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Citation Codes
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Case Number
Attorney(S)
  • G.R. Ethirajulu Naidu
  • G. Sarangan
  • K.R. Ramamani
Judges
  • G.K. Govind Bhat
  • Justice B. Venkataswami
Acts
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Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
  • G.R. Ethirajulu Naidu
  • G. Sarangan
  • K.R. Ramamani
Judges
  • G.K. Govind Bhat
  • Justice B. Venkataswami
Acts
See more information ...
Smart Summary

Structured Summary of the Opinion (Reference under Section 256(1), Income-tax Act, 1961)

Factual and Procedural Background

This is a reference made by the Income-tax Appellate Tribunal (Madras Bench "A") under section 256(1) of the Income-tax Act, 1961, raising two questions of law concerning the assessment year 1963-64. The assessee is the Bangalore Race Club Ltd., incorporated on 31 March 1962, which took over the assets and liabilities of the unincorporated Bangalore Race Club. The company's memorandum showed objects that included carrying on the business of a race club and entering arrangements with other persons or bodies engaged in such activities.

The assessee entered into agreements (one dated 16 April 1962 with His Highness the Maharaja of Mysore and another dated 25 May 1962 with the Mysore Race Club) under which the assessee undertook to conduct races at Mysore and to bear any losses incurred. For the relevant accounting period the assessee paid Rs. 24,222 to the Mysore Race Club as its share of loss in running races at Mysore and claimed that amount as a deductible business expenditure.

The assessing authority, the Appellate Assistant Commissioner and the Tribunal rejected the deduction. The Tribunal held the payments to be gratuitous and that conducting races at Mysore through the Mysore Race Club was beyond the objects of the assessee. The Tribunal also held that the racing activity did not amount to a charitable purpose under section 11 of the Act. The Tribunal referred to prior case law and secondary authority in support of that conclusion.

Legal Issues Presented

  1. Whether, on the facts and in the circumstances of the case, the assessee was not entitled to the deduction of the loss in running the races at Mysore?
  2. Whether the income of the assessee was exempt under section 11 of the Income-tax Act, 1961 (i.e., whether the business of racing conducted by the assessee fell within charitable purposes)?

Arguments of the Parties

Assessee's Arguments

  • The assessee treated the payments made to the Mysore Race Club as expenditure incurred in the course of its business (race club activities) and claimed deduction of Rs. 24,222 accordingly.
  • The learned counsel for the assessee relied on the decision in Commissioner of Income-tax v. Andhra Chamber of Commerce to argue that the activity should qualify for exemption under section 11 (advancement/promotion of a public purpose), and thus the assessee sought tax exemption under that provision.

Revenue/Tribunal's Contentions

  • The assessing authority, the Appellate Assistant Commissioner and the Tribunal rejected the deduction, characterising the payments as gratuitous.
  • The Tribunal held that running races (and associated betting) was beyond the scope of the objects of the assessee-company and that racing did not constitute a charitable purpose within the meaning of section 11 (citing that promotion of a sport is not within charitable purpose).

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Cricket Association of Bengal v. Commissioner of Income-tax Held that mere promotion of the practice of a game (cricket) for general entertainment or for advancement of the game itself is not a charitable purpose. The Tribunal relied on this decision to support the view that promotion of sport (here, horse racing) is not a charitable purpose; the court agreed racing did not confer public benefit.
Simon, Income Tax (secondary authority cited) Statement that encouragement of a particular sport (examples: yacht racing, angling, fox hunting, teaching of cricket) is not a charitable purpose. Quoted by the Tribunal and noted by the court as supportive authority for the proposition that encouragement of a sport is not within the charitable ambit.
Commissioner of Income-tax v. Andhra Chamber of Commerce Principle that advancement or promotion of trade, commerce and industry leading to economic prosperity enures for the benefit of the entire community (supporting claim to public benefit/exemption). The assessee relied on this decision to argue for exemption under section 11; the court distinguished it, holding that horse racing (and its concomitant betting) does not confer benefit to the general public as envisaged in that decision.
Company Petition No. 13 of 1967 (decision of the learned company judge of this Court) Interpreted the memorandum and articles of association and the rules of the Mysore Race Club to conclude collaboration/assistance to the Mysore Club lay within the company's objects; prior acceptance of such expenses by the company's general body. The court relied on this decision to hold that payments to the Mysore Race Club pursuant to the agreements fell within the scope of the assessee's objects and therefore were not beyond the company's constitution.

