COMMISSIONER OF INCOME-TAX, CENTRAL ZONE VS MESSRS KARACHI RACE CLUB LTD.
1991 P T D 36
[Karachi High Court]
Before Saleem Akhtar and Mukhtar Ahmed Junejo, JJ
COMMISSIONER OF INCOME-TAX, CENTRAL ZONE
versus
Messrs KARACHI RACE CLUB LTD.
I.T.R. No.21 of 1982, decided on 20/10/1990.
Income-tax Act (XI of 1922)---
----S. 10(2)(xvi)---Admissible expenditure ---Assessee, a race cub, established with the object to carryon the business of horse-racing and horse-breeding etc.--Assessee, paid certain amount to another such club in pursuance to direction of the Jackey Club of Pakistan whose object, inter alia, was to develop business of horse-racing and horse-breeding in Pakistan---Amount in question having been laid out and expended wholly and exclusively for the purpose of horse-racing it was admissible expenditure under S.10(2)(xvi).
Messrs General Tyre and Rubber Company v. Commissioner of Income-tax, Central 1986 PTD 52; Commissioner of Income-tax, West Bengal v. Royal Calcutta Royal Club 1961 ITR 414 and Commissioner of Income-tax v. Pakistan Investment Limited 1988 PTD 532 ref.
Commissioner of Income-tax, Bombay North v. Chundulal Keshavlal & Co. 1960 ITR 60fdistinguished.
K. Salahuddin for Appellant.
Sirajul Haq for Respondent.
Date of hearing: 24th September, 1990.
JUDGMENT
MUKHTAR AHMED JUNEJO, J.---This is a reference under Section 66(1) of the Income Tax Act by the Income Tax Appellate Tribunal, Karachi Bench, Karachi (hereinafter to be mentioned as the Tribunal), made at the instance of the Department.
2. M/s. Karachi Race Club (hereinafter to be mentioned as Assessee) is a company, established with the object to carry on the business of Horse-Racing and Horse-Breeding etc. For the Assessment year 1969-70 it submitted Income Tax Return, wherein it claimed in the income and expenditure account a sum of Rs.2,04,843 under the head "Racing Development Expenses", which included a sum of Rs.1,40,000 being payments made to Quetta Racing Club for development of the Races at Quetta. During scrutiny of the Income Tax Return, the concerned Income Tax Officer on going through minute Book of Managing Committee of the assessee, found that said amount of Rs.1,40,000 represented donations. Accordingly he held said amount to be inadmissible expenditure. The Income Tax Officer also disallowed an amount of Rs.11,344 claimed as losses or. horses, on the ground that losses on horses were of recoverable nature. The assessee took said order of the I.T.O. in appeal before the Tribunal (5th Bench) Karachi, which under an order dated 7-1-1975 allowed both claims of the assessee, besides accepting his two other appeals relating to the assessment years 1968-69 and 1970-71. In respect of payment of Rs.1,40,000 by the assessee to Quetta Race Club out of Racing Development Expenses, the Tribunal held that payment of said amount was made in pursuance of the objectives of the club and disallowance of said amount was incorrect and was knocked off.
3. In view of above, the Commissioner of Income Tax Central Zone, Karachi moved an application under Section 66(1) of the Income Tax Act before the Tribunal, Karachi Bench, for referring to this Court the following questions:--
(1) Whether on the facts and in the circumstances of the case, the payment of Rs.1,40,000 to Quetta Race Club is an expenditure wholly and exclusively incurred for the purpose of business within the meaning of Section 10(2) (xvi) of the Income Tax Act?
(2) Whether on the facts and in the circumstances of the case, the learned Tribunal was justified in deleting a sum of Rs.11,344 claimed as bad debt specially when the debts are recoverable from the various known and well-to-do parties?
4. Learned Tribunal entertained said application and after hearing departmental representative and the representative of the assessee referred to this Court for opinion the following question only:-
"Whether on the facts and in the circumstances of the case, the payment of Rs.1,40,000 to Quetta Race Club is an expenditure wholly and exclusively incurred for purpose of business within the meaning of Section 10(2) (xvi) of the Income Tax Act?"
