http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 6  

PETITIONER: THE COMMISSIONER OF INCOME-TAX, WEST BENGAL

       Vs.

RESPONDENT: ROYAL CALCUTTA TURF CLUB

DATE OF JUDGMENT: 28/11/1960

BENCH: KAPUR, J.L. BENCH: KAPUR, J.L. HIDAYATULLAH, M. SHAH, J.C.

CITATION:  1961 AIR 1028            1961 SCR  (2) 729  CITATOR INFO :  R          1964 SC1722  (9)  F          1972 SC 159  (4)  R          1972 SC 397  (5)

ACT: Income  Tax-Expenditure  for  preservation  of  business--If wholly   and  exclusively  laid  out  for  the  Purpose   of business--Indian  Income Tax Act, 1922 (XI of 1922),  S.  10 (2)(XV).

HEADNOTE: The business of the respondent club was to run race meetings on a commercial scale.  The club did not own any horse,  and therefore  did not employ jockeys. it was a matter  of  some importance to the club that there were jockeys of  requisite skill  and  experience in sufficient numbers  who  would  be available  to the owners and trainers because otherwise  the running  of  the  race meetings would  not  be  commercially profitable  and its interest would suffer and it might  have had to abandon its business if it did not take steps to make jockeys  of the necessary calibre available.   Therefore  it established  a  school for the training of  Indian  boys  as jockeys  and  claimed the sums spent on the running  of  the school  as  deductable  amount under s. 10  (2)(XV)  of  the Indian Income Tax Act. The  question was whether in the circumstances of  the  case the  expenditure  claimed  was  one  which  was  wholly  and exclusively  laid  out for the purpose of  the  respondent’s business. Held, that any expenditure which was incurred for preventing the extinction of a business would be expenditure wholly and exclusively laid opt for the purpose of the business of  the assessee and would be an allowable deduction. In  the  instant  case the amount in dispute  was  laid  out wholly  and exclusively for the purpose of the  respondent’s business,  because  if the supply of  jockeys  of  requisite efficiency and skill failed, the business of the  respondent would no longer be possible. Eastern Investments Ltd. v. Commissioner of Income-tax, West Bengal,  [1951] S. C. R. 594 and Commissioner of  Income-tax v.  Chandulal Keshavlal & Co., [1960] 38 I.T.R. 601;  relied

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 6  

on, British  Insulated and Helsby Cables v. Atherton, [1926]  A. C.  205,  Morgan v. Tate & Lyle Ltd., [1955] A.  C.  21  and Boarland  v.  Kramat Pulai Ltd., [1953] 2 All, E.  R.  1122, discussed. Strong  & Co. v. Woodifield, [1906] A. C. 448 and  Smith  v. Incorporated  Council of Law Reporting, [1914] 3  K.B.  674, referred to. Ward & Co. Ltd. v. Commissioner of Taxes, [1923] A. C.  145, distinguished. 730

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 419 of 1958. Appeal  by special leave from the judgment and  order  dated August 20, 1957, of the Calcutta High a Court in  Income-tax Reference No. 1 of 1956. Hardyal Hardy and D. Gupta, for the appellant. N.  C. Chatterjee, Dipak Choudhri and B. N. Ghosh,  for  the respondent. 1960.  November 28.  The Judgment of the Court was delivered by KAPUR,  J. - This is an appeal by special leave against  the judgment  and  order  of the High  Court  of  Judicature  at Calcutta  in  a reference made by the  Income-tax  Appellate Tribunal  under  s.  66(1)  of  the  Income-tax  Act.    The following question was referred: "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 as jockeys,  did not  constitute  expenses of the business  of  the  assessee allowable under s. 10(2)(xv)?" which was answered in  favour of the respondent.  The Commissioner is the appellant before us and the assessee is the respondent. The  respondent is an association of persons whose  business is to hold race meetings in Calcutta on a commercial  basis. It holds two series of race meetings during the two  seasons of  the  year.  The respondent does not own any  horses  and therefore  does not employ jockeys but they are employed  by owners  and trainers of horses which are run in  the  races. It  is  a matter of some importance to the  respondent  that there  should  be  jockeys  available  to  the  owners  with sufficient skill and experience because the success of races to  a  considerable extent depends upon the  experience  and skill  of a jockey who rides a horse in a race.  Because  it was  of  the opinion that there was a risk  of  the  jockeys becoming  unavailable  and that  such  unavailability  would seriously  affect  its business which might  result  in  its closing 731 down the business, the respondent considered it expedient to remedy  that defect.  Therefore in 1948, it,  established  a school  for the training of Indian boys as jockeys  so  that after their training they might be available for purposes of race meetings held under its auspices.  The school, however, did  not prove a success and after having been in  existence for three years it was closed down. During the year ending March 31, 1949, the respondent  spent a sum of Rs. 62,818 on the running of its school and claimed that amount as a deduction under s. 10(2)(xv) of the Income- tax  Act  and  also in the  assessment  under  the  Business Profits  Tax  for the chargeable  accounting  period  ending March 31, 1949.  This claim was disallowed by the Income Tax

