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2 S.C.R. SUPREMECOURT REPORTS 729 THE COMMISSIONER OE' INCOME-TAX, WEST BENGAL v. ROYALCALCUTTATURE' CLUB • (J. L. KAPUR, M. HIDAYATULLAH and J. c. SHAH, JJ.) Income Tax-Expenditure for preservation of business-If wholly and exclusivelylaid out for the purposeof business-Indian Income Tax Act, r922 (XI of r922), s. ro (2)(xv). The businessof therespondentclub was to runrace meet ings on a .commercialscale. The clubdid notown any horseand thereforedid notemployjockeys. It. was a matter of some importanceto the club that there were jockeys of requisiteskill andexperiencein sufficientnumbers who would be availableto the owners and trainers because otherwise the running of the racemeetingswould not be commerciallyprofitable and its interest would sufferand it might have had to abandonits busi ness if it did not takestepsto makejockeysof thenecessary calibreavailable.Therefore it establisheda schoolfor the trainingof Indianboys as jockeysand claimedthe sumsspent on the runningof theschoolas deductableamount under s. 10 (2)(xv) of theIndianIncomeTax Act. Th.e questionwas whetherin thecircumstancesof the case the expenditure claimed was one whichwas whollyand exclusi vely laid out for the purposeof therespondent'sbusiness. Held, that any expenditure which was incurredfor prevent ing the extinctionof abusinesswould be expenditurewholly andexclusivelylaid out for thepurposeof the businessof the assessee and wouldbe anallowablededuction. In the instant case the amountin disputewas laid out whollyand exclusivelyfor the purpose of therespondent's busi ness,becauseif thesupplyof jockeys of requisiteefficiencyand skillfailed,the businessof therespondentwould no longerbe possible. EasternInvestmentsLtd. v. Commissionerof Income-tax,West Bengal, [r95r] S. C.R. 594 and Commissioner of Income-tax v. ChandulalKeshavlal & Co., [1960] 38 I.T.R. 6o1, reliedon. British ltisulated and HelsbyCables v. Atherton, [1926) A. C. 205, Morgan v. Tate 0- Lyle Ltd., [1955) A. C. 21 and Boarland v. Kramat Pulai Ltd., [1953] 2 AIL E. R. n22, discussed. Strong & Co. v. Woodifield, (1906) A. C. 448and Smith v. IncorporatedCouncil of LawReporting, (1914) 3 K.B. 674, referr ed to . . Ward 0- Co. Ltd. v. Commissionerof Taxes, [1923] A. C. 145, distinguished. I960 Novembera8. 730 SUPREME COURT REPORTS [1961] :c960 CIVIL APPELLATE JURISDICTION: The Commission" 419 of 1958. Civil Appeal No. of Tncom!!·tax, West Bengal v. Royal Calcutta Turf Club Kapur J. Appeal by specialleave from the judgment and order dated August 20, 1957, of the Calcutta High Court in Income-taxReference No. 1 of 1956. HardyalHardy and D. Gupta, for the appellant. N. C. Chatterjee,Dipak Choudhri and B. N. Ghosh, for therespondent. 1960.November28. The Judgment of the Court was delivered by KAPUR, J.-This is an appeal by specialleave against the judgment and order of the High Court of Judicature at Calcuttain a referencemade by the Income-taxAppellate Tribunal under s. 66(1) of the Income-tax Act. The following question was refer red: "Whether in the facts and circumstances of this case, the Appellate Tribunal was right in holding that Rs.61,818 spent by the assessee to train Indian boys asjockeys, did not constituteexpenses of the business of the assessee allowableunder s. 10(2)(xv)?" which was answered in favour of the respondent.The Commissioneris the appellant before us and the asses. seeis the respondent. The respondentis an association of persons whose businessis to hold race meetings in Calcutta. on acommercialbasis. It holds two series of race meetings during the twoseasons of the year. The respondentdoes not own any horses and therefore doesnot employjockeys but they are employed by owners and trainers of horses which are run in the races. It is a matter of someimportance to the respondent that there shouldbe jockeys avail able to the owners with sufficientskill and experience because the success of races to aconsiderable extent depends upon the experience and skill of a jockeywho rides a horsein a race.Because it was of the opinion that there was a risk of the jockeysbecoming unavail able and that such unavailabilitywould seriously affect its businesswhich might result in its closing ' •· 2 S.C.R. SUPREME COURT REPORTS 731 down