Commissioner of Income Tax, West Bengal v. Royal Calcutta Turf Club

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 419 of 1958

Decision Date: 28 November 1960

Coram: J.L. Kapur, M. Hidayatullah, J.C. Shah

The case titled Commissioner of Income‑Tax, West Bengal versus Royal Calcutta Turf Club was decided on 28 November 1960 by the Supreme Court of India. The opinion was authored by Justice J. L. Kapur and the judgment was delivered by a three‑judge bench comprising Justices J. L. Kapur, M. Hidayatullah and J. C. Shah. The petitioner in the proceedings was the Commissioner of Income‑Tax for the State of West Bengal and the respondent was the Royal Calcutta Turf Club. The formal citation of the decision is reported in the 1961 volume of the All India Reporter at page 1028 and also in the 1961 Supreme Court Reports (Second Series) at page 729. The case is further referenced in later reports as R 1964 SC 1722 (9), F 1972 SC 159 (4) and R 1972 SC 397 (5). The statutory provision that formed the core of the dispute was Section 10(2)(XV) of the Indian Income‑Tax Act, 1922 (XI of 1922), which permits a deduction for expenditure incurred wholly and exclusively for the purpose of preserving the business.

The factual background set out that the business of the respondent club consisted of conducting horse‑race meetings on a commercial scale in Calcutta. The club itself did not own any horses and therefore did not employ jockeys directly. Nevertheless, the commercial viability of the race meetings depended critically on the availability of jockeys who possessed the requisite skill and experience, because without such riders the meetings could not be conducted profitably and the club’s interests would be jeopardised, possibly forcing it to abandon the enterprise. In order to ensure a sufficient supply of suitably trained jockeys, the club established a school whose purpose was to train Indian boys as jockeys. The club subsequently claimed that the amounts spent on operating this training school were allowable deductions under Section 10(2)(XV) of the Income‑Tax Act, asserting that the expenditure was laid out wholly and exclusively for the purpose of its business.

The principal legal question before the Court was whether the expenditure on the jockey‑training school qualified as an amount “wholly and exclusively laid out for the purpose of the respondent’s business” within the meaning of the statutory provision. The Court held that any expenditure incurred to prevent the extinction of a business is, by definition, incurred wholly and exclusively for the purpose of that business and therefore constitutes an allowable deduction. Applying this principle to the present case, the Court found that the sum contested—Rs 61,818—had indeed been spent wholly and exclusively for the purpose of preserving the Turf Club’s business, because the absence of suitably trained jockeys would have rendered the conduct of race meetings impossible. Consequently, the claim for deduction was upheld.

In arriving at this conclusion, the Court referred to several earlier authorities. It relied upon Eastern Investments Ltd. v. Commissioner of Income‑Tax, West Bengal, reported in the 1951 Second Report of the Supreme Court at page 594, and Commissioner of Income‑Tax v. Chandulal Keshavlal & Co., reported in the 1960 volume of the Income‑Tax Reporter at page 601. The Court also discussed 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, drawing analogies from their treatment of expenditure for business preservation. Additionally, it cited Strong & Co. v. Woodifield, [1906] A.C. 448 and Smith v. Incorporated Council of Law Reporting, [1914] 3 K.B. 674, while distinguishing the case of Ward & Co. Ltd. v. Commissioner of Taxes, [1923] A.C. 145, on the basis that the latter did not involve expenses aimed at averting the demise of the assessee’s business.

The judgment was recorded under the heading “Civil Appellate Jurisdiction” and concerned Civil Appeal No. 419 of 1958. The appeal had been filed by special leave against the order dated 20 August 1957 pronounced by the Calcutta High Court. The High Court’s decision had arisen from a reference made by the Income‑Tax Appellate Tribunal under Section 66(1) of the Income‑Tax Act, wherein the Tribunal had held that the amount spent on the jockey‑training school did not constitute a business expense allowable under Section 10(2)(XV). The Supreme Court, after thorough examination of the facts and authorities, reversed the Tribunal’s view and permitted the deduction claimed by the Royal Calcutta Turf Club.

In this case, the matter arose before the High Court in Income‑tax Reference No. 1 of 1956. The appellant was represented by counsel Hardyal Hardy and D. Gupta, while the respondent was represented by counsel N. C. Chatterjee, Dipak Choudhri and B. N. Ghosh. The judgment was delivered on 28 November 1960 by Justice Kapur. The appeal before this Court was filed by special leave against the judgment and order of the Calcutta High Court, which had entertained a reference made by the Income‑tax Appellate Tribunal under section 66(1) of the Income‑tax Act. The specific question that had been referred to the High Court was whether, in the particular facts and circumstances of the case, the Tribunal was correct in holding that the amount of Rs 61,818 expended by the assessee on the training of Indian boys as jockeys did not constitute an allowable business expense under section 10(2)(xv) of the Income‑tax Act. The High Court had answered this question in favour of the respondent.