Court's Reasoning and Analysis

The court proceeded in two main strands corresponding to the two referred questions:

  1. On the question of exemption under section 11: The court agreed with the Tribunal that racing does not confer public benefit because betting on horses is an essential concomitant of horse racing and betting cannot be said to be beneficial to the public. The court relied on the authority that promotion of a sport is not necessarily a charitable purpose and distinguished the Andhra Chamber of Commerce decision because that case involved promotion of trade and industry which benefits the entire community, whereas horse racing (with betting) does not have analogous public benefit. For these reasons the court answered the section 11 question against the assessee.
  2. On the question of deductibility of the loss (claim under section 37): The court disagreed with the Tribunal's holding that the payments were gratuitous and beyond the objects of the company. The court accepted the finding of the learned company judge (Company Petition No. 13 of 1967) that the memorandum and articles of association encompassed collaboration with or assistance to clubs like the Mysore Race Club and that the company's association with Mysore Race Club was long-standing and accepted by the company through adoption of balance-sheets. The court noted that the assessing authority and the Tribunal themselves recorded that the net effect of the agreements was that the Bangalore Race Club undertook to conduct races at Mysore and to bear any losses. Given that the payments were made pursuant to legally binding agreements and obligations incurred by the assessee in conducting its racing activity, the court held these payments were not gratuitous but were expenditures incurred in respect of the assessee's own business. Invoking section 37 (expenditure incurred exclusively for the purpose of business), the court concluded that the loss paid to the Mysore Race Club was deductible.

Holding and Implications

Holding:

The court held that (1) the income of the assessee was not exempt under section 11 of the Income-tax Act, 1961, and (2) the assessee was entitled to deduction of the loss in running the races at Mysore.

Implications and consequences:

  • The direct effect is that the assessee cannot claim exemption under section 11 for its racing activities, but it can claim the Rs. 24,222 (and similar losses arising from the Mysore racing activity undertaken pursuant to the agreements) as deductible business expenditure under section 37.
  • The court treated the payments as made in discharge of legal obligations pursuant to the agreements between the assessee and the Mysore parties, not as gratuitous donations.
  • The opinion did not purport to establish a broad new precedent beyond the specific factual matrix; it distinguished prior authority relied upon by the assessee and relied on an internal company-law decision about the company's objects to resolve the question of whether payments were within corporate objects. No sweeping change to the law of charitable purpose is announced beyond the application to horse racing in the facts before the court.
  • The court directed that the parties bear their own costs.

This summary is strictly confined to the facts, holdings and reasoning expressly set out in the provided opinion and does not add or infer information not present in the text.

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    Bangalore Race Club v. Commissioner Of Income-Tax, Mysore

    1. This is a reference under section 256(1) of the Income-tax Act, 1961, by the Income-tax Appellate Tribunal, Madras Bench "A". The following two questions of law have been referred for our opinion :

    "1. Whether, on the facts and in the circumstances of the case, the assessee was not entitled to the deduction of the loss in running the races at Mysore ?"

    2. The questions relate to the assessment year 1963-64. The assessee is the Bangalore Race Club Ltd., Bangalore. It was incorporated under the Companies Act, 1956, on 31st March, 1962. It took over the assets and liabilities of the unincorporated club known as the "Bangalore Race Club". The objects for which the company was established were, inter alia, to carry on the business of a race club in all its branches and to enter into any arrangement with any person, association or company carrying on or engaged in any business or transaction which the assessee is authorised to carry on or engage in. The assessee entered into an agreement with His Highness the Maharaja of Mysore, dated April 16, 1962, and another agreement dated May 25, 1962, with the Mysore Race Club. The net effect of these two agreements was that the assessee undertook to conduct races at Mysore and to bear the losses, if any. During the relevant accounting period the assessee paid a sum of Rs. 24,222 to the Mysore race Club as loss incurred in running races at Mysore. The assessee claimed deduction of the said sum of Rs. 24,222 paid to the Mysore Race Club as an item of expenditure deductible from the gross profits of the assessee. The said claim was rejected by the assessing authority, the Appellate Assistant Commissioner and the Tribunal. The Tribunal has rejected the claim for deduction of the amounts paid to the Mysore Race Club on the ground that it was a gratuitous payment and that the activity of running races at Mysore through the Mysore Race Club was beyond the scope of the objects of the assessee-company. On the first question that is referred for out opinion, whether the assessee is exempt from tax under section 11 of the Income-tax Act, the Tribunal has held that the business of racing conducted by the assessee does not fall within the scope of section 11 because conduct of races is not a charitable purpose as defined in sub-section (15) of section 2 of the Act. In paragraph 24 of the order, the Tribunal has stated that in their opinion the object of the club is only to encourage sports and to provide recreation to a few individuals. The Tribunal relied on the decision in Cricket Association of Bengal v. Commissioner of Income-tax, wherein it was held that mere promotion of the practice of the game of cricket in general either for the entertainment of the public or for the advancement of the game itself was not a charitable purpose. In Simon's Income Tax, volume I, page 455, this is what is stated :

    "The encouragement of a particular sport is not a purpose within the spirit and intendment of the preamble; consequently gifts for yacht racing (a), angling (b), fox hunting (c) or the teaching of cricket (d) are not for charitable purposes."