the business, the respondent considered it ex- i96o pedient to remedy that defect. Therefore in 1948, it Tl c --- .. establisheda schoolfor the training of Indian boys as ~j 1;;::;~;::~er jockeys SO that after their training they mightbe West Bengal availablefor purposes of racemeetingsheld under its v. auspices. The school, however,did not prove a sue- Royal Calcutta cess and after having beenin existencefor three years 1·urj Club it was closeddown. Kapur J. During the year endingMarch 31, 1949, the respon dent spent a sum of Rs.62,818on the running of its school and claimed that amount asa deductionunder s. 10(2)(xv) of the Income-taxAct and also in the assess ment under the Business Profits Tax for the charge able accountingperiod endingMarch 31, 1949.This claimwas disallowed by the Income Tax Officerand on appeal by AppellateAssistant Commissioner and also by the Income-taxAppellate Tribunal. At the instan ce of the respondent the question already quoted was referredto the High Court and was answeredin favour of the respondent.This appeal is brought by specialleave against that judgment. The decision under the BusinessProfits Tax Act willbe consequentialupon the decisfon of the deduc tion under the Income-tax Act. The Tribunal found that it was not the business of the respondent to pro vide jockeys to owners and trainers, that the jockeys trainedin the respondent'sschool were not boundto rideonlyin the races run by the respondent and that the benefit, if any, whichaccruedwas of ap. enduring nature. It also found that the respondent had been conductingrace meetingssince long, that it was not the case of the assessee that if-it did not train jockeys they wouldbecomeunavailable and that the mere policy of producingefficient Indian jockeys was not a sufficientconsiderationfor treating the expenditure as oneincurredfor the business of the respondent. For these reasons the expenditurewas disallowed. Before the AppellateAssistant e,pmmissioner, it was contendedby the respondent, that the reasonfor incurring the expenditurewas "to promote efficient Indian jockeys" and it was in the interest of the res pondent to see that the races are not abandoned on 732 SUPREME COURT REPORTS [1961] r96o account of the scarcity of jockeys. In the order of the T C --. . Tribunal it is stated that this was not the case of the he omnnsstouer dd I: of Income-tax responent, an thereiore when the respondentwant- West Bengal' ed paragraph 5 of the statement to besubstituted by v. the following: Royal Calcutta "It was the case of the assessee that unless it Turf Club. trained Indian Jockeys,· time may comewhen there Kapur]. may not be sufficient number of trainedjockeys to ride horsesin the races conducted by the assessee." the Tribunal did not agree to do so. Counsel for the appellantraised three points before us; (1) The question as towhether an item of expen ditureis wholly and exclusivelylaid out for the pur poses of business or not is a question of fact; (2) the connectionbetween an expenditure and profit-earning of the assesseeshould be direct and substantial and notremote and (3) to be admissibleas revenue expen diture it should not be in the nature of a capital ex pense,i.e., it should not bring into existence an asset of an enduringnature. As to the firstquestion this court has held in Ea11- tern InvestmentsLtd. v. Commissioner of Income-tax, WestBengal(') that "though the question must be decidedon the facts of each case, the finalconclusion isone of law". In Commissioner of Income Tax v. ChandulalKeshavlal & Co. (2), this Court said:- " Another test is whether the transactionis pro perly entered into as a part of the assessee'slegitimate commercialundertaking in order to facilitate the car rying on of its business; and it is immaterial that a third party alsobenefitsthereby. (Ea11tern Investment Ltd. v. Commissioner of Income-Tax, (1951) 20 I.T.R. 1). But in everycase it is aquestion of fact whether theexpenditurewas expendedwholly and exclusively for the purpose of trade or business of the assessee. In the presentcase the finding is that it was laid out for the purpose of the assessee'sbusiness and there is evidence to support this finding." But thoseobservations must be read in the context. In that case the assesseefirm was the ManagingAgent of a Company and at the request of the Direotors of (1) [1951] S.C.R. 59~. 