JUDGMENT
Ratnam, J.
1. The assessee is a Hindu undivided family. On March 14, 1962, the assessee purchased a race horse (mare) “High Flight” for Rs. 15,000, with a view to run it in races. However, the horse did not participate in any of the races; but instead was sent to the stud-farm. While in the stud-farm, the mare gave birth to a colt and a filly. On July 1, 1966, the assessee sold the mare and the colt and the filly for Rs. 50,000. In the course of the assessment proceedings for the assessment year 1967-68, the Income-tax Officer brought to tax as capital gains, the difference between the sale price of Rs. 50,000 and the cost of acquisition of the mare at Rs. 15,000, i.e., Rs. 35,000. Although the appeal by the assessee before the Appellate Assistant Commissioner was originally dismissed, on further appeal to the Tribunal, it remitted the matter to the Appellate Assistant Commissioner and the Appellate Assistant Commissioner held that though there was no cost of acquisition for the colt and the filly, yet the expenditure on the upkeep and maintenance of the mare as well as the colt and the filly had to be deducted in computing the capital gains, as such expenditure would amount to cost of improvement. It was also further held by the Appellate Assistant Commissioner that, if such expenditure had not been incurred, the asset would have ceased to exist and the amount spent in respect of the payments to the race club, stud farm, etc., to the extent of Rs. 28,653 should be held to be admissible, but a sum of Rs. 5,000 could not be deducted. Eventually, the appellate Assistant Commissioner took the view that the expenditure on the maintenance and upkeep of all the three animals could be taken at Rs. 30,000 and adding the cost of acquisition of the mare at Rs. 15,000 deducted this from the sale price of mare and the colt and the filly, viz., Rs. 50,000, and computed the capital gains at Rs. 5,000. On further appeal by the Revenue before the Tribunal, it took the view that the expenditure incurred by the assessee for maintaining the mare at the stud-farm, without which the offspring could not have come into existence, could be regarded as the cost of acquisition of the offspring, which were also later sold and that the amount of Rs. 21,435 would clearly be a deductible item. In addition, the training free expended on the animals was also held to be an admissible item of deduction as cost of improvement on a capital asset sold, viz., the mare. Regarding the claim of the assessee for deduction of certain other amounts to the tune of Rs. 5,000 incurred,the Tribunal found that this expenditure was not vouched and that that could not be allowed as a deduction, Ultimately, the Tribunal determined the quantum of aggregate deduction at Rs. 25,000 and adding that amount to the cost of acquisition of the mare, i.e., Rs. 15,000, the assessable capital gains were computed at Rs. 10,000 (Rs. 50,000 – (Rs. 25,000 plus Rs. 15,000)). Under section 256(1) of the Income-tax Act, 1961, (hereinafter referred to as “the Act”), at the instance of the Revenue, the following question of law have been referred to this court for its opinion :
“(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in computing the capital gains at Rs. 10,000 on the sale of the horse for the assessment year 1967-68 ?
(2) Whether, on the facts and in the circumstances of the case, the maintenance expenses on the mother-horse and the offspring would constitute the cost of improvement of the asset within the meaning of section 48(ii) of the Income-tax Act, 1961 ?
(3) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the payments made to the stud-farm should be deducted as cost of acquisition in computing the capital gains ?”
2. Learned counsel for the Revenue contended that the expenditure incurred at the stud-farm for the maintenance of the mare was in the nature of expenditure for routine upkeep and maintenance, though spent on a capital asset and partook and the character of revenue expenditure whose nature was not altered as a result of the consequence of such expenditure. It was also submitted that the spread-over principle should have been adopted and that, in any event, the expenses incurred after the birth of the colt and the filly, cannot be regarded as cost of acquisition. Reference in this connection was also made to certain decisions.
3. On the other hand, learned counsel for the assessee submitted that the Tribunal was quite correct in holding, on an analysis of the expenses, that the total payments made to the stud-farm aggregating to Rs. 21,435 really represented the cost of the acquisition of the offspring which were also sold along with the mare as, but for the incurring of such expenditure, the offspring would not have come into existence at all. Learned counsel also submitted that the expenditure on the training fee certainly would constitute improvement of not only the mare, but also the filly and the colt, till the time of their sale and was, therefore, rightly taken into account by the Tribunal for purposes of deduction and that the ultimate conclusion of the Tribunal computing the assessable capital gains at Rs. 10,000 was also quite in order.