    3. We are in agreement with the opinion of the Tribunal that racing does not confer any public benefit since betting on horses is one of the essential concomitants of the activity of racing. It cannot be said that betting on horses is beneficial to the public.

    4. The learned counsel for the assessee relied on the decision of Commissioner of Income-tax v. Andhra Chamber of Commerce. That decision formed the basis for the contention that the assessee is entitled to exemption from tax under section 11 of the Act. That case, in our opinion, is clearly distinguishable since racing activity and its concomitant betting on horses, in our opinion, are not for the benefit of the general public. The decision in Commissioner of Income-tax v. Andhra Chamber of Commerce proceeded on the ground that advancement or promotion of trade, commerce and industry leading to economic prosperity enures for the benefit of the entire community. That is not the case in the case of horse racing. Therefore, the first question has to be answered against the assessee.

    5. With regard to the second question, the Tribunal, in our opinion, was not right in the view it has taken that the payment to the Mysore Race Club was a gratuitous payment and that the payment was beyond the scope of the objects of the assessee. In Company Petition No. 13 of 1967 on the file of this court, the learned company judge before whom some of the members of the assessee-company had challenged the payment to the Mysore Race Club, has held, on a consideration of the memorandum and articles of association of the assessee-company that the payment was within the scope of the objects of the company. In paragraphs 27 and 28 of the order of the learned company judge, this is what has been stated :

    "27. The first contention of a total lack of relation between the objects of the company and the company's association with the Mysore Race Club appears to me to be not well-founded. I have already set out the relevant portions of the memorandum of association of the company as well as the rule of the Mysore Club defining its objects. Both the clubs are undoubtedly clubs formed with the principal object of encouraging horse racing. Whereas the memorandum of the company goes into the details of what may be regarded as allied activities, the relevant rule of the Mysore Club refers to them in general terms. Clauses (c) and (h) of the paragraph 3 of the memorandum of association, the relevant portions of which have already been referred to above, also make it perfectly clear that collaboration with or rendering assistance to clubs of the type of the Mysore Race Club were not only matters within the scope of the principal object of the company but also matters actually contemplated and provided for in the document of constitution, the memorandum. The close association between the two clubs for more than a decade is a matter of admission; although the petitioner was not a member of the managing committee after the incorporation of the company under the Companies Act, he was admittedly a person closely associated with both the clubs for a number of years. The expenses incurred or losses met by the company on account of its association with the Mysore Race Club during all the years right down to 1966 had been accepted by the company by its general body adopting the balance-sheets year after year. I have also referred to the fact that, under the rules of the Mysore Club, three of its stewards are persons to be nominated by the company itself.

    28. I do not, therefore, accept the argument that any association by the company with the Mysore Race Club or any assistance that it may render to it or any arrangement for extending all facilities to the Mysore Race Club for the purpose of running races can be straightaway condemned as an activity beyond the scope of the objects of the company."

    6. This court, therefore, held that the payments by the assessee to the Mysore Race Club pursuant to the agreement between them was within the scope of the objects of the company.

    7. The assessing authority, after referring to the two agreements between the assessee and his Highness the Maharaja of Mysore and the agreement between the assessee and the Mysore Race Club held that the net effect of the agreements is that the Bangalore Race Club had undertaken to conduct races at Mysore and to bear the losses, if any, in such conduct. The Tribunal, in the statement of the case has also stated that the net effect of these agreements was that the Bangalore Race Club undertook to conduct races at Mysore and to bear the losses, if any. Therefore, it is clear that the assessee undertook to conduct races at Mysore and to bear the losses, if any, pursuant to the agreements referred to earlier. If the conduct of the races at Mysore under the agreements was by the Bangalore Race Club through the agency of the Mysore Race Club, the payment of loss, if any, pursuant to the terms of the agreements cannot be called gratuitous payment. It was payment for the legal obligation incurred. In that view, the payment is really an item of expenditure incurred by the assessee in respect of its own racing activity. Under section 37 of the Income-tax Act, 1961, the assessee is entitled to the deduction of the expenditure incurred exclusively for the purpose of its business. If profits had been earned through the racing activity at Mysore, the assessee would have been entitled to 50 per cent. of the profits and the same would have been chargeable to income-tax. In the instant case loss was suffered and that loss was met by the assessee. In our opinion, the second question has to be answered in favour of the assessee and against the revenue.

    8. In the result, our answer is that, on the facts and the circumstances of the case, the income of the assessee was not exempt under section 11 of the Income-tax Act, 1961, and that, on the facts and circumstances of the case, the assessee was entitled to the deduction of the loss in running the races at Mysore.

    9. In the circumstances, we direct the parties to bear their own costs.

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    Comments

    Bangalore Race Club v. Commissioner Of Income-Tax, Mysore
    (Nov 26, 1969)