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[2003] 129 Taxman 803 (Madras)/[2003] 259 ITR 184 (Madras)/[2003] 180 CTR
231 (Madras)

[2003] 129 Taxman 803 (Madras)

HIGH COURT OF MADRAS
Mrs. Kamala Muthia
v.
Commissioner of Income tax
V.S. SIPURKAR AND N.V. BALASUBRAMANIAN, JJ.
T.C. NO. 44 OF 1988
OCTOBER 10, 2002

Section 28(i) of the Income-tax Act, 1961 - Business income - Chargeable as -

Assessment year 1980-81 - Assessee owned and maintained a number of race horses,
which were run in horse races and were also leased out in auction conducted by Turf
Club to run in horse races - Tribunal held that race horses were stock-in-trade of
assessee whose activities were in nature of business and, therefore, income arising
therefrom was her taxable business income, besides holding that entire income arising
from auction was assessable in year of auction - Whether Tribunal was right in holding
that receipts from lease and sale of horses were assessable as income in the hands of
the assessee - Held, yes - Whether Tribunal was right in holding that receipts from
lease and sale of horses were to be considered for assessment only under head
‘Profits and gains of business or profession’ and not under head ‘Capital gains’ - Held,
yes - Whether Tribunal was right in holding that horses were not personal effects of the
assessee but they were stock-in-trade of assessee - Held, yes - Whether, since
assessee was maintaining accounts on mercantile basis, Tribunal was right in holding
that receipts from lease of horses were liable to be assessed in year of accrual, that is,
in year of auction when bidding was completed and same need not be spread over
period of lease - Held, yes
FACTS

The assessee owned and maintained a number of race horses. The assessee made use of horses in races
and she offered the winnings of the stake money received in the running of the horses in the horse
races. Horses were given on lease in auction and successful bidders were also required to use the race
horses in races. The successful bidders were entitled to use a filly in horse race for a period of four
years and in the case of a colt they were permitted to use it for a period of five years. The Bangalore
Turf Club, which arranged the lease of horses, retained a portion of the lease income and handed over
the balance to the assessee. The assessee not only maintained the horses but also sent horses to the stud
farm and if the mare gave birth to foals, she would automatically become the owner of the offspring.
The assessee paid to the Bangalore Turf Club for the services rendered to the horses and the Bangalore
Turf Club maintained the accounts on behalf of the assessee. Apart from maintaining horses, the

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assessee maintained regular books of account and it was stated that the assessee was having a running
account with the Bangalore Turf Club, which conducted auction on behalf of the assessee for the lease.
The ITO rejected the assessee’s contention that owning of race horses was a hobby and receipts arising
from the same were receipts from hobby and not liable to be taxed. Besides rejecting the assessee’s
contention of hobby, the ITO held that income arising from the sale of horses could not be assessed as
capital gains because the horses were the stock-in-trade and not capital assets of the assessee. The
assessee contended that even if the horses were her capital assets, the charge would still fail because
there was no cost of acquisition involved in the purchase of a filly or colt and since there was no
question of cost of acquisition, the sale or lease of horses would not result in capital gains. She also
contended that the lease income arising from the auction of horses was not assessable in the year of
auction but should be spread over the period of lease and was liable to be assessed in each year of
receipt of income. All the contentions raised by the assessee were rejected by the ITO and the order of
the ITO was upheld by AAC and the Tribunal.
On reference :
HELD

