IN THE HIGH COURT OF JUDICATURE AT MADRAS. DATED: 10/10/2002 CORAM THE HONOURABLE MR.JUSTICE V.S.SIRPURKAR. AND THE HONOURABLE MR.JUSTICE N.V.BALASUBRAMANIAN. TAX CASE No. 209 of 1986 and TAX CASE No. 210 of 1986. Shri M.Ct.Muthiah, HUF-II, 110,Coral Merchant Street, Madras. ...Applicant in T.C.209/1986. -Vs- The Commissioner of Income Tax, Tamilnadu-I, Madras. ..Respondent in T.C.209/1986. ... The Commissioner of Income Tax, Tamil Nadu-I, Madras. ...Applicant in T.C.210/1986. .vs. Shri M.Ct.Muthiah (HUF-II), Madras. ...Respondent in T.C.210/1986. Tax Cases filed against the order of the Income Tax Appellate Tribunal dated 15.1.1985 and made in R.A.Nos. 1066 and 1109 (Mds) of 1984 (I.T.A.No.751/Mds/83). !For Applicant ..... Mr.R.Meenakshisundaram. in T.C.209/86 and respondent in T.C.210/86. ^For Respondent ..... T.C.A.Ramanujam Sr.Standing Counsel For I.T T.C.210/86 and for applicant in T.C.210/86. :JUDGMENT N.V.BALASUBRAMANIAN,J. T.C.No.209/86 is a reference at the instance of the assessee, and T.C.No.210/86 is a reference at the instance of the Revenue and the assessment year involved in both the Tax Cases is 1978-79. We dispose of both the Tax Cases by this common judgment for the convenient sake. 2.The Income Tax Appellate Tribunal hereinafter referred to as ' the Tribunal', at the instance of the assessee has stated a case and referred the following question under Section 256(1) of the Income Tax Act, 1961. "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the Inspecting Assistant Commissioner had jurisdiction under section 144B of the Income Tax Act 196 1 to direct the Income Tax Officer to include a sum of Rs.1,51,152/- as income from horse racing in computing the total income of the assessee which sum was not originally included by the Income Tax Officer in his draft assessment order, for the assessment year 1978-79?" 3. The following questions of law are referred by the Tribunal, at the instance of the Revenue in relation to the same assessment year 1 978-79: 1.Whether on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in holding that the income derived by the assessee from lease of horses and sale of horses arising out of a "hobby" and cannot be taxed under the Income Tax Act? 2. Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the horses constituted ' personal effects of the assessee within the meaning of Section 2(14)(ii) and therefore, the gains arising from their sale cannot be taxed under the head 'capital gains'?. 4. The Tax Case No. 209/86 at the instance of the assessee raises the question of jurisdiction of the Inspecting Assistant Commissioner in the draft assessment proceedings under Section 144B of the Act, and the Tax Case No.210/86, at the instance of the Revenue, raises the question of the taxability of receipts derived by the assessee from the sale and lease of the race horses which were claimed by the assessee as receipts from the hobby of the assessee. 5. The assessee is a Hindu Undivided Family consisting of M.Ct. Muthiah, his wife and children. For the previous year ended 31.3.1978, relevant to the assessment year 1978-79, the assessee filed a return declaring a total income of Rs.25,480/-. The assessee claimed a loss of Rs.19,870/- under the head "winnings from horse races" computed separately and carried forward the same. 6. The Income Tax Officer, while considering the case of the assessee directed the assessee to furnish particulars of the race horses owned by it, the date of purchase, amounts paid, sources for purchase consideration and the expenditure incurred on each of the race horses. The assessee sent a reply stating that the assessee was the owner of the race horses and they were purchased during the previous year relevant to the assessment year 1978-79 giving details of the dates of purchase of the horses. The assessee thereafter was asked to explain how it was able to meet the losses claimed by it for the earlier assessment years and it was also directed to furnish the details of deposits with Bank of Madura. Thereafter, the assessee came forward with the reply stating that in addition to three horses, it was owning 8 breed mares, which were not in the racing and also furnished the statement for the purchases from the year 1964. It was found that the assessee has received a sum of Rs.42,111/- from the Bangalore Turf Club and another sum of Rs.85,000/- from Bangalore Turf Club which were kept as fixed deposit with another company. The Income-tax Officer also found that certain sums were received by Mrs. Muthiah from the Bangalore Turf Club and it was also found that the assessee was having extensive activities in maintaining race horses and has not made a consolidated account. The Officer also found in making the draft assessment that the assessee has not explained the sources for the expenditure and maintenance of the horses and the mares and the assessee had not furnished full details for making a proper assessment. The assessing officer found that the sources for the purchase of the two horses and the source for the loss claimed in the racing account required explanation and in the absence of explanation, the amount of Rs.1,53,250/- was treated as income from undisclosed source. The assessing officer made a draft assessment and sent the draft assessment order to the assessee seeking its explanation, and the assessee gave its explanation for the source for the purchase of the horses and also for the sources for the loss claimed in the racing account. The Income Tax Officer forwarded the draft assessment order together with the objections raised by the assessee to the Inspecting Assistant Commissioner and the Inspecting Assistant Commissioner on scrutiny of the accounts found that the assessee had not only purchased the horses in the auction sales, but also auctioned horses which were reared in the stables and it had won stake money and sold