Commissioner of Income-tax Vs. Mrs. Sunita Kumar - Court Judgment

Shyamal Kumar Sen, J.

1. This reference under Section 256(1) of the Income-tax Act, 1961, arises out of the income-tax assessment of the assessee for the assessment year 1980-81 for which the previous year ended on March 31, 1980.

2. The material facts involved in the reference are that the assessee is an individual deriving income from salary, dividend, interest on debentures, bank interest, insurance commission and horse racing. During the year under consideration, the assessee earned profit of Rs. 99,528 on the sale of race horses. The assessee was engaged in owning and maintaining as well as breeding race horses. She earned some income from winnings at races. The winnings were set off by the Income-tax Officer himself against the losses in horse racing carried forward from earlier years. However, the Income-tax Officer declined to set off the profit of Rs. 99,328 earned by the assessee on the sale of race horses against the losses from activities relating to horse racing as determined in the earlier years. The Income-tax Officer held that the profit earned on the sale of horses could be set off only against the losses suffered on the sale of horses. According to him, winnings from races in the shape of stake money otherwise constituted a distinctly separate source of income other than the income earned on the sale of race horses and so Section 74A(3) did not permit such set off against the losses of the earlier years. The Income-tax Officer disallowed the claim of the assessee to set off the current year's profit of Rs. 99,328 earned on the sale of race horses against the determined losses of the earlier years from horse racing.

3. The assessee appealed to the Commissioner of Income-tax (Appeals) and contended that the action of the Income-tax Officer was not justified. The Commissioner of Income-tax (Appeals) held that the claim of the assessee is admissible. According to him, the income earned by the assessee on the sale of horses was business income and so the same should have been set off against the brought forward losses from the activity of dealing in race horses. He directed the Income-tax Officer accordingly.

4. On the Revenue's appeal, the Tribunal held that the profit arising from the sale of horses during the year under consideration definitely comes under Section 74A(2)(c) as it cannot come under any one of the other sub-sections. It held that the losses suffered under Clause (c) and determined in the earlier years have to be set off against such profits during the current year which also come under Clause (c). The Tribunal agreed with the conclusion of the Commissioner of Income-tax (Appeals), though for a different reason. The Tribunal also observed that it was not necessary to go into the other questions relating to the head 'Capital gains' or 'Business'.

5. On the aforesaid facts, the following question has been referred to this court by the Tribunal under Section 256(1) on the application of theRevenue :

'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the profit arising from the sale of horses during the previous year relevant to the assessment year 1980-81 definitely comes under Section 74A(2)(c) of the Income-tax Act, 1961 ?'

6. It has been submitted on behalf of the Revenue that the losses of the earlier years as determined by the Income-tax Officer did not relate to the activity of dealing in horses which is separate from the winnings at horse races. According to him, the race horses were capital assets and the profit arising from their sale came under the head 'Capital gains' and, therefore there is no scope for setting off the losses accrued due to such sale against the adjustments of the account of the current year in the business.

7. It is the contention of the learned advocate for the Revenue that the race horses were capital assets and the profit earned by the assessee on the sale of horses cannot be income from business.

8. It is on record that the assessee was having activities not only relating to the winnings from horses but also relating to the sale of horses. The assessee suffered losses from the sale of horses in the earlier years also. In the assessment year 1979-80, there was sale of horses and the assessee suffered a loss in that year which has been duly determined by the Income-tax Officer to be carried forward to future years. Similarly, in the assessment year 1978-79, the assessee sold horses and suffered a loss which has also been determined by the Income tax Officer for being carried forward. The expenses arising out of the maintenance of race horses, their purchase price and the losses suffered in competing for stake money were all grouped together under the head 'Races including horse races' and losses have been determined under that head which appears in Section 74A(2)(c). The Department cannot now turn round and say that there are two different sources of income envisaged under the single item 74A(2)(c).