The question whether the income from lease or sale of horses run in horse races amounted to business
or not would depend upon the facts and circumstances of the case. [Para 7]
Admittedly, the assessee had been carrying on the activity in the sale, lease, and maintenance of horses
in an organised manner not only in the year in question but in the prior years and also in the
subsequent previous years and further the assessee had carried on the activity with a profit motive,
which was clear from the way in which the activities were carried on by the assessee. There was a
commercially organised activity carried on by the assessee with the aid of the staff and the purchasing
agents and with the help of the Bangalore Turf Club and the assessee had used the horses in various
races conducted at various centres. It was, therefore, held that the assessee had employed the horses in
races as a normal business as a prudent man would normally do and it was not a case of an owner of
the horse, who possessed the horses either for pleasure or for the purpose of pride of possession. It
was, therefore, held that the Tribunal was correct in holding that the activities of the assessee were
business activities and there was a profit element involved in carrying on the activity of the assessee. It
was found that the Tribunal had taken into account the dominant intention of the assessee in
maintaining the race horses and found that she had engaged herself in an organised systematic
business activity in the sale and lease of the horses. Hence, it was held the activity of the assessee was
the business activity. It was found that the assessee had carried on the activity of the horses with the
object of earning income from those horses by employing them in races, by letting out the horses and
by sale of the horses in a systematic and regular activity in the course of other assessment years
including the assessment year in question. It was, therefore, held that the Tribunal was perfectly
justified in its view that the income which arose from the sale of the race horses and the lease of the
horses was business income and the income should be assessed as such.
The Court was of the view that the question whether the activity was a business activity or it was a
hobby would depend upon the dominant intention of the assessee and the actual activity carried on by
the assessee. It was found that there was a regular and systematic activity carried on by the assessee in
maintenance of the race horses and the dominant intention of the assessee in maintaining race horses
was to earn income from the horses either by allowing them to run in races and to earn profit or by way
of sale or lease of the horses and thereby to earn income. The instant case was not a case where the
assessee maintained one or two horses as a hobby. The receipts from the sale or lease of the horses
were not one-time receipts, but the assessee had been periodically receiving the income by the sale or
lease of the horses for different assessment years in question. Further, the assessee had been
maintaining the horses as a normal businessman would do and the activities of maintaining, sale or

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lease of the horses were conducted by the assessee in a systematic manner with a commercial motive in
holding and maintaining the horses. It was, therefore, held that the receipts arising either from the sale
or lease of the horses were rightly held to be the income of the assessee chargeable to tax. It was found
from the facts of the case that the horses were used for commercial purposes to earn profit. It was,
therefore, held that the Tribunal was correct in holding that the receipts from the sale of horses or by
the lease of horses were her business income and not an income from the hobby. [Paras 8 and 9]
As to the question whether horses owned by the assessee were her personal assets, the view of the
Tribunal that the race horses owned by the assessee were stock-in-trade was reasonable as the assessee
was engaged in the activity of maintaining the horses by spending considerable time, money and
energy. It was, therefore, held that horses, in the circumstances, were rightly held to be stock-in-trade
of the assessee. Once it was held that the horses were the stock-in-trade of the assessee, the further
question that there was no cost of acquisition in the case of colt or filly also did not assume importance
as the income from the sale or lease of the horses would be assessable under the head ‘Profits and
gains of business or profession’ and not under the head ‘Capital gains’. [Para 11]
As to the question of time of accrual of income, on the basis of the agreement entered into by the
assessee, the right of the assessee to receive the entire income accrued as soon as bidding was
completed in the auction conducted by the Bangalore Turf Club. Therefore, it was held that there was
no scope for spreading the income over the period of lease. The entire income was taxable in the year
of auction and not in the subsequent years when the moneys were received by the assessee. [Para 12]
CASES REFERRED TO

State of Andhra Pradesh v. H. Abdul Bakshi & Bros. [1964] 15 STC 644 (SC) [Para 8] and CIT v. K.S.
Venkatasubbiah Reddiar [1996] 221 ITR 18/ 89 Taxman 262 (Mad.) [Para 10].
R. Meenakshisundaram for the Appellant. T.C.A. Ramanujam for the Respondent.
JUDGMENT

