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 appellant
N C Chatterjee Dipak Choudhri and B N Ghosh for the respondent
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 section 661 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 61818 spent by the assessee to train Indian boys as jockeys did not constitute expenses of the business of the assessee allowable under section 102xv 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 62818 on the running of its school and claimed that amount as a deduction under section 102xv 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 ie 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 vs 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 vs 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 vs Commissioner of Income Tax 1951 20 ITR 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   598
2  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 vs 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 vs 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 vs 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 askIf 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  610
2 3 735 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 vs Woodifield1 the observations of Lord Davey and Smith vs Incorporated Council of Law Reporting 2
Counsel for the appellant relied upon the judgment of the Privy Council in Ward  Co Ltd vs 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 vs Tate  Lyle4 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 vs 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 Company
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  2 19I4 3 KB 674
3 1923 AC 145
4 5 736 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
Appeal dismissed


Summary:
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 section 10 2XV 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 vs Commissioner of Income tax West Bengal  and Commissioner of Income tax vs Chandulal Keshavlal  Co  relied on British Insulated and Helsby Cables vs Atherton 1926 A C 205 Morgan vs Tate  Lyle Ltd and Boarland vs Kramat Pulai Ltd  discussed
Strong  Co vs Woodifield  and Smith vs Incorporated Council of Law Reporting  referred to
Ward  Co Ltd vs Commissioner of Taxes 1923 A C 145 distinguished