598. (2)[1g6o] 38 I.T.R. 6o1,610. 2 S.C.R. SUPREMECOURT REPORTS 733 the latter agreed to accepta lessercommissionfor the Z960 year of account than it was entitledto. It was found Ths Commissione by the AppellateTribunal there that the amount was of Income-tax, expendedfor reasons of commercialexpediency and west Bengal was not givenas a bounty but tostrengthen the v. managedcompany so that if its financialposition Royal Calctttta became strong the assesseewould benefitthereby, and Turf Club on the evidencethe Tribunalcame to theconclusion Kapur 1. that the amount was whollyand exclusivelyfor the purpose of such business. It was on thisevidence that the expense was held to be wholly and exclusive- ly laid out for the purpose of the assessee'sbusiness andthis was the findingreferredto. In that case the Tribunal had not misdirecteditself as to the true scope and meaning of the words "wholly and exclusively laid out for the purpose of theassessee's business". In the presentcase the Income-taxAppellate Tribu- nal had misdirecteditself as to the true scope and meaning of thesewords. In our opinion,in the cir- cumstances of thiscase,it. cannotbe said that the finding of the Tribunal was one of fact. Thequestionas to whetherthe expenses of running the schoolfor jockeysis deductiblehas to bedecided taking intoconsiderationthe circumstances of this case. The business of the respondentwas to run race meetingson a commercialscale for which it is neces sary to haveraces of as high an orderas possible. For the popularity of the races run by the respondent and to make its businessprofitable it was necessary that therewere jockeys of requisiteskill and experiencein sufficientnumbers who wouldbe availableto the owners and trainersbecause withoutsuch efficient jockeys the running of racemeetingswould not be commerciallyprofitable. It was for this purpose that the respondent started the schoolfor training Indian jockeys. If therewere not sufficientnumber of effi cient Indian jockeys to ridehorsesits interestwould havesuffered, and it mighthave had to abandonits business if it did not takesteps to makejockeys of the necessarycalibre available.Therefore any expendi ture which was incurredfor preventing the extinction 93 734 SUPREME COURT REPORTS [1961) '960 of the respondent's business would, in our opinion,be The Commissioner expenditure wholl:y and exclusivelylaid out for the of Income-tax, purpose of the busmess of the assessee and wouldbe West Bengal an allowablededuction.This findssupportfrom v. decidedcases. In Commissioner of Income-tax v. Royal Calcutta Ohandulal Keshavlal & Go. (1 ), this Court held that in Turf Club order to justifya deduction the disbursement must be Kapur J. forreasons of commercialexpediency; it may be voluntary but incurredfor the assessee'sbusiness; and if the expense is incurredfor the purpose of the busi ness of the assessee it does not matter that the pay ment also enures to the benefit of a third party. Anothertest laiddownwas that if the transactionis properlyentered into as a part of the assessee's legiti mate commercialundertaking in order to facilitatethe carryingon of its business it is immaterial that a third party alsobenefitsthereby. In British Insulatedand Belsby Gables v. Atherton('),Viscount Cave L. C. held that a sum of moneyexpended, not of necessity and with a view to a directand immediatebenefit to the trade, but voluntarily and on the ground of commer cial expediency and in orderindirectly to facilitate the carryingon of the businessmay yet be expended wholly and exclusivelyfor the purpose of the trade. In a casemorerecentlydecided Morganv. Tate & Lyle Ltd. (8 ) the assesseecompanywas engaged in sugar refiningbusiness and it incurredexpensesin a propa gandacampaignto oppose the threatened nationalisa tion of the industry. It washeld by the House of Lords by a majority that the object of the expenditure being to preserve the assets of the companyfrom seizure and soto enable it to carryon itsbusiness and earningprofits, the expensewas an admissible deduc tion beingwholly and exclusivelylaid out for the pur pose of the company'strade. Lord Morton of Henry. ton said: "Looking simply at the words of the ruleI would ask: "If moneyso spentis not spentfor the purpose of the company'strade, for what purposeis it spent?" If the assets are seized, the companycan no longer (1) (1g6o) 38 I.T.R. 601,610.