1. The assessment year with which we are concerned in 1980-81. At the instance of the assessee, the
Appellate Tribunal has stated a case and referred the following questions of law for our consideration
under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"):
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding
that the receipts from lease and sale of horses are assessable as income in the hands of the assessee
?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in rejecting
the assessee’s contention that proceeds from sale of horses are to be considered for assessment
only under the head ‘Capital gains’ and not under any other head of income ?
3. On the facts and in the circumstances of the case whether the Tribunal was correct in holding
that the horses are not personal effects of the assessee ?
4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that
the entire receipts from the lease of horses accrued in this year when the auction took place, even
though the lease was for a period of more than one year ?"
2. The main case of the assessee was that owning of race horses is a hobby and receipts arising from
the same are receipts from hobby and not liable to be taxed under the provisions of the Act. She also
claimed that even if her case that holding of horses is a hobby is rejected, the income arising from the
sale of horses can be assessed only as capital gains, but the charge would fail because the horses were

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the personal assets of the assessee and not capital assets giving rise to liability of tax under the head
"Capital gains". Her further case was that even if the horses were her capital assets, the charge would
still fail because there was no cost of acquisition involved in the purchase of a filly or colt and since
there was no question of cost of acquisition, the sale or lease of horses would not result in capital gains.
She also contended that the lease income arising from the auction of horses was not assessable in the
year of auction, but should be spread over the period of lease and is liable to be assessed in each year of
receipt of income.
3. All the contentions raised by the assessee were rejected by the Income-tax Officer and the order of
the Income-tax Officer was upheld by the Appellate Assistant Commissioner and also by the Appellate
Tribunal. It is against the order of the Appellate Tribunal, that the assessee has sought for a case and the
Tribunal has stated a case and referred the questions of law set out earlier.
4. Mr. R. Meenakshisundaram, learned counsel for the assessee, reiterated the contentions which were
advanced on behalf of the assessee before the lower authorities and submitted that the holding of horses
by the assessee was a hobby and the receipts arising from the sale or lease of horses did not give rise to
taxable income. He also submitted that there is no liability under the head "Capital gains" on the
ground that the horses are personal assets and there was no cost of acquisition involved in the purchase
of a filly or colt. He also submitted that the lease amount should be assessed over the period of lease
and the entire income cannot be assessed in the year of auction.
5. Mr. T.C.A. Ramanujam, learned counsel for the Revenue, on the other hand, supported the order of
the Appellate Tribunal.
6. We have carefully considered the submissions of learned counsel for the assessee and learned
counsel for the Revenue. The first question that arises is whether the receipts from the sale or lease of
the horses are the income of the assessee. The main case of the assessee is that the amounts were
received by virtue of the hobby of the assessee of owning horses and, therefore, the receipts by may of
lease or sale of horses are incidental to the hobby, and, therefore, they are not taxable. We are unable to
accept the submission of learned counsel for the assessee. There is no dispute that the assessee owned
and maintained a number of race horses. The assessee made use of the horses in races and she offered
the winnings of the stake money received in the running of the horses in the horse races. Insofar as the
lease of the horses is concerned, the leases were arranged by the Bangalore Turf Club and the
successful bidders were also required to use the race horse in the races. The successful bidders were
entitled to use a filly in horse races for a period of four years and in the case of a colt they were
permitted to use it for a period of five years. The Bangalore Turf Club retained a portion of the lease
income and handed over the balance to the assessee. The assessee not only maintained the horses, but
she also sent the horses to stud farm and if the mare gave birth to foals, she would automatically
become the owner of the offspring. The assessee paid to the Bangalore Turf Club for the services
rendered to the horses and the Bangalore Turf Club maintained the accounts on behalf of the assessee.
Apart from the maintenance of the horses, the assessee maintained regular books of account and it is
stated that the assessee was having a running account with the Bangalore Turf Club, which conducted
auction on behalf of the assessee for the lease. It is clear that the assessee was keeping the horses on a
commercial basis and there was an organised activity carried on by the assessee with the help of
staff/accountants and purchasing agents and she also used the horses in racing programmes at various
