COMMISSIONER OF INCOME-TAX VS K.P. MADAN MOHAN
1998 P T D 2328
[222 I T R 1]
[Madras High Court (India)]
Before Thanikkachalam and Balasubramanian, JJ
COMMISSIONER OF INCOME-TAX
versus
K.P. MADAN MOHAN
Tax Case No. 1082 (Reference No.363 of 1980), decided on 11/01/1996.
Income-tax---
----Other sources---Deductions---Winnings from races---Assessable as income from other sources---Expenditure on earning such income based on estimate of Tribunal---Deductible---Indian Income Tax Act, 1961, Ss.56 & 57.
The assessee was an individual whose only activity was going to horse races both at Madras and Bangalore. He joined a syndicate consisting of 13 members. The syndicate won a jackpot,- which gave it a sum of Rs.3,11,486. The assessee's share came to Rs.48,669.69. The Income Tax Officer treated this receipt as income of the assessee from undisclosed sources and brought to tax the entire receipt of Rs.48,670 in the assessment year 1973-74. The Appellate Assistant Commissioner found that the assessee earned the share income from the jackpot and that alone was the subject- matter of the assessment and held that the expenditure that would have been incurred for such restricted activity alone could be allowed. On that basis, he allowed a sum of Rs.1,000 by way of expenditure. The Tribunal, on going through the accounts produced by the assessee did not doubt the genuineness of the same, and on a perusal of the account books filed by the assessee estimated the expenditure incurred in purchasing the lottery tickets to the extent of Rs.15,000 and allowed the same as deduction, On a reference:
Held, that winnings from races were assessable as income from other sources. Inasmuch as the Tribunal did not doubt the genuineness of the account books, and on the basis of the account books, estimated the probable expenditure for winning the jackpot, its conclusion could not be interfered with by the High Court. The amount of Rs.15,000 was, therefore, deductible.
CIT v. Rajendra Prasad Moody (1978) 115 ITR 519 (SC) ref.
S.V. Subramanian for the Commissioner.
R. Janakiraman for K. Srinivasan for the Assessee.
JUDGMENT
THANIKKACHALAM, J.---At the instance of the Department, the Tribunal referred the following question for the opinion of this Court under section 256(1) of the Income Tax Act, 1961 (in short, "the Act"):
"Whether, on the facts and in the circumstances of the case and having regard to the provisions of section 57(iii) of the Income Tax Act, 1961, the Appellate Tribunal was justified in holding that a further sum of Rs.14,000 should be allowed as an expenditure against the jackpot race winnings of the assessee?"
The assessee is an individual. He has no avocation. His only activity is going to races both at Madras and Bangalore. According to the assessee, he was maintaining a regular day book and ledger showing the expenditure incurred in going to races. The total expenses claimed by the assessee was Rs.32,905. For the assessment year 1973-74, the assessee returned an income of Rs.15,764 from jackpot money. The assessee claimed before the Income Tax Officer that the activity of the assessee is a business-activity and, therefore, the income from jackpot is a business income and as such the expenditure incurred by him will have to be allowed as business expenditure. The assessee joined in a syndicate, consisting of 13 members. In the syndicate, the, assessee purchased a ticket for Rs.25 and joined the pool headed by one Shri Abdul Shukoor. The said syndicate won a jackpot, whit gave the syndicate, a sum of Rs.3,11,486. The assessee's share comes Rs.48,669,69. The Income Tax Officer treated this receipt as income of the assessee from undisclosed sources and brought to tax the entire receipt Rs.48,,670.
On appeal, the Appellate Assistant Commissioner held that the receipt should not be treated as the income of the assessee from undisclosed sources. He also did not agree with the assessee that it is a business income. The Appellate Assistant Commissioner also found that since the assessee earned the share income from jackpot and that alone is the subject-matter of the assessment, the expenditure that would have been incurred for such restricted activity alone could be allowed. On that basis, he allowed a sum Rs.1,000 by way of expenditure and disallowed the further claim of Rs.31,905.