The Tribunal declined to refer the other question to this Court.
5. Mr. Salahuddin, learned counsel for the Department argued that the amount paid by the assessee to Quetta Race Club was not expenditure laid out or expended wholly and exclusively for the purpose of business of Horse-Racing and Horse-Breeding for the purposes of clause (xvi) of sub-section (2) of section 10 of the Income Tax Act, 1922. Reference was made to the case of M/s. General Tyre and Rubber Company v. Commissioner of Income Tax Central 1986 P T D 52 where payment of penalty by an assessee due to default committed by him in importing certain goods without a valid import licence, was held to be not coming within the purview of clause (xvi) of section 10(2) of the Income Tax Act, because such expenditure cannot be treated as expenditure incurred wholly and exclusively for the purpose of the business.
6. Mr. Sirajul Haq, learned counsel for the assessee argued that the amount in question was paid to the Quetta Race Club in pursuance of direction of the Jackey Club of Pakistan whose object, inter alia, was to develop business of horse-racing and horse-breeding in Pakistan and as such the amount in question was covered by clause (xvi) of section 10(2) of the Income Tax Act. In support reliance was placed on the case of Commissioner of Income Tax, West Bengal v. Royal Calcutta Turf Club 1961 ITR 414, where a club whose business was to hold horse race meetings on a commercial basis, established a School for the training of Indian Boys as Jockeys and claimed the amount spent on running of the School, as a deduction under section 10(2) (xv) of the Income Tax Act and it was held that the amount expended by the Club was not in nature of the capital expense, because no asset of an enduring nature was created thereby but as the amount was spent for preservation of its business the same was laid out wholly and exclusively for the purpose of the business of the club and was an allowable deduction under section 10(2)(xv) of the Income Tax Act. Reliance was also placed on the case of Commissioner of Income Tax Bombay North v. Chundulal Keshavlal & Co. (1960 ITR 601), where the assessee was a firm and it was managing agent of a company from whom it was to get commission. Since financial position of the managed company was unsatisfactory, the assessee had been remitting a part or whole of its commission in the past whenever the profits of the managed company were unsatisfactory and business of the assessee was so linked up with the managed company that if the latter was put on a sounder position the assessee would get a larger commission in the future and part of the commission was remitted by the assessee for reasons of commercial expediency and the assessee claimed remitted part of the commission as business expenditure allowable under section 10(2)(xv) of the Income Tax Act. It was held that in order to justify deduction the sum must be given up for reasons of commercial expediency and it might not be voluntary, but so long as it was incurred for the assessee's benefit the deduction was allowable. It was also held that the amount was expended for reasons of commercial expediency and was not given as a bounty but to strengthen the managed company so that if the financial position of the managed company became strong the assessee would benefit thereby, and as such it was a deductible expense under section 10(2)(xv) of the Income Tax Act. This authority may not apply on all the fours to the facts of the instant case. Reliance was also placed on the case of Commissioner of Income Tax v. Pakistan Investment Limited (1988 P T D 532) where an investment Company claimed loss of amount which was advanced to East Pakistan Tank Terminal Ltd., which had become bad debt and the view taken was that such amount was admissible item of expense under section 10 of the Income Tax Act.
7. On facts learned Tribunal arrived at the conclusion that payment of Rs.1,40,000 was made by the assessee to the Quetta Race Club on the instructions of the Jackey Club of Pakistan and that one of the objects of the said Club was to promote or assist in promotion of Racing Clubs in Pakistan. Similar claims were allowed in the earlier years from 1950-51 to 1968-69. These findings of fact have become conclusive and have not been challenged in these proceedings.
8. In view of the provisions contained by section 10(2)(xvi) of the Income Tax Act and in the light of the case-law discussed above: and on the basis of findings of fact given by the Tribunal, we have no hesitation in holding that the amount in question was laid out and expanded wholly and exclusively for the purpose of business of Horse Racing and as such the amount in question was admissible under clause (xvi) of section 10(2) of the Income Tax Act. Consequently we reply question No.1 in the affirmative.
9. These are reasons for our short order dated 24-9-1990, by which we answered the question No.1 in the affirmative,
M.BA./C-167/K Order accordingly.