racing centres. The race horses were kept and maintained by the club in the club premises itself for the
purpose of rearing and for earning income from the horses. In other words there was a regular
systematic activity conducted by the assessee in maintaining the horses and earning income from the
horses. The assessee not only earned income in the assessment year in question by the sale or lease of
the horses and it has been found that she was periodically earning income for several years prior to the
assessment year either by the sale or by the lease of the horses.
7. The question whether the income from lease or sale of horses run in horse races amounts to business
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or not would depend upon the facts and circumstances of the case. The expression "business" is defined
in section 2(13) of the Income-tax Act, which reads as under :
"‘business’ includes any trade, commerce or manufacture or any adventure or concern in the nature
of trade, commerce or manufacture."
8. The Supreme Court in State of Andhra Pradesh v. H. Abdul Bakshi & Bros. [1964] 15 STC 644,
considered the definition "business" as found in the Tamil Nadu General Sales Tax Act, 1959, and
made the following observations :
"The expression ‘business’ though extensively used is a word of indefinite import. In taxing
statutes, it is used in the sense of an occupation, or profession, which occupies the time, attention
and labour of a person, normally with the object of making profit. To regard an activity as
business, there must be a course of dealings, either actually continued or contemplated to be
continued with a profit motive, and not for sport or pleasure." (p. 647)
Applying the test laid down by the Supreme Court, in order to constitute an activity as business
activity, there are certain essential requirements which must be fulfilled. Firstly, it must be a continuous
course of dealing and, secondly, it must be carried on with a profit motive. Admittedly, the assessee has
been carrying on the activity in the sale, lease and maintenance of the horses in an organised manner
not only in the year in question but in the prior years and also in the subsequent previous years and
further the assessee has carried on the activity with a profit motive which is clear from the way in
which the activities were carried on by the assessee. It was found as a matter of fact that there was a
systematic activity in maintenance of the horses, in rearing the horses and in earning income from the
horses either by way of sale and purchase of horses or lease of horses and use of the horses in the races.
In other words, their is a commercially organised activity carried on by the assessee with the aid of the
staff and the purchasing agents and with the help of the Bangalore Turf Club and the assessee has used
the horses in various races conducted at various centres. We, therefore, hold that the assessee has
employed the horses in races as a normal business and prudent man would normally do and it is not a
case of an owner of the horse, who possessed the horses either for pleasure or for the purpose of pride
of possession. We, therefore, hold that the Appellate Tribunal was correct in holding that the activities
of the assessee were business activities and there was a profit element involved in carrying on the
activity of the assessee. We find that the Appellate Tribunal has taken into account the dominant
intention of the assessee in maintaining the race horses and found that she has engaged herself in an
organised systematic business activity in the sale and lease of the horses. Hence, we hold that the
activity of the assessee was the business activity. We find that the assessee has carried on the activity of
the horses with the object of earning income from those horses by employing them in races, by letting
out the horses and by sale of the horses in a systematic and regular activity in the course of other
assessment years including the assessment year in question. We, therefore, hold that the Appellate
Tribunal was perfectly justified in its view that the income which arose from the sale of the race horses
and the lease of the horses was business income and the income should be assessed as such.
9. We are of the view that in considering the question whether the activity was a business activity or it
was a hobby would depend upon the dominant intention of the assessee and the actual activity carried
on by the assessee. We find that there was a regular and systematic activity carried on by the assessee
in maintenance of the race horses and the dominant intention of the assessee in maintaining race horses
was to earn income from the horses either by allowing them to run in races and to earn profit by way of
sale or lease of the horses and thereby to earn income. It is not a case where the assessee maintained
one or two horses as a hobby. The receipts from the sale or lease of the horses were not one-time
receipts, but the assessee has been periodically receiving the income by the sale or lease of the horses
for different assessment years in question. Further, the assessee has been maintaining the horses as a
normal businessman would do and the activities of maintaining, sale or lease of the horses were
conducted by the assessee in a systematic manner with a commercial motive in holding and
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maintaining the horses. We, therefore, hold that the receipts arising either from the sale or lease of the
