1984 (4) TMI 127 - AT - Income Tax

Issues Involved:
1. Jurisdiction of the IAC in directing the assessment of income from horse racing.
2. Nature of the assessee's activities related to horse racing - hobby vs. business.
3. Taxability of receipts from horse racing activities.
4. Classification of income under the Income-tax Act.
5. Applicability of section 80JJ for deductions.
6. Taxability of capital gains from the sale of horses.
7. Consideration of horses as personal effects for capital gains purposes.

Issue-wise Detailed Analysis:

1. Jurisdiction of the IAC:
The assessee raised a preliminary objection regarding the jurisdiction of the IAC to direct the assessment of income from horse racing when no such proposal was made in the draft assessment order. The Tribunal overruled this objection, agreeing with the revenue's contention that the nature of the funds utilized for meeting expenses was the subject of controversy, not the source of those funds. The IAC's directions were deemed within jurisdiction as they pertained to the same funds proposed for taxation by the ITO.

2. Nature of the Assessee's Activities:
The assessee argued that the activities of purchasing, raising, grooming, and running horses in races constituted a hobby, and any receipts from these activities were incidental and not taxable as income. The Tribunal agreed, noting that the primary activity was betting on horse races, and the receipts were incidental to this hobby. The Tribunal emphasized that hobbies are pursued for pleasure, not profit, and thus, receipts from such activities cannot be regarded as income.

3. Taxability of Receipts from Horse Racing Activities:
The Tribunal highlighted that the classic definition of 'income' involves a periodical monetary return from a definite source with the object of producing a return. Since a hobby is pursued for pleasure, not profit, receipts from it are not income. However, the Tribunal noted that section 2(24)(ix) of the Act includes winnings from horse races as income, indicating that but for this definition, such winnings would not be considered income.

4. Classification of Income under the Income-tax Act:
The Tribunal clarified that under section 10(3) of the Act, casual and non-recurring receipts are exempt from being included in total income, except for winnings from lotteries and similar activities. The Tribunal concluded that the assessee's activities were not conducted as a business, and thus, the receipts could not be taxed under 'Profits and gains of business or profession' or 'Income from other sources' unless they fell within the scope of 'winnings from lotteries.'

5. Applicability of Section 80JJ for Deductions:
The Tribunal found it unnecessary to consider the applicability of section 80JJ for deductions related to the breeding of horses, as the receipts were not being assessed as income from business. The Tribunal emphasized that the computation of income must follow the provisions of the Act rather than normal commercial methods.

6. Taxability of Capital Gains from the Sale of Horses:
The Tribunal ruled that capital gains arising from the sale of horses should not be taxed, as the horses were considered personal effects and not capital assets. The Tribunal stated that the definition of 'capital asset' in section 2(14) excludes personal effects, and assets held for the pursuit of a hobby must be regarded as personal effects.

7. Consideration of Horses as Personal Effects:
The Tribunal concluded that horses maintained for the pursuit of a hobby are personal effects and cannot be considered capital assets. The Tribunal directed the ITO to recompute the income taxable under the head 'Income arising from horse racing' by setting off the expenditure incurred for maintaining the horses against the stake money and winnings from betting on the horses.

Conclusion:
The Tribunal set aside the orders of the authorities below and directed the ITO to recompute the income taxable under the source of horse racing activities, considering only the stake money and winnings from bets, and excluding income from leasing or sale of horses. The appeal was treated as allowed.

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