ORDER
Shamim Yahya, Accountant Member
1. This appeal by the revenue emanates out of the order of CIT(A) dated 12-3-2002 and the germane assessment year is 1994-95.
2. The issue raised is as under:-
The assessee is not a dealer in horses but has only invested in the animals for racing purposes.
Selling of horses when it becomes old and not fit for racing is only releasing of investment when its value decreases and cannot be treated as sale of stock-in-trade.
The learned CIT (Appeals) is not justified in allowing the decrease in value of assets (depreciation) as decrease in value of closing stock.
3. The brief facts of the case are stratified as under:-
The Assessing Officer disallowed Rs. 3.62 lakhs claimed under the head “Decrease in value of horses” by holding as under:-
The assessee had filed a statement of market value of horses as on 31-3-1994. As per this statement, the value of the horses as on 1-4-1993 was Rs. 8,62,357, the additions being Rs. 5,85,250 the total value was Rs. 14,47,607. On this total value, the assessee had computed decrease in value of horses of Rs. 3,62,607 and arrived at value as on 31-3-1994 of Rs. 10,85,000. For the horses in existence as on 1-4-1993 and 31-3-1994 and for the additions made during the year, the assessee has computed decrease in value of horses on account of factors of ageing, health etc. The method of computation of decrease in value of horses made by the assessee does not go to corroborate the assessee’s statement that the net effect of opening stock and closing stock is the decrease in value of horses. Further the horses existing as on 1-4-1993 were still in existence as on 3.1-3-1994, along with the additions. The closing stock of value of horses should be the same value as that of the opening stock of value of horses and the value of additions of horses. The total value of opening stock of horses as on 1-4-1993 and the additions made during the year, aggregating to Rs. 14,47,607 should have been shown as value of closing stock as on 31-3-1994 since there was no sale of horses mentioned in the list. This is not the case. The decrease in value of horses computed by the assessee, therefore, is only in the nature of depreciation, and it is not allowable since the provision granting depreciation had been removed from the Income-tax Act. Hence, decrease in value of horses of Rs. 3,62,607 is disallowed.
4. Upon the assessee’s appeal, the learned CIT(A) held as under:-
The appellant is owning race horses. For the relevant period the a appellant was owning 90 horses. The appellant has filed before me the value of the horsewise value as on 1-4-1993 as well as value as on 31-3-1994. Each horse was valued by a Senior Veterinary Officer of the Madras Race Club. The appellant consistently adopts valuing closing stock by a method on which cost or market value whichever is less. The appellant claims before me that during the year the value of horses increased or decreased according to the races won by them or lost by the horse during the year. Market value varies accordingly. For a number of years appellant has consistently followed this method.
After going through the complete list filed by the appellant as well as the valuation given by the Madras Race Club, I am convinced. Since the appellant is following consistently a method of accounting, there is no necessity to disturb the valuation adopted by the appellant. I am unable to agree with the view expressed by the Assessing Officer that this is the depreciation claimed by the appellant. This is only the method adopted by the appellant in valuing the closing stock. The addition made by the Assessing Officer on decrease in value of horses is deleted.
5. The learned Counsel for the assessee submitted that, the assessee is in the business of horse breeding and giving horses on lease for races. Thus, he claimed that this was the business of the assessee and horses were his stock-in-trade. Moreover, he claimed that this method of accounting had been followed for a number of years consistently in previous years and had not been objected by the revenue. He, further, pointed out that in the Statement of Income, there is not only decrease in value of horses but also increase in stock of foals and yearlings, amounting to Rs. 53,000, which has been ignored by the Assessing Officer.
6. In rebuttal, the learned DR relied on the Grounds of Appeal and the Assessing Officer’s order and further submitted that the assessee has only claimed depreciation on horses in the garb of decrease in value of horses. He submitted that in Income-tax Act, such provision had already been withdrawn with effect from 1-4-1962. He, further, submitted that the assessee is claiming his income from this business as only ‘income from other sources’ in his returns. As such, the claim that the income is from business is totally unfounded.