Aggrieved, the assessee filed a second appeal before the Tribunal. Before the Tribunal, the assessee produced the account books. From the account books, the Tribunal came to know that a sum of Rs.9,990. which was stated to be spent in connection with Bangalore races. which includes the train fare, purchasing of the race books, transport charges, food charges, entrance fees and the loss in the purchase of tickets for betting on horses. So also, from the statement, it was found that a sum of Rs.16,690. 75 was stated to be incurred in connection with the Madras races. In the account books, it was also found that a sum of Rs.6,225 related to LIC, M.E.S., audit fees, car maintenance, subscriptions to clubs, telephones, incidental charges, newspaper and trunk calls, etc. According to the assessee, without going to the races both at Madras and at Bangalore and incurring the abovesaid sums by way of expenditure, he would not have got the share in the jackpot money. However, the Department took a stand that at the most, the expenditure incurred by the assessee in connection with the purchase of tickets for the jackpot alone could be allowed as deduction. Thus, on a perusal of the account books and following the provisions contained in section 56(2)(i)(b) and section 2(24)(ix) of the Act, the Tribunal came to tire conclusion that the expenditure is allowable under the head "Other sources". The Tribunal, thereafter, estimated the expenditure and allowed a sum of Rs.15,000 as deduction under section 57(iii) of the Act.
Mr. S.V. Subramaniam, learned -senior standing counsel for the Income-tax Department, the applicant herein submitted that the account books said to have been maintained by the assessee were not produced before the authorities below and that they were produced for the first time before the Tribunal. According to learned senior standing counsel, the assessee is entitled to claim expenditure as deduction under the head "Other sources", excepting the expenditure incurred for the purchase of the ticket, which won the jackpot, with regard to the expenses incurred for purchasing the other tickets, they are not allowable since there was no earning of income by those tickets. Learned senior standing counsel further pointed out that the estimate of the expenditure done by the Tribunal is on the higher side. He also relied upon the decision of the Supreme Court reported in CIT v. Rajendra Prasad Moody (.1978) 115 ITR 519 in order to support his contention that the purchase of ticket is an investment and the money spent for purchasing the ticket therefore cannot be allowed as expenditure. Therefore, learned senior standing counsel for the Income Tax Department submitted that the order passed by the Tribunal, allowing an expenditure of Rs.15,000 is not correct.
On the other hand, learned counsel appearing for the respondent/assessee, while supporting the order passed by the Tribunal submitted than even if the tickets purchased are not yielding any income, the expenditure incurred for purchasing such tickets should be allowed as deduction. Learned counsel for the respondent further submitted that the assessee was going to races both at Madras and at Bangalore and he incurred the expenditure under various heads. The assessee was maintaining regular account books and the account books were accepted by the Tribunal. It was only on the basis of the entries made in the account books, a sum of Rs.15,000 was allowed by the Tribunal as expenditure under section 57(iii) of the Act. Learned counsel appearing for the respondent/assessee also relied upon the aforesaid decision of the Supreme Court in CIT v. Rajendra Prasad Moody (19781 115 ITR 519 in order to support his contention than even if the tickets are not yielding any income, the expenditure incurred for purchasing the tickets be allowed as deduction. According to learned counsel considering all these aspects, the Tribunal estimated the expenditure and allowed a sum of Rs.15,000 under the head "Other sources". It was, therefore, submitted that there was no infirmity in the order passed by the Tribunal.
It remains to be seen that the assessee joined in a syndicate and purchased tickets for a sum of Rs.25. The syndicate got the jackpot, which gave a prize money of Rs.3,11,468 to the syndicate. The assessee's share comes to Rs.48,669.69. The assessee returned an income of Rs.15,764 from the jackpot money, deducting the total expenses of Rs.32,905. According to the assessee, a sum of Rs.9,990 was incurred in connection with the Bangalore races and a sum of Rs.16,690.75 was incurred in connection with the Madras races. The expenses were incurred for purchasing race books, tickets, by way of fare, insurance fee and loss in the purchase of tickets for betting on horses Therefore, according to the assessee, the entire expenditure incurred by him should be allowed as deduction, from his share in the jackpot. The Department contended that the expenditure incurred for the purchase of that ticket, which won the jackpot alone should be deducted under the head "Other sources" and the rest of the expenditure should not be allowed.