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 6  

Officer  and on appeal by Appellate  Assistant  Commissioner and  also  by  the Income-tax Appellate  Tribunal.   At  the instancc  of the respondent the question already quoted  was referred to the High Court and was answered in favour of the respondent.  This appeal is brought by special leave against that judgment. The  decision  under the Business Profits Tax  Act  will  be consequential  upon the decision of the deduction under  the Income-tax  Act.   The Tribunal found that it  was  not  the business of the respondent to provide jockeys to owners  and trainers,  that  the  jockeys trained  in  the  respondent’s school  were not bound to ride only in the races run by  the respondent  and that the benefit, if any, which accrued  was of  an enduring nature.  It also found that  the  respondent had  been conducting race meetings since long, that  it  was not  the  case  of the assessee that if  it  did  not  train jockeys  they  would become unavailable and  that  the  mere policy  of  producing  efficient Indian jockeys  was  not  a sufficient consideration for treating the expenditure as one incurred  for  the business of the  respondent.   For  these reasons the expenditure was disallowed. Before   the  Appellate  Assistant  Commissioner,   it   was contended  by the respondent, that the reason for  incurring the  expenditure was "to promote efficient  Indian  jockeys" and it was in the interest of the respondent to see that the races are not abandoned on 732 account  of  the scarcity of jockeys.  In the order  of  the Tribunal  it  is stated that this was not the  case  of  the respondent,   and  therefore  when  the  respondent   wanted paragraph  5  of  the statement to  be  substituted  by  the following: "It  was  the case of the assessee that  unless  it  trained Indian  Jockeys,  time  may  come  when  there  may  not  be sufficient  number of trained jockeys to ride horses in  the races conducted by the assessee." the Tribunal did not agree to do so. Counsel for the appellant raised three points before us; (1) The question as to whether an item of expenditure is  wholly and exclusively laid out for the purposes of business or not is  a  question  of  fact; (2)  the  connection  between  an expenditure  and  profit-earning of the assessee  should  be direct  and  substantial  and  not  remote  and  (3)  to  be admissible  as revenue expenditure it should not be  in  the nature of a capital expense, i.e., it should not bring  into existence an asset of an enduring nature. As  to  the first question this court has  held  in  Eastern Investments Ltd. v. Commissioner of Income-tax, West  Bengal (1)  that "though the question must be decided on the  facts of  each  case,  the final conclusion is one  of  law".   In Commissioner of Income Tax v. Chandulal Keshavlal & Co. (2), this Court said:- "Another test is whether the transaction is properly entered into  as  a  part of the  assessee’s  legitimate  commercial undertaking  in order to facilitate the carrying on  of  its business;  and  it  is immaterial that a  third  party  also benefits  thereby. (Eastern Investment Ltd. v.  Commissioner of Income-Tax, (1951) 20 I.T.R. 1).  But in every case it is a question of fact whether  the expenditure  was  expended wholly and  exclusively  for  the purpose of trade or business of the assessee. In the present case the finding is that it was laid out for the purpose  of the  assessee’s  business and there is evidence  to  support this finding." But those observations must be read in the context.  In that

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 6  

case  the assessee firm was the Managing Agent of a  Company and at the request of the Directors of (1) [1951] S.C.R. 594, 598.  (2) [1960] 38 I.T.R. 601, 610. 733 the latter agreed to accept a lesser commission for the year of  account than it was entitled to.  It was found,  by  the Appellate  Tribunal there 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  its financial position became strong the assessee would  benefit thereby,  and  an  the evidence the  Tribunal  came  to  the conclusion  that the amount was wholly and  exclusively  for the purpose of such business.  It was on this evidence  that the  expense was held to be wholly and exclusively laid  out for the purpose of the assessee’s business and this was  the finding  referred  to.  In that case the  Tribunal  had  not misdirected  itself as to the true scope and meaning of  the words  "wholly and exclusively laid out for the  purpose  of the  assessee’s business".  In the present case the  Income- tax Appellate Tribunal had misdirected itself as to the true scope  and meaning of these words.  In our opinion,  in  the circumstances  of  this  case, it cannot be  said  that  the finding of the Tribunal was one of fact. The  question  as  to whether the expenses  of  running  the school  for jockeys is deductible has to be  decided  taking into  consideration  the circumstances of  this  case.   The business  of -the respondent was to run race meetings  on  a commercial scale for which it is necessary to have races  of as  high  an order as possible.  For the popularity  of  the races  run  by  the  respondent and  to  make  its  business profitable  it  was  necessary that there  were  jockeys  of requisite  skill  and experience in sufficient  numbers  who would  be  available  to the  owners  and  trainers  because without such efficient jockeys the running of race  meetings would  not  be  commercially profitable.  It  was  for  this purpose that the respondent started the school for  training Indian  jockeys.,  If there were not  sufficient  number  of efficient  Indian jockeys to ride horses its interest  would have suffered, and it might have had to abandon its business if  it did not take steps to make jockeys of  the  necessary calibre  available.   Therefore any  expenditure  which  was incurred for preventing the extinction 93 734 of  the  respondent’s  business would, in  our  opinion,  be expenditure wholly and exclusively laid out for the  purpose of  the business of the assessee and would be  an  allowable deduction.   This  finds  support from  decided  cases.   In Commissioner of Income-tax v. Chandulal Keshavlal & Co. (1), this  Court  held that in order to justify a  deduction  the disbursement  must be for reasons of commercial  expediency; it  may  be  voluntary  but  incurred  for  the   assessee’s business; and if the expense is incurred for the purpose  of the  business  of the assessee it does not matter  that  the payment  also  enures  to  the benefit  of  a  third  party. Another  test  laid  down was that  if  the  transaction  is properly entered into as a part of the assessee’s legitimate commercial  undertaking in order to facilitate the  carrying on of its business it is immaterial that a third party  also benefits thereby.  In British Insulated and Helsby Cables v. Atherton  (2), Viscount Cave L. C. held that a Bum of  money expended,  not of necessity and with a view to a direct  and immediate  benefit to the trade, but voluntarily and on  the ground  of commercial expediency and in order indirectly  to facilitate  the  carrving  on of the  business  may  yet  be

