1988 (5) TMI 66 - AT - Income Tax

Summary

Issues:
1. Whether the profit earned on the sale of race horses can be set off against the losses from horse races carried forward from earlier years.
2. Whether the profit from the sale of race horses constitutes business income or capital gains.

Analysis:
1. The appeal was filed by the Department against the CIT(A)'s order directing the Income-tax Officer to allow the carried forward losses in 'Horse Racing' against short-term and long-term capital gains from the sale of race horses for the assessment year 1980-81. The Department argued that this contravened the provisions of section 74A(3) of the Income-tax Act, 1961. The CIT(A) held that the income earned on the sale of horses should be set off against the brought forward losses from dealing in race horses, which the ITO had declined previously.

2. The Assessing Officer (ITO) disallowed the set off of the profit earned on the sale of race horses against the losses from horse races based on the distinction between winnings from races and income from the sale of horses. The ITO held that these were separate sources of income and section 74A(3) did not permit such set off. However, the ITAT found that dealing in race horses falls under section 74A(2)(c), which includes horse races. The losses determined in earlier years under this section must be set off against profits from the same source, as in the current year.

3. The Department contended that the profit from the sale of horses should be considered capital gains, not business income. The ITAT disagreed, stating that the sale of race horses falls under the category of races including horse races, as per section 74A(2)(c). Therefore, the profit earned on the sale of horses should be set off against the losses determined in earlier years under the same section.

4. The ITAT upheld the CIT(A)'s decision to allow the set off of losses from earlier years against the profit earned on the sale of race horses during the assessment year 1980-81. It was concluded that both the losses and profits fell under section 74A(2)(c), making it permissible to set off the losses against the profits from the same source. The appeal by the Department was dismissed, affirming the direction of the CIT(A) to allow the set off.