horses also. According to the assessee, two accounts were maintained on behalf of the assessee by the Madras Race Club, one of which was called racing account wherein the various expenses incurre d by the Race club on behalf of the assessee were debited and various amounts received as stake moneys were credited . There was another account called breeders account and the expenses incurred by the Madras Race Club in maintaining the race horses were debited and the amounts received from the sale of the horses were credited. The assessee also enclosed accounts maintained in the Bangalore Race Club along with the explanation for the source of the funds for the purchase of race horses. The Inspecting Assistant Commissioner found that the assessee was maintaining a racing stable and it purchased offspring of race horses and reared them in the stable. It was also found that the horses were used for running in the horse races and after the racing capacity was over, they were used to rear the colts or fillies. It was found that normally racing period for fillies is about 4 years and for colts it is about 5 years. It was also found that some of the horses in the assessee's stable during the period were leased out and the lessees maintained the horses at the lessee's cost and used them in the horse races and the lease amounts were also paid to the assessee. The Inspecting Assistant Commissioner found that the income from the sale of race horses and lease of the race horses were taxable. The assessee objected to the treatment of the income from the sale of horses and lease of horses on the ground that the racing is the hobby and the horses are the personal effects of the assessee and hence they are not capital assets and the sale proceeds do not give rise to any capital gains. The assessee also raised an objection that there is no cost of acquisition either in the case of colts or fillies and in the absence of cost of acquisition they are not liable for capital gains. The main case of the assessee was that the amounts received on lease or sale of the horses are not taxable as the receipts are incidental to the activity of hobby carried on by the assessee as the owner of the horses. The Inspecting Assistant Commissioner rejected the contentions of the assessee on the ground that the assessee's claim that racing is its hobby cannot be entertained as the assessee is a Hindu Undivided Family and it is incongruous to say that the Hindu Undivided Family can have a hobby. The Inspecting Assistant Commissioner held that even assuming that the kartha of the Hindu Undivided family can have a hobby, but that cannot be held to be the hobby of a Hindu Undivided Family. The Inspecting Assistant Commissioner also found that there were 11 horses in the stable and 3 were in racing and 8 in the stud farm including the mares and offspring. It was found that the assessee was engaged in rearing good offspring which could compete well in the races. He held that the maintenance of race horses was a highly specialised field of activity which required extensive knowledge on the horses which run in races and their speed and performance in the race are material. The Inspecting Assistant Commissioner found that a great deal of time, money and energy are spent in organising the activity and it is done on a commercial scale and the scale of action can be gauged from the receipts by way of stake money, the sale price and the lease income. The Inspecting Assistant Commissioner therefore held that the receipts are taxable not under the head, 'business income', but under the head, 'income from other sources'. The Inspecting Assistant Commissioner has found that the Income Tax Officer has reported a sum of Rs.1,22,500/- as the income derived from lease of horses and there was also excess of the expenditure over the receipts of a sum of Rs.28,652/- as net income from the lease of the horses. The Inspecting Assistant Commissioner therefore gave a direction to include both the receipts as income from the racing and passed order accordingly. 7. On the basis of the directions given by the Inspecting Assistant Commissioner, the Income Tax Officer completed the assessment under Section 143(3) read with Section 144(B) of the Act treating the income from racing accounts viz.,Rs.1,51,152/- as income from other sources. 8. The assessee preferred an appeal against the order of assessment before the Commissioner of Income Tax (Appeals), Chennai. The assessee raised two objections before the Commissioner of Income Tax ( Appeals). The first objection raised was that the Inspecting Assistant Commissioner has no jurisdiction to give a direction to include a sum of Rs.1,51,152/- as those items were not the subject matter in the draft assessment order. The second objection raised was that the amount in any event cannot be regarded as the income from other sources and the income from the sale and lease of horses were incidental to the hobby of the assessee of owning horses. 9. The Commissioner of Income Tax (Appeals) rejected both the contentions and held that the Inspecting Assistant Commissioner did not exceed her jurisdiction under Section 144 B of the Act in giving the directions. The Commissioner of Income Tax (Appeals) also rejected the contention that the income arose from the hobby. The Commissioner of Income Tax also held that the activities of sale and lease of the horses were done on a commercial scale and since the assessee spent considerable time, energy and money in the activity of maintaining the horses and earning income therefrom, the receipts arising therefrom would be taxable. He also held that since the assessee was regularly buying and selling horses and the offspring, the receipts arising from the sale and lease of the horses would constitute the income of the assessee. The Commissioner of Income Tax (Appeals) noticed the provision of Section 