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 6  

expended  wholly  and  exclusively for the  purpose  of  the trade.   In  a case more recently decided Morgan v.  Tate  & Lyle  Ltd.  (3) the assessee company was  engaged  in  sugar refining  business and it incurred expenses in a  propaganda campaign  to  oppose the threatened nationalisation  of  the industry.   It was held by the House of Lords by a  majority that  the  object of the expenditure being to  preserve  the assets  of the company from seizure and so to enable  it  to carry  on its business and earning profits, the expense  was an  admissible deduction being wholly and  exclusively  laid out for the purpose of the company’s trade.  Lord Morton  of Henryton  said: "Looking  simply  at the words of the rule I  would  ask:"If money so spent is not spent for the purpose of the company’s trade, for what purpose is it spent?" If the assets are seized, the company can no longer (1) (1960) 38 I.T.R. 601, 610.    (2) [1926] A.C. 205. (3)  [1955] A.C. 21. 735 carry  on the trade which has been carried on by the use  of these assets.  Thus the money is spent to preserve the  very existence of the company’s trade". See also Strong & Co. v. Woodifield(1), the observations  of Lord  Davey;  and  Smith  v.  Incorporated  Council  of  Law Reporting (2). Counsel  for the appellant relied upon the judgment  of  the Privy Council in Ward & Co. Ltd. v. Commissioner of Taxes (3 ),  but that decision proceeds on a different statute  where the  words were of a very restrictive character,  the  words being: ".....................  Expenditure or loss of any kind  not exclusively  incurred  in the production of  the  assessable income derived from that source............... This case was distinguished in Morgan v. Tate & Lyle(4) on the ground that the  language of the Now Zealand statute was  much  narrower than the language of r. 3A in England. Reference  was  also made by the appellant  to  Boarland  v. Kramat  Pulai  Ltd. (5).  In that case  Directors  of  three Companies   engaged  in  tin  mining  in   Malaya   incurred expenditure  on printing. and circulating to shareholders  a pamphlet containing remarks of the Chairman of the  Company. The  pamphlet  was an attack on the policy and acts  of  the Socialist  Government  and  it was held  that  the  question whether  the  money was wholly and exclusively laid  out  or expended  for  the purpose of trade within  the  meaning  of rules  applicable  to the question was one of law but  on  a consideration   of  the  question  it  was  held  that   the expenditure was not solely incurred with that object.  It is not  necessary  to discuss that case at any  length  because what  was  held in that case was that the pamphlet  was  not wholly  and  exclusively for the purpose  of  the  company’s trade. Applying  the  law,  as laid down in  those  cases,  to  the present  case the conclusion is that the amount  in  dispute was  laid out wholly and exclusively for the purpose of  the respondent’s business because if the (1) [1906] A C. 448.             (2) [19I4] 3 K.B. 674. (3) [1923] A.C 145.             (4) [1955] A.C. 21. (5) [1953] 2 All E.R. 1122. 736 supply  of  jockeys  of  efficiency  and  skill  failed  the business  of  the respondent would no  longer  be  possible. Thus the money was spent for the preservation of the respondent’s business. As  to  the  third  point  there  is  no  substance  in  the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 6  

submission  that  the  expenditure was in the  nature  of  a capital  expense  because no asset of  enduring  nature  was being created by this expense. In  our  opinion the High Court has rightly  held  that  the expenditure claimed was one which was wholly and exclusively laid  out for the purpose of the respondent’s business.   It was to prevent the threatened extinction of the business  of the respondent.  In the result this appeal is dismissed with costs.                      Appeal dismissed.