Bhargavan & Ors Vs. State of
Kerala  INSC 230 (28 November 1960)
CITATION: 1961 AIR 1028 1961 SCR (2) 729
CITATOR INFO :
R 1964 SC1722 (9) F 1972 SC 159 (4) R 1972 SC
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).
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,  S. C. R. 594 and Commissioner of Income-tax v.
Chandulal Keshavlal & Co.,  38 I.T.R. 601; relied on, British
Insulated and Helsby Cables v. Atherton,  A. C. 205, Morgan v. Tate &
Lyle Ltd.,  A. C. 21 and Boarland v. Kramat Pulai Ltd.,  2 All, E.
R. 1122, discussed.
Strong & Co. v. Woodifield,  A. C.
448 and Smith v. Incorporated Council of Law Reporting,  3 K.B. 674,
Ward & Co. Ltd. v. Commissioner of Taxes,
 A. C. 145, distinguished.
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
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
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 case the assessee firm was the Managing Agent of a Company
and at the request of the Directors of (1)  S.C.R. 594, 598. (2) 
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 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)  A.C. 205.
(3)  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
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 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)  A C. 448. (2) [19I4] 3 K.B. 674.
(3)  A.C 145. (4)  A.C. 21.
(5)  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 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.