7. We have heard the rival contentions in the light of precedents relied upon and the documents perused.
8. We find that one of the contentions of the learned DR is that since the income from horses has been shown as ‘income from other sources’ in income-tax returns, it cannot be considered as business income. Here, we find that courts have uniformly held that in taxation matters, substance prevails over form. In this regard, we draw support from the principles expressed by Viscount Simon in IRC v. Wesleyan and General Assurance Society which reads as under :
It may be well to repeat two propositions which are well established in the application of the law relating to income-tax. First, the name given to a transaction by the parties concerned does not necessarily decide the nature of the transaction. To call a payment a loan if it is really an annuity does not assist the taxpayer, any more than to call an item a capital payment if that is its true nature. The question always is, what is the real character of the payment, not what the parties call it. Secondly, a transaction, which on its true construction is of a kind that would escape tax, is not taxable on the ground that the same result could be brought about by a transaction in another form which would attract tax. Hence if in substance the concerned assets are identified as business assets, they have to be valued as part of stock-in-trade of the assessee.
9. Now we come to the crux of the issue. We find that the Assessing Officer has not dwelt on the issue whether horses are business assets or not. Also he did not hold the valuation process followed by the assessee as defective or otherwise. He has only gone on the premise that this is a ploy to claim depreciation on horses. Admittedly, provision of depreciation on live stock has been withdrawn by amendment of Section 43(3) with retrospective effect from 1-4-1962 by Finance Act, 1995. But this is nothing new which happened during the previous year. As pointed out by the CIT(A), the assessee had been consistently following a method of accounting. In this regard, the relevant exposition is from Hon’ble Jurisdictional High Court decision in L.G. Balakrishnan v. CIT [2003] 129 Taxman 854 (Mad.) which reads as under:-
Having regard to the amendment of the definition of the word ‘plant’ in Section 43(3), with effect from 1-4-1962, which amendment has been effected by the Finance Act, 1995, it must be held that the birds being ‘livestock’ could not be regarded as capital assets and, therefore, are required to be valued as part of the stock-in-trade of the assessee. It is settled law that in case of running business, the stock-in-trade has to be valued either on cost basis or on the basis of market price, whichever is lower.
10. Considering the entire spectrum of the case, we find that in order to adjudicate upon the claim of the assessee that the horses are stock-in-trade, the question which needs to be answered is whether the income from lease of horses run in horse races amounts to business or not as per the facts and circumstances of the case.
11. The expression “business” as defined in Section 2(13) of the Income-tax Act, reads as under:-
‘business’ includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.
The Hon’ble Apex Court in State of Andhra Pradesh v. H. Abdul Bakshi & Bros. [1964] 15 STC 644, had occasion to consider the definition of “business”, and the following was observed:-
The expression ‘business’ though extensively used is a word of indefinite import. In taxing statutes, it is used in the sense of an occupation, or profession, which occupies the time, attention and labour of a person, normally with the object of making profit. To regard an activity as business, there must be a course of dealings, either actually continued or contemplated to be continued with a profit motive, and not for sport or pleasure.
12. Thus on the anvil of aforesaid exposition, in order to constitute an activity as business activity, there are certain essential requisites which must be fulfilled. Firstly, it must be a continuous course of dealing and, secondly, it must be carried on with a profit motive. Admittedly, the assessee has been carrying on the activity in lease and maintenance of the horses in an organised manner over a period of time including the year in question. Moreover, the assessee has carried on the activity with a profit motive, which is clear from the way in which the activities were carried on by the assessee. It was found as a matter of fact that there was a systematic activity in maintenance of the horses, in rearing the horses and in earning income from the horses by way of lease of horses and use of the horses in races. In other words, there is a commercially organised activity carried on by the assessee and the horses were used in various races conducted. In our considered opinion, the assessee has employed the horses in normal business as any prudent man would normally do and the case cannot be bracketed with an owner of the horse, who possessed the horses either for pleasure or for the purpose of pride of possession.
13. We, therefore, hold that the activities of the assessee were business activities and there was a profit element involved in carrying on the activity of the assessee. We find that one has to take into account the dominant intention of the assessee in maintaining the race horses and accordingly we find that the assessee had engaged herself in an organised systematic business activity. Hence, we hold that the activity of the assessee was business activity. We find that the assessee has carried on the activity of the horses with the object of earning income from those horses by letting out the horses and by sale of the horses in a systematic and regular activity, consistently over a period of years. As such, the income of the assessee from horses was business income.
14. Since it is adjudicated in the preceding paragraphs that the assessee is engaged in business activity through the employment of horses, the horses are to be treated as the stock-in-trade of the assessee. As such, the consistent policy of the assessee of valuing stock as on the close of the year and account for the increase and decrease accordingly cannot be brushed aside by holding that this is a mere garb of claiming depreciation.
15. Considering the aforesaid, we are stated to opine that order of the CIT(A) is not necessitous of any interference on our part. As such, we uphold the same.
16. In the result, the revenue’s appeal is dismissed.