(2) [1926]A.C. 205. (3) [1955]A.C . .,, / 2 S.C.R. SUPREME COURT REPORTS 735 carry on the trade whichhas beencarriedon by the z96o use of these assets.Thus the money is spentto pre- Th c --. . th .f th .,td ,, e ommissioner servee veryexistenceoe companys ra e. of Income-ta"· See also Strong & Co. v. Woodifield( 1), the observations West Bengal of Lord Davey; and Smith v. IncorporatedCouncil of v. Law Reporting (g). Royal Calcutta C 1h . Turf Club ounsel for the appel ant relied upon te Judgment of the Privy Councilin Ward & Co. Ltd. v. Commis- Kapu 1 1. sioner of Taxes ( 3), but that decisionproceedson a differentstatute where the words were of a very res- trictivecharacter,the wordsbeing: " ..................... Expenditureor loss of anykind not exclusivelyincurred in the production of the assessable income derivedfrom that source ............ ". This case was distinguished in Morgan v. Tate & Lyle(') on the ground that the language of the New Zealand statute wasmuchnarrower than the language of r. 3A in England. Referencewas alsomade by the appellantto Boar "land v. Kramat Pulai Ltd. ( 5). In that case DiJ'.ectors of threeCompaniesengaged in tin mining in Malaya incurredexpenditureon printing and circulatingto shareholdersa pamphletcontainingremarks of the Chairman of the Company.The pamphletwas an attack on the policy and acts of the Socialist Govern ment and it was held that the questionwhether the money was wholly and exclusivelylaid out or expend ed forthepurpose of tradewithin the meaning of rules applicable to the question was one of law but on aconsideration of thequestion it washeld that the expenditurewas not solelyincurredwith that object. It is not necessaryto discuss that case at any length becausewhat was heldin that case was that the pam phlet was not whollyand exclusivelyfor the purpose of the company's trade.. Applying the law,as laiddown in thosecases, to the presentcase the conclusionis that the amount in dispute was laidoutwholly and exclusivelyfor the purpose of the respondent'sbusiness because if the (1) [19o6] A.C. 448, (2) (1914] 3 K.B.674. (3) [1923)] A.C. 1.45· (4) [1955] A.C. 21. (5) [1953] 2 All E.R. 1122. 736 SUPREME COURT REPORTS [1961] '96° supply of jockeys of efficiency and skill failed the Th C -. . business of the respondentwould no longer be possi- e ommissioner b. of Income-tax le. Thus the money was spent for the preservation West Bengal' of the respondent'sbusiness. v. As to the third point there is nosubstancein the Royal Calcutta submission that the expenditurewas in the nature of Turf Club a capitalexpensebecause no asset of enduring nature Kapur J. wasbeingcreated by this expense. In our opinion the High Courthas rightlyheld that the expenditureclaimed was one whichwas wholly and exclusively laid out for the purpose of the respon dent'sbusiness. It was to prevent the threatened extinction of the business of the respondent. In the result this appealis dismissed with costs. Novemberag. Appeal dismissed. K. R. C. S. BALAKRISHNACHETTY & SONS & CO. v. THE STATE OF MADRAS (J. L. KAPUR, M. HIDAYATULLAH and J.C. SHAH, JJ.) Sales Tax -Claimof exemption.by licensee-If conditional upon observance of conditionsand restrictions-Ma4J'as General Sales Tax Act, I939(Mad. IX of z939), s. 5. The appellants,who weredealersin Cotton yarn, obtained alicenseunder the MadrasGeneralSales Tax Act, 1939(IX of 1939).Section 5 of that Act exemptedsuch dealersfrom pay ment of sales tax under s. 3 of the Actsubjectto such restric tionsand conditionsas mightbe prescribed,including the condi tions as to licensesand licensefees. Section13 requireda licen seeto keep and maintaintrue and correct accountsof the value of the goods sold and paid by him. Rule 5 of the General Sales Tax Rulesprovided that any personseekingexemption unders. 5 of the Act must apply for license in Form 1 which made the licensesubject to the provisionsof the Act and the rules madethereunder. The appellantson surpriseinspection werefound to maintain two separatesets of accounts,on the basisof one of which they submitted their returns and the other |
