the provision for allowances which follows.'
Their Lordships considered the provisions of section 4(3)(v), which is now omitted by section 3 of the Income-tax (Amendment) Act (22 of 1947), but which before its amendment provided that the Act shall not apply to the following classes of income : viz.,
'Any capital sum received in commutation of the whole or a portion of a pension, or in the nature of consolidated compensation for death or injuries, or in payment of any insurance policy, or as the accumulated balance at the credit of a subscriber to any such provident fund.'
and held, repelling the contention that the word 'income' in the Act has wider significance than would ordinarily be attributed to it, in that the receipts mentioned in the sub-section (v) of section 4(3) are also termed as 'income'. Sir George Lowndes said at page 214 :
'Their Lordships do not think that any of these sums, apart from their exemption, could be regarded in any scheme of taxation as income, and they think that the clause must be due to the over anxiety of the draftsman to make this clear beyond possibility of doubt. They cannot construe it as enlarging the word income so as to include receipts of any kind which are not specially exempted.'
While their Lordships did not consider the question of exemption under section 4(3)(vii) and though that the decision in the case of In re Turner Morrison & Co., needed reconsideration in the light of the judgment of the Privy Council, nonetheless their observations in respect of the word 'income' used in section 4(3) would apply in relation to the exemption in clause (vii) of that section, viz., that a receipt which is of a casual and non-recurring nature cannot be deemed to be income.
In Narain Swadeshi Weaving Mills v. Commissioner of Excess profits Tax their Lordships of the Supreme Court, while referring with approval to the dictum in Income-tax Commissioner v. Shaw Wallace & Co., viz., 'that the words used in that definition are no doubt wide but underlying each of them is the fundamental idea of the continuous exercise of an activity', observed at page 773 :
'The word business connotes some real, substantial and systematic or organised course of activity or conduct with a set purpose. On the other hand, a single and isolated transaction has been held to be conceivably capable of falling within the definition of business as being an adventure in the nature of trade provided the transaction bears clear indicia of trade. The question, therefore, whether a particular source of income is business is.'
In the light of the above discussion, the question for determination is : Whether the dealings of the assessee in what is known as 'brackets' which comprise of winning or losing the money based on the opening and the closing rates of the New York Cotton Exchange on a particular date depending on whether or not they tallied with the figures given by the assessee, constitute his business within the meaning of the definition as explained by the Privy Council and the subsequent Supreme Court decisions. If it is business, then there is no question of the assessee not being liable to tax. If it is not, then there is the further question whether it is of a 'casual and non-recurring nature'.
The learned advocate for the assessee contends that receipts from these transactions are similar to receipts from a gam of card or betting on horse races which do not involve the continuous exercise of activity or an organised or systematic effort or enterprise on the part of the assessee. From the nature of the transaction it is clear to our minds that the winning or losing does not depend on any skill or enterprise, much less on any organised skill or activity. It is a mere game of gambling and guess work. What would be the figure with which the New York Cotton Stock Exchange opens on any particular day and closes, is a gamble. It may be a sheer coincidence if the figures given by the assessee tally with the opening and closing figures. The probability of winning is a mere chance. No doubt, a Full Bench of the Allahabad High Court in In re Lala Indra Sen said that the test is to try to see what is the mans own dominant object - whether it was to conduct an enterprise of a commercial character or whether it was primarily to entertain himself. If it is a hobby or pastime, the winning would be exempt from tax as being a receipt of non-recurring nature and not arising from business or exercise of business, vocation or occupation. But if betting on racing is conducted on business lines, or as a commercial enterprise, receipts arising out of it would be chargeable as profits of a business or as income from other sources and any resulting loss would be set off against the other heads of income. While dealing with the observations of Rowlatt J. in Graham v. Green and Cooper v. Stubbs, in the latter of which Warrington L.J. desired to reserve for consideration the question whether betting transactions which produce a revenue to the person who engages in them may not result in profits which are assessable to tax, the Full Bench remarked that these English cases should not be considered by the income-tax authorities as of universal application, as what we have to deal with in the definition of business as given in the Indian Income-tax Act. It will be observed that their Lordships of the Privy Council also in Shaw Wallace case said much the same thing when they observed that,
'.........their Lordships would discard altogether the case law which has been so painfully evolved in the construction of English income-tax statutes - both the cases upon which the High Court relied and the flood of other decisions which has been let loose in this Board.'
It was further observed :
'The Indian Act is not in pari materia; it is less elaborate in many ways, subject to fewer refinements, and in arrangement and language it differs greatly from the provisions with which the courts in this country have had to deal. Under such conditions their Lordships think that little can be gained by attempting to reason from one to the other, at all events in the present case in which they think that the solution of the problem lies very near the surface of the Act, and depends mainly on general considerations.'