horses were rightly held to be the income of the assessee chargeable to tax. It is found on the facts of
the case that the horses were used for commercial purposes to earn profit. We, therefore, hold that the
Tribunal was correct in holding that the receipts from the sale of horses or by the lease of horses were
her business income and not an income from the hobby.
10. In CIT v. K.S. Venkatasubbiah Reddiar [1996] 221 ITR 18, this Court has considered the case
whether the activities carried on by the assessee in acquiring race horses and in maintaining and
training them and employing them in different races would amount to business or not. This court taking
into account of the fact that the similar activities were carried on by the assessee for earlier assessment
years, held that the activity of the assessee was his business activity and the assessee was entitled to the
deduction of the losses that arose from such activity. In our opinion, the ratio of the decision of this
Court in K.S. Venkatasubbiah Reddiar’s case (supra) would apply to the facts of the case.
11. The next question that arises is whether the horses owned by the assessee are the personal assets of
the assessee. We also find that the view of the Appellate Tribunal that the race horses owned by the
assessee were stock-in-trade is reasonable as the assessee was engaged in the activity of maintaining
the horses by spending considerable time, money and energy. We, therefore, hold that the horses in the
circumstances were rightly held to be the stock-in-trade of the assessee. Once we hold that the horses
are the stock-in-trade of the assessee, the further question that there was no cost of acquisition in the
case of a colt or a filly also does not assume importance as the income from the sale or lease of the
horses would be assessable under the head "Business" and not under the head "Capital gains".
12. The other point raised by Mr. R. Meenakshisundaram, learned counsel for the applicant, is that the
Income-tax Officer was not correct in assessing the entire income in the year of auction and the income
should be spread over the period of four years or five years, as the case may be. We find that on the
basis of the agreement entered into by the assessee, the right of the assessee to receive the entire
income accrued as soon as the bidding was completed in the auction conducted by the Bangalore Turf
Club. We, therefore, hold that the Appellate Tribunal was correct in holding that there is no scope for
spreading the income over the period of lease. We find that the income accrued when the bid was
completed and it is not open to the assessee to claim that the income should be assessed proportionately
depending upon the years of receipt of the auction money. We, therefore, hold that the Appellate
Tribunal was correct in holding that the entire amount is taxable in the year of auction and not in the
subsequent years when the moneys were received by the assessee.
13. Mr. T.C.A. Ramanujam, learned senior standing counsel appearing for the Revenue, submitted that
the entire income should be assessed under the head "Other sources" and not under the head "Income
from business". He referred to section 56(2)(ib) of the Act, and submitted that there is a specific head
for assessment of the income from the horse races and, therefore, the Tribunal was not correct in
holding that the entire income should be assessed under the head "Business". We are unable to accept
the submission of learned standing counsel for the Department. The Appellate Tribunal has specifically
found that the profit arising from the sale or the lease of the horses should be assessed under the head
"Business" and not under the head "Other sources". The Revenue has not challenged the finding of the
Appellate Tribunal that the income should be assessed under the head ‘Business’ in a manner known to
law or in the manner permitted by the law. The said finding of the Appellate Tribunal has become final
and, hence, it is not open to counsel for the Revenue in the reference made at the instance of the
assessee to challenge the said finding. Hence, we do not permit counsel for the Revenue to raise such a
submission and we reject the same. Accordingly, we answer the questions of law referred to us as under
:
Question No. 1 : The Tribunal was right in holding that the receipts from lease and sale of the horses
are assessable in the hands of the assessee as income.

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Question No. 2 : The Tribunal was also right in holding that the profits from the sale of horses are to be
assessed only under the head "Business" and not under the head "Capital gains".
Question No. 3 : The Tribunal was right in holding that the horses are not personal effects of the
assessee and they are the stock-in-trade of the assessee.
Question No. 4 : Since the assessee was maintaining the mercantile system of accounting the receipts,
the Tribunal was right in holding that the receipts from the lease of the horses are liable to be assessed
in the year of accrual and need not be spread over the period of lease.
14. In fine, all the questions of law are answered in the affirmative, against the assessee and in favour
of the Revenue. The Revenue is entitled to the cost of a sum of Rs. 1,000. We appreciate the efforts
taken by Mr. R. Meenakshisundaram as also by the Government counsel in the matter.
■■

In favour of revenue

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