Winnings from races are assessable under the head "Other sources". Section 56(2)(i)(b) of the Act provides that all winnings covered by section 2(24 (ix) of the Act shall be assessed as "income from other sources". The assessee now claims deduction of the expenses which were incurred not only for purchasing the jackpot ticket, but also the loss incurred in purchasing the other tickets, which did not yield any income. According to learned counsel for the assessee/respondent, even if the tickets did not yield any income the expenditure incurred for purchasing the said tickets should be allowed as deduction under section 57(iii) of Act.
In the case reported in CIT v. Rajendra Prasad Moody (1978) 115 ITR 519, the Supreme Court, while considering the claim for deduction of interest paid on monies borrowed for investment in shares under sections 37(1) and 57(iii) has held as under (page 522):
"It is also interesting to note that, according to the Revenue, the expenditure would disqualify for deduction only if no income results from such expenditure in a particular assessment year, but if there is some income, howsoever small or meagre, the expenditure would be eligible for deduction. This means that in a case where the expenditure is Rs.1,000, if there is income of even Re. 1, the expenditure would be deductible and there would be resulting loss of Rs.999 under head 'Income from other sources'. But, if there is no income, then, on the argument of the Revenue, the expenditure would have to be ignored as it would not be liable to be deducted. This would indeed be a strange and highly anomalous result and it is difficult to believe that the Legislature could have ever intended to produce such illogicality. Moreover, it must be remembered that when a profit and loss account is cast in respect of any source of income, what is allowed by the statute as proper expenditure would be debited as an outgoing and income would be credited as a receipt and the resulting income or loss would be determined. It would make no difference to 'his process whether the expenditure is X or Y or nil; whatever is the proper expenditure allowed by the statute would be debited. Equally, it would make no difference whether there is any income and if so, what, since whatever it be, X or Y or Y would be credited. And the ultimate income or loss would be found. We fail to appreciate how expenditure which is otherwise a proper expenditure can cease to be such merely- because there is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective of whether there is receipt of income or not. That is the plain requirement of proper accounting and interpretation of section 57(iii) cannot be different. The deduction of the expenditure cannot, in the circumstances, be held to be conditional upon the making or earning of the income."
According to the facts arising in the abovesaid decision, deduction was claimed with regard to the interest paid on the amount borrowed which was invested in purchasing shares and there is no claim for deduction of the amount spent for purchasing the shares because this would be the investment made by the assessee. So, also in the present case, the assessee purchased tickets, out of which one ticket got the jackpot. The assessee invested the amounts for purchasing the other tickets also for deduction under section 57(iii) of the Act. This is not possible because the amount spent for purchasing the tickets would amount to investment made by the assessee. If the assessee had borrowed the amount, purchased the ticket and paid interest on the borrowed amount, then the assessee can claim deduction of interest amount. That is not the case here.
The Tribunal, on going through the accounts produced by the assessee did not doubt the genuineness of the same, and on perusal of the account books filed by the assessee estimated the expenditure incurred in purchasing the lottery tickets to the extent of Rs.15,000. According to learned senior counsel, the estimate made by the Tribunal is on the higher side. The expenditure was incurred by the assessee not only towards fare, purchase of race-books, tickets, entrance fee, etc., but also towards the loss in the purchase of tickets for betting on horses and food charges. It remains to be seen that personal expenditure is not allowable as deduction. So also, the amount invested for purchasing the ticket cannot be allowed as deduction since it amounts to investment. Barring these two items of expenditure, the assessee can claim deduction of other expenditure incurred for purchasing the tickets even though the tickets did not yield any income.
Considering all these aspects, the Tribunal estimated the expenditure incurred by the assessee in winning the jackpot. Inasmuch as the Tribunal did not doubt the genuineness of the account books, and on the basis of the account books. estimated the probable expenditure for winning the jackpot, we consider that we cannot interfere with the order passed by the Tribunal in the matter of allowing the expenditure at Rs.15,000 on the basis on the estimate.
Accordingly, we answer the question referred to us in the affirmative and against the Department. There will be no order as to costs.
M.B.A./1503/FCReference answered.