The Commissioner of Income‑tax appeared as the appellant before this Court and the assessee, an association of persons, was the respondent. The respondent’s business consists of organising race meetings in Calcutta on a commercial basis. It conducts two series of race meetings each year, one in each of the two racing seasons. The respondent does not own any horses and consequently does not employ any jockeys directly; the jockeys who ride in its races are employed by the owners and trainers of the horses that participate. For the respondent, it is important that skilled and experienced jockeys be readily available to the owners, because the success of a race depends to a great extent on the jockey’s skill and experience. The respondent was of the view that there existed a real risk that suitable jockeys might become unavailable, and that such a shortage would seriously damage its business and could even force it to cease operations.

In order to mitigate this perceived risk, the respondent established, in 1948, a school dedicated to training Indian boys to become jockeys, with the expectation that, after completing their training, these boys would be available to ride in the race meetings organised under the respondent’s auspices. The school, however, proved unsuccessful and after operating for three years it was closed down. During the financial year ending 31 March 1949, the respondent incurred an expenditure of Rs 62,818 on the operation of the school. It claimed this amount as a deduction under section 10(2)(xv) of the Income‑tax Act and also included the same amount in its assessment under the Business Profits Tax for the accounting period ending 31 March 1949. The claim for deduction was disallowed by the Income‑tax Officer. The disallowance was upheld on appeal before the Appellate Assistant Commissioner and thereafter before the Income‑tax Appellate Tribunal.

At the instance of the respondent, the question that had been referred to the High Court was once again considered, and the High Court answered it in favour of the respondent. The present appeal has therefore been filed by special leave against that judgment of the High Court. The Court noted that the decision to be made under the Business Profits Tax Act would necessarily follow from the decision on the question of deduction under the Income‑tax Act. The Tribunal had originally found that the expenditure was not part of the respondent’s business of providing jockeys to owners and trainers, and consequently had disallowed the deduction. The appeal now seeks to overturn that finding.

The Tribunal concluded that it was not the business of the respondent to supply jockeys to owners and trainers, and that the jockeys trained at the respondent’s school were not obligated to ride solely in races organized by the respondent. Consequently, any benefit that might have accrued from the training was not of an enduring nature. The Tribunal further observed that the respondent had been conducting race meetings for a long period, and it was not the case of the assessee that, without its own training programme, jockeys would become unavailable. The Tribunal held that the mere policy of producing efficient Indian jockeys did not constitute a sufficient consideration for treating the expenditure as incurred for the respondent’s business. For these reasons, the Tribunal disallowed the claimed deduction. Before the Appellate Assistant Commissioner, the respondent argued that the purpose of the expenditure was “to promote efficient Indian jockeys” and that it was in the respondent’s interest to prevent the abandonment of races due to a scarcity of jockeys. The Tribunal recorded that this was not the respondent’s case, and when the respondent sought to replace paragraph five of its statement with the wording: “It was the case of the assessee that unless it trained Indian jockeys, time may come when there may not be a sufficient number of trained jockeys to ride horses in the races conducted by the assessee,” the Tribunal declined to permit the amendment.

The counsel for the appellant raised three matters before the Court. First, the appellant submitted that determining whether an item of expenditure is wholly and exclusively laid out for the purposes of business is a question of fact. Second, the appellant argued that the link between the expenditure and the assessee’s profit‑earning must be direct and substantial, not remote. Third, the appellant maintained that for an expenditure to be allowable as revenue expense, it must not be of a capital nature; that is, it must not create an asset of enduring character. Regarding the first submission, this Court has previously 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.” The Court further observed in Commissioner of Income Tax v. Chandulal Keshavlal & Co. (2) that a relevant test is whether the transaction is entered into as part of the assessee’s legitimate commercial undertaking to facilitate the carrying on of its business, and that the benefit to a third party is immaterial. Nonetheless, in every case the determination of whether the expenditure was wholly and exclusively for the purpose of the assessee’s trade remains a factual inquiry. In the present matter, the Tribunal found that the expenditure was laid out for the purpose of the assessee’s business and that there existed evidence supporting this finding. The Court noted, however, that these observations must be read in the appropriate contextual setting.

In that earlier case the assessee firm acted as the Managing Agent of a company, and at the request of the directors of that company the latter agreed to accept a commission for the relevant financial year that was lower than the amount to which it was legally entitled. The Income‑Tax Appellate Tribunal examined the circumstances and concluded that the reduced commission had been paid for reasons of commercial expediency rather than as a gratuitous bounty, and that the purpose of the payment was to strengthen the managed company so that, should its financial position improve, the assessee would ultimately benefit. On the basis of the evidence produced before it, the Tribunal held that the amount was wholly and exclusively expended for the purpose of the assessee’s business, and this finding formed the basis of the Tribunal’s decision in that matter. The Court observed that, in that earlier case, the Tribunal had not erred in interpreting the true scope and meaning of the expression “wholly and exclusively laid out for the purpose of the assessee’s business”. By contrast, in the present matter the Income‑Tax Appellate Tribunal was found to have misdirected itself as to the proper scope and meaning of those words, and, in the view of the Court, the Tribunal’s finding could not be treated as a factual determination. The issue to be resolved, therefore, was whether the expenses incurred in running a school for jockeys were deductible, given the particular facts of the present case. The respondent’s business consisted of conducting race meetings on a commercial scale, and the commercial success of such meetings depended on the ability to stage races of the highest quality. For the races to be popular and profitable it was essential that a sufficient number of jockeys possessing the requisite skill and experience be available to owners and trainers; without such efficient jockeys the conduct of race meetings would not be commercially viable. Consequently, the respondent established a school for training Indian jockeys in order to ensure an adequate supply of competent riders. The Court noted that if there were not enough efficient Indian jockeys to ride the horses, the respondent’s commercial interest would be jeopardised, and the business might have to be discontinued unless steps were taken to develop jockeys of the necessary calibre. Accordingly, any expenditure incurred to prevent the extinction of the respondent’s business was, in the Court’s opinion, wholly and exclusively laid out for the purpose of the assessee’s business and therefore entitled to be allowed as a deduction. This approach was supported by earlier decisions, including Commissioner of Income‑Tax v. Chandulal Keshavlal & Co., where the Court had held that, to justify a deduction, a disbursement must be made for reasons of commercial expediency; it may be voluntary but must be incurred for the assessee’s business, and the fact that the payment also benefits a third party does not defeat the deduction.

The Court explained that once a payment is made for the purpose of the assessee’s own commercial activity, it is irrelevant that a third party also receives a benefit. In other words, if the transaction is entered into as a legitimate part of the taxpayer’s business in order to facilitate the carrying on of that business, the fact that another party gains from it does not defeat the deduction. This principle was illustrated in British Insulated and Helsby Cables v. Atherton, where Viscount Cave, L.C., observed that a sum of money expended, although not absolutely necessary, may still be wholly and exclusively deductible if it is spent voluntarily on the ground of commercial expediency and with a view to indirectly facilitating the trade. A more recent authority, Morgan v. Tate & Lyle Ltd., involved a sugar‑refining company that incurred expenses on a propaganda campaign opposing the threatened nationalisation of the industry. The House of Lords, by majority, held that because the objective of the expenditure was to preserve the company’s assets from seizure and thereby enable it to continue its business and earn profits, the expense qualified as an allowable deduction, being wholly and exclusively laid out for the purpose of the trade. Lord Morton of Henryton articulated the test by asking, “If money so spent is not spent for the purpose of the company’s trade, for what purpose is it spent?” He explained that if the assets are seized, the company can no longer carry on the trade that depended on those assets; consequently the money is spent to preserve the very existence of the trade. The Court also referred to the observations of Lord Davey in Strong & Co. v. Woodifield and to the decision in Smith v. Incorporated Council of Law Reporting for support.

Counsel for the appellant cited the Privy Council decision in Ward & Co. Ltd. v. Commissioner of Taxes, but the Court distinguished that case because it was decided under a different statute whose language was narrowly restrictive, limiting “expenditure or loss of any kind not exclusively incurred in the production of the assessable income derived from that source.” That restrictive wording was contrasted with the broader language of rule 3A in England, a distinction previously drawn in Morgan v. Tate & Lyle. Further reference was made to Boarland v. Kramat Pulai Ltd., where directors of three Malayan tin‑mining companies spent money printing and circulating a pamphlet containing the chairman’s remarks that attacked the socialist government’s policies. The Court examined whether that expenditure was wholly and exclusively laid out for the purpose of the companies’ trade and concluded that it was not, because the primary object was political agitation rather than a business purpose. The appellant’s reliance on that case was therefore not applicable to the present facts, where the expenditure under consideration was directed toward ensuring the supply of skilled jockeys essential for the respondent’s business.

The Court observed that the earlier authority concerned the question of trade within the meaning of the applicable rules and that the matter was a question of law; however, upon consideration of that case, the Court had held that the expenditure in question was not incurred solely for that purpose. The Court stated that it was unnecessary to discuss the earlier case at length, noting merely that the decision in that case was based on the finding that the pamphlet was not wholly and exclusively for the purpose of the company's trade. Applying the principles laid down in those authorities—namely (1) [1906] A.C. 448, (2) [1914] 3 K.B. 674, (3) [1923] A.C. 145, (4) [1955] A.C. 21, and (5) [1953] 2 All E.R. 1122—to the facts before it, the Court concluded that the amount in dispute was laid out wholly and exclusively for the purpose of the respondent’s business. The reasoning was that, if the supply of jockeys possessing efficiency and skill were to fail, the respondent’s business could no longer continue, and therefore the expenditure was made to preserve the respondent’s business. Regarding the second contention, the Court found no merit in the argument that the expenditure was of a capital nature, because no enduring asset was being created by the outlay. In the Court’s opinion, the High Court was correct in holding that the expenditure claimed was wholly and exclusively incurred for the respondent’s business, as it was intended to prevent the threatened extinction of that business. Consequently, the appeal was dismissed and the appellant was ordered to pay costs. The appeal was therefore dismissed with costs.