9. The decisions on the effect of loss incurred in owning and maintaining race horses are of no aid since such decisions are concerned with the question in the context of the law that prevailed before the insertion of Section 74A by the Finance Act, 1972, having effect from April 1, 1972. For example, in Janab A. Syed Jalal Sahib v. CIT : [1960]39ITR660(Mad) , the assessee, besides carrying on the business of manufacture and sale of beedis, attended horse races and indulged in betting and also entered in the race horses, some of which were his own and some owned in partnership with others. For the assessment years 194748 and 1948-49, the excess of the receipts over expenditure in the racing activities was assessed as income from business. It was decided that the receipt from racing and betting arising in the assessment years 1947-48 and 1948-49 could not be income from business, profession or vocation. The same could be income from other sources within the scope of Section 6 of the Indian Income-tax Act, 1922. But that income was of a casual and non-recurring nature exempt under Section 4(3)(vii) of the Act. After the insertion of Section 74A of the Income-tax Act, 1961, the law has altogether changed, rendering such decisions irrelevant.

10. The Finance Act, 1972, in the first instance, inserted a new item in the enumeration of income in Section 2(24) by inserting Clause (ix) therein. It has made '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 form or nature whatsoever' includible as income. So, from the assessment year 1972-73, it cannot be said that the winnings from lotteries, etc., are income of a casual and non-recurring nature exempt from tax.

11. While bringing such income to tax, a provision for the carry-forward and set off of losses from such sources has also been made by the Finance Act, 1972, by inserting a new Section 74A with effect from April 1, 1972. Section 74A, as it stood at the material time, is set out below :--

'74A. Losses from certain specified sources falling under the head 'Income from other sources'.--(1) Where the net result of the computation made for any assessment year in respect of any source falling under the head 'Income from other sources' and being a source specified in subsection (2), is a loss, such loss shall not be set off against income, if any, from any other source under that head or against income under any other head.

(2) The sources referred to in Sub-section (1) are ;--

(a) lotteries ;

(b) crossword puzzles ;

(c) races including horse races ;

(d) card games ;

(e) other games of any sort ;

(f) gambling or betting of any form or nature whatsoever not falling under any of the foregoing clauses.

(3) In the case of an assessee, being the owner of horses maintained by him for running in horse races (such horses being hereafter in this sub-section referred to as race horses), the amount of loss incurred by the assessee in the activity of owning and maintaining race horses in any assessment year shall not be set off against income, if any, from any source other than the activity of owning and maintaining race horses in that year and shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year and-

(a) it shall be set off against the income, if any, from the activity of owning and maintaining race horses, assessable for that assessment year :

Provided that the activity of owning and maintaining race horses is carried on by him in the previous year relevant for that assessment year; and

(b) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on ; so, however, that no portion of the loss shall be carried forward for more than four assessment years immediately succeeding the assessment year for which the loss was first computed.'

12. The Central Board of Direct Taxes in Circular No. 158, dated June 17, 1974, explained the scope of the said section in the following terms:--

'34. Carry forward and set off of losses from horse races.--Under Section 74A, losses from lotteries, crossword puzzles, races, card games, etc., are allowed to be set off only against income from the same source. Losses relating to these sources incurred in one year are also not allowed to be carried forward to be set off against income of a subsequent year. For this purpose, each of the following sources is regarded as a separate and distinct source :--

(a) lotteries ;

(b) crossword puzzles ;

(c) races, including horse races ;

(d) card games ;

(e) other games of any sort ;

(f) gambling or betting of any form or nature not falling under any of the foregoing items.

In view of this provision, loss incurred by an owner of race horses in the activity of owning and maintaining such horses is not allowed to be set off in the year in which it is incurred against any source of income except his winnings from races nor is it allowed to be carried forward to be set off against income from any source in any subsequent year.