4. We may first take up the third question for consideration. Though some dispute appears to have been raised before the authorities below on whether the mare was the personal effects of the assessee or a capital asset, it was not disputed before the Tribunal or even before this court that the mare, acquired by the assessee, was a capital asset. No doubt, at the time when the asset was acquired, the assessee appeared to have entertained the idea of making the mare participate in races. However, for some reasons which are not very clear, the mare “High Flight” was sent to the stud-farm and it never participated in any race at all. While at the stud-farm, the mare had brought into existence a colt and a filly. On an analysis of the expenses incurred by the assessee on the mare during its stay at the stud-farm, the Tribunal found that Rs. 21,435 had been spent for the maintenance of the mare. It may be that, looked at from the point of view of the mare alone, the expenditure incurred by the assessee on the maintenance of the mare during its stay at the stud-farm and the birth of a colt and a filly there, be regarded as the normal, routine maintenance expenses on a capital asset. However, the very purpose with which the mare was sent to the stud-farm was to enable it to bring forth colts and fillies at least, as the mare could not participate in races. Till such time the mare delivered the colt and the filly, in a sense, there was oneness of the capital asset, viz., the mare alone. It cannot, at the same time, be lost sight of that the mare was enceinte. In order, therefore, to nurture and keep the mare and the foetus within in good shape and health,amounts had to be expended by the assessee, though ostensibly on the mare, but more essentially for the colt and the filly, in the shape of foetus within the mare. Thus, looked at from the point of view of the colt and the filly, the expenditure, incurred by the assessee, though apparently on the mare, was really for the purpose of nurturing, protecting and preserving the foetus of the colt and the filly in good shape and health, in order that healthy offspring were brought into existence by the mare. The expenditure thus incurred by the assessee for this purpose, though it might at firsts sight appear to be routine maintenance or upkeep expenses of the mare, was really intended to bring into being the offspring in the shape of the colt and filly, and, in that sense, could be legitimately regarded as cost incurred by the assessee in the acquisition of the colt and the filly. We may also observe that if the expenditure incurred by the assessee during the stay of the mare at the stud-farm had not been incurred, it would have meant that the mare had not gone at all to the stud-farm and the offspring would not have gone at all the to the stud-farm and the offspring would not have been brought into being. We are, therefore, inclined to agree with the Tribunal that the amount of Rs. 21,435 can be properly regarded as the cost of acquisition of the cost and the filly which were also sold along with the mare. Though we have been referred to some decisions by learned counsel for the Revenue, we find that none of them is in point on the factual position in this case and we, therefore refrain from making a reference to those cases. We, therefore, answer the third question referred to us in the affirmative and against the Revenue.
5.We now proceed to a consideration of the second question. The question of improvement of the mare as well as the colt and the filly, from the time of their birth all sale would be relevant from the view point of the claim for deduction by the assessee. From the order of the Tribunal, we find that the animals had been subjected to training and it cannot be disputed that trained animals are far superior to untrained animals, and more valuable as well. The incurring of expenditure on imparting training to the animals by which the animals are subjected to discipline and control through the rigours of training, in our view, should be regarded as an improvement of the capital asset sold, at least in relation to the mare. We have earlier held that the payments made to the stud-farm should be regarded as the cost of acquisition of the colt and the filly falling under the first part of section 48(ii) of the Act. In view of that, the expenses incurred by the assessee as training fee on the animals would properly constitute the costs of improvement falling under the latter part of section 48(ii) of the Act. Nevertheless, the second question as referred also comprehends and takes within its sweep the maintenance expenses on the mare and the offspring, as forming part of the costs of improvement of the asset. In view of the frame of the second question, even if the cost of acquisition of the colt and the filly should be regarded as “nil”, it would still be a matter for consideration as to whether the expenses incurred by the assessee would not form part of the cost of improvement of the asset. It is in this context that it has to be noticed that the word “improve” has various shades of meaning and it includes everything by doing which there is an enhancement in the value of the asset or there is a rise in its price or the asset is made to grow better or it is even followed up by something better. By the incurring of expenditure on the mare initially and later on the colt and the filly also for their maintenance, undoubtedly, the assessee had improved the capital asset. By the expenditure incurred by the assessee, there had been an increase in the value of the mare and the colt and the filly and a rise in their price. We may also observe that but for the incurring of the expenditure by the assessee in the proper maintenance of the mare and the colt and the filly, the assessee would not have been able to realise a price of Rs. 50,000 at the time of their sale. The price for which the animals had been sold by the assessee clearly indicates that there has been an increase in the value and a rise in price at the time of the sale of the animals, referable to their proper maintenance and we are, therefore, of the view that the maintenance expenses on the mare and the offspring, could be regarded as cost of improvement of the capital asset within the meaning of the later part of section 48(ii) of the Act. We, therefore, answer the second question in the affirmative and against the Revenue.
6. We now take up the first question for consideration. In view of the answers rendered by us on questions Nos. 3 and 2, it follows that the answer to question No. 1 has to be in the affirmative and against the Revenue. We, accordingly, answer the questions referred to us, as stated earlier. The assessee will be entitled to the costs of this reference. Counsel’s fee Rs. 500.