The Madras High Court in Janab A. Syed Jalal Sahib v. Commissioner of Income-tax was dealing with the case of an assessee, who while carrying on the business of manufacturing and selling beedis, indulged in betting and also entering in the races, horses, some of which were his own and some of which he owned in partnership with others. He maintained separate set of accounts for these racing activities. The excess of the receipts over the expenditure in these activities amounts to Rs. 44,259 for the accounting year ending March 31, 1947 and Rs. 13,104 for the accounting year ending March 31, 1948. Neither the assessee nor the department made any difference between what the assessee made or lost on his bets and what he made or expended on his horses. The question was whether those amounts were taxable income or were casual and non-recurring receipts and exempt from tax under section 4(3)(vii) of the Income-tax Act. Rajagopalan J., who delivered the judgment of the Bench, held that gambling by betting on horses cannot be viewed as a business, though a person indulges in it habitually and even makes money by it ; and that 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. It is virtually impossible, the learned judge said, to look upon gambling by betting or racing, i.e., entering horses for races, or a combination of both, as constituting a profession or vocation. These observations were in accord with those of Braund J. in In re Lala Indra Sen. At page 674, Rajagopalan J. said :
'We are in respectful agreement with these observations of Braund J. To adapt the words of Braund J., where the only facts known are that a well-to-do man like the assessee owns horses and bets on them and other houses the prima facie view should be that he does so for his pleasure, even though that pleasure brought him substantial sums of money. Obviously it is not the ultimate success or failure from a pecuniary point of view that really decides whether a given set of activities constituted the business of a person. If the racing and betting activities of the assessee constituted his business, it would continue to be his business, whether he made profits or sustained losses in any given year or even over a series of years. The amount won or lost in a given period again may not be a relevant factor in deciding whether it was his business. The activities organised on normally accepted commercial lines constitute the essence of any business; and, as we have pointed out, there was no evidence of that at all in the case of the assessee. There was nothing to rebut what Braund J. held should be a prima facie view of such racing activities, that a person of comparative affluence and means undertakes them for his pleasure. To that must be added the further factor to which we have already adverted, the very nature of a bet with something wholly irrational about its results, as pointed out by Rowlatt J. Again, we have to guard ourselves against being understood to say that gambling could never be organised on a commercial basis and could never constitute a business. 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. That evidence is lacking in this case.'
The next question they dealt with was whether that income was of a casual or non-recurring nature. Again Rajagopalan J. had recourse to Braund Js observations in In re Lala Indra Sen (page 220) :
'I think that the word casual in this section (i.e., section 4(3)(vii)) must be read as meaning the antithesis of that which is governed by something more than mere chance - something out of which, according to the probabilities of business or to the known course of practical experience, a rational expectation of profit arises. And that does not, in my opinion, apply to a mere bet.'
It may be noted that in the Full Bench case of the Allahabad High Court, Braund J., with whom Bajpai J., was in substantial agreement, pointed out that what section 4(3)(vii) of the Act requires is that the receipts should not only be casual but they should also be non-recurring. Iqbal Ahmed J., however, dissented and in his opinion that test that it should be non-recurring was not satisfied. The observations of Braund J. at page 220, which were cited by Rajagopalan J. with approval, are as follows :
'... the true view is that he made a bet whenever he felt inclined to do so. He was not compelled to and, as far as we know, there was no method in his betting. It think, therefore, that the right way to look at this is that the assessee, whenever he felt inclined, from time to time made a bet and not that he made a series of bets on a prescribed plan. He was free to stop whenever he liked. And if each bet is, as I think, an individual transaction, I can myself see nothing of a recurring nature about it. It was not its nature to recur. If it did in fact recur with great frequency, it might on that account because a business. It may be true that, in fact, these bets did recur. But that was not the result of the nature of the transaction but of the mere spasmodic volition of the assessee. They were not, to my mind, of a recurring nature ...'
After citing these observations, Rajagopalan J. said at page 678 :
'In the case of gambling by betting and racing, even as in the case of gambling with dice or cards, the habit of gambling or the habitual indulgence in gambling is not enough to show that the receipts, when they do materialise, are of a recurring nature. In the case of such receipts from betting, what suffices to establish that they were casual should, to a large extent, suffice also to establish that they were non-recurring.'
Then he have the example of persons winning prizes in lotteries, which are wholly dependent on chance. He observed :
'If person wins a prize in a lottery, that transaction is never likely to recur, as pointed out by Braund J. In another lottery the same person may win another prize. It is not a recurrence either of the transaction, or even of a receipt of the prize. Could it be said that because a man won two prizes, either in the same lottery or in more than one lottery in the course of a short time or a long time, the receipts of prizes were of a recurring nature and therefore fell outside the scope of section 4(3)(vii) of the Act ... We are clearly of opinion that receipts even from habitual betting are non recurring receipts, which fell within the scope of the exemption for which section 4(3)(vii) of the Act provides.'
It is also our view that betting, in which there is purely an element of chance and winning in it is not dependent on skill of any degree, notwithstanding the fact that it brings periodic income or periodic loss, the net result of which over a year may be a gain, is not business and the receipts therefrom would only be of a casual and non-recurring nature. At any rate, the mere fact that a person received amounts by gambling, or betting or in a game of chance, does not be itself establish that the transaction is in the nature of a business and the income is not casual and non-recurring. It must further be established that it must involve continuous exercise of activity or an organised or systematic effort or enterprise on the part of assessee. We do not think that in this case there is any element of that nature which will justify of a business nature or that the receipts therefrom are not of a casual or non-recurring nature.
In the result, our answer to the first question is in the negative and in favour of the assessee and to the second question is in the affirmative and also in favour of the assessee. Let the reference be answered accordingly with costs. Advocates fee Rs. 250.