The Finance Act, 1974, has amended Section 74A so as to provide that the losses incurred by owners of race horses in the activity of owning and maintaining such horses, to the extent these cannot be set off against other income from the source 'races, including horse races', will be carried forward and set off against income from the aforesaid source in subsequent years up to a period of four assessment years following the assessment year for which the loss is first computed. In a case where the taxpayer has no income by way of stake money in the relevant year, the whole of the revenue expenditure laid out or expended by him wholly and exclusively for the purposes of maintaining race horses will be regarded as the loss incurred by him in the activity of owning and maintaining such horses. Where the assessee has income by way of stake money in the relevant year, the amount of loss incurred by him in the activity of owning and maintaining race horses will be the amount by which the stake money falls short of the revenue expenditure laid out or expended by him wholly and exclusively for the purposes of maintaining such horses. The loss incurred by the taxpayer in the activity of owning and maintaining race horses will be set off against his winnings, if any, from races, in the same previous year and the balance, if any, will be carried forward to be set off against income from the same source in subsequent years. It should be noted that no deduction will be made in respect of the actual cost of the race horses nor will any depreciation be allowed in respect of such horses. Further, the loss computed for any previous year will be allowed to be set off in a subsequent year not only against the stake money received in the relevant subsequent year but also against other winnings, if any, from races. The set off will, however, be allowed only if the taxpayer carries on the activity of owning and maintaining race horses in the previous year relevant to the subsequent assessment year.

For the purpose of Section 74A(3), a race horse would mean a horse maintained for running in races upon which wagering or betting may be lawfully made and 'income by way of stake money' would mean the gross amount of prize money received on a race horse or race horses by the owner on account of the horse or horses or any one or more of the horses winning or being placed second or in a lower position in a horse race.'

13. Owning and maintaining horse races as such is not included in the enumeration of the sources, namely, Clauses (a) to (f) of Sub-section (1). But Sub-section (3) provides that the losses incurred by the owners of race horses in the activity of owning and maintaining such horses to the extent this cannot be set off against other income from the source, 'races, including horse races' appearing in Clause (c) of Sub-section (2) of Section 74A will be carried forward and set off against income from the aforesaid source in the subsequent years. But such carry forward shall not go beyond four years following the assessment years for which the loss is first computed. Now, the owner of the race horses may as well have income by way of stake money where he has income by way of stake income and at the same time if he suffers loss from the activity of owning and maintaining race horses, the loss will be allowed to be set off against income by way of stake money and the balance not so absorbed will be carried forward and can be set off against similar income from the activity of owning and maintaining race horses as well as income by way of stake money on horse races mentioned in Clause (c) of Section 74A(2).

14. This reading of the provisions of Section 74A(2)(c) read with Section 74A(3) is the correct reading of the law.

15. Section 56(2)(ib) provides that all winnings covered by Section 2(24) shall be assessed as 'Income from other sources'. Therefore, in no case can such winnings be assessed under Section 28 even where the gambling activity amounts to a business. If instead of winnings there is a loss in such activities, Section 74A prohibits the set off of such loss against income from any other source.

16. Accordingly, income from races including horse races is chargeable under the head 'Income from other sources'. The income arising from winnings by or stake money or from maintenance of race horses both fall under the head 'Income from other sources'.

17. We hold that Section 74A(3) makes special provision for an assessee, being the owner of horses, meaning thereby race horses. If the net result of the computation in respect of the source specified in Clause (c) of subsection (2), i.e., races including horse races is a loss, then, so much of the amount of such loss as does not exceed the amount of loss incurred by the assessee in the activity of owning and maintaining race horses shall be carried forward to the following assessment year and it shall be set off against the income, if any, from the source specified in Clause (c) of Sub-section (2) assessable for that assessment year, provided that the activity of owning and maintaining race horses is carried on by him in the previous year relevant to that assessment year.

18. Under such circumstances, it appears to us that income or profit arising out of sale of race horses may be adjusted under the aforesaid Subsection (3) of Section 74A against the loss arising in races including horse races as mentioned in Section 74A(2)(c).

19. As already noted, the assessee had been dealing in horses in the earlier two assessment years and there was a clear direction in the assessment orders to carry forward those losses to be set off against future profits arising under Section 74A(2)(c).

20. Accordingly, in our opinion, the Tribunal was correct in upholding the direction of the Commissioner of Income-tax (Appeals) to set off the losses of the earlier years against the profits of the current year from the same sources.

21. The question is, therefore, answered in the affirmative and in favour of the assessee.

22. There will be no order as to costs.

Ajit Kumar Sengupta, J.

23. I agree.