2002 (10) TMI 76 - HC - Income Tax

Assessee raises the question of jurisdiction of the Inspecting Assistant Commissioner in the draft assessment proceedings under section 144B of the Act, and the Tax Case No. 210 of 1986, at the instance of the Revenue, raises the question of the taxability of receipts derived by the assessee from the sale and lease of the race horses which were claimed by the assessee as receipts from the hobby of the assessee. - 1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in holding that the income derived by the assessee from lease of horses and sale of horses arising out of a hobby and cannot be taxed under the Income-tax Act? - 2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the horses constituted personal effects of the assessee within the meaning of section 2(14)(ii) and, therefore, the gains arising from their sale cannot be taxed under the head Capital gains ? - We are therefore of the view that the first question of law required to be answered in favour of the Revenue and against the assessee and the second question is not required to be answered.

Summary

Issues Involved:
1. Jurisdiction of the Inspecting Assistant Commissioner under section 144B of the Income-tax Act, 1961.
2. Taxability of receipts from the sale and lease of race horses.
3. Classification of horses as personal effects under section 2(14)(ii) of the Income-tax Act, 1961.
4. Applicability of section 74A of the Income-tax Act, 1961, regarding losses from horse racing.

Issue-wise Detailed Analysis:

1. Jurisdiction of the Inspecting Assistant Commissioner:
The court examined whether the Inspecting Assistant Commissioner (IAC) had jurisdiction under section 144B of the Income-tax Act, 1961, to direct the Income-tax Officer (ITO) to include a sum of Rs. 1,51,152 as income from horse racing in the draft assessment order. The assessee argued that the IAC exceeded her jurisdiction by including items not initially covered in the draft assessment order. The court held that the IAC's jurisdiction extends to matters covered by the objections raised by the assessee, and not just the items mentioned in the draft assessment order. The court found that the IAC acted within her jurisdiction as the objections raised by the assessee included references to the maintenance of horses and the receipts from their sale and lease. Therefore, the IAC's direction to include the income from horse racing was justified.

2. Taxability of Receipts from Sale and Lease of Race Horses:
The court analyzed whether the income derived from the sale and lease of race horses was taxable. The assessee claimed that these receipts were incidental to a hobby and not taxable. The IAC and the Commissioner of Income-tax (Appeals) found that the activities were carried out on a commercial scale, involving significant time, money, and energy, and therefore, the receipts were taxable. The Tribunal initially held that the activities were a hobby, but the High Court disagreed, stating that the assessee's systematic and organized activity in maintaining and racing horses indicated a business activity. The court concluded that the income from the sale and lease of race horses was taxable under the head "Business" and not as a hobby.

3. Classification of Horses as Personal Effects:
The Tribunal had held that the horses constituted personal effects under section 2(14)(ii) of the Income-tax Act, and thus, gains from their sale could not be taxed as capital gains. The High Court rejected this view, stating that the assessee's activities were commercial in nature and not merely for personal enjoyment. The court emphasized that the assessee's systematic and organized activity in maintaining and racing horses indicated a business activity, and therefore, the horses could not be classified as personal effects.

4. Applicability of Section 74A:
The court considered the applicability of section 74A of the Income-tax Act, which deals with losses from horse racing. The Tribunal had held that section 74A did not apply as it only covered losses from running race horses and not from their sale or lease. The High Court noted that the Tribunal's finding was inconsistent with its own decisions in subsequent years, where it had held that the income from the sale and lease of horses was assessable under the head "Business". The court concluded that the income from the sale and lease of race horses should be assessed under the head "Business" and not under section 74A.

Conclusion:
The High Court held that the IAC acted within her jurisdiction in directing the inclusion of income from horse racing in the draft assessment order. The court also held that the income from the sale and lease of race horses was taxable as business income and not as a hobby. The horses could not be classified as personal effects, and the income from their sale and lease was not covered under section 74A. The court answered the questions of law in favor of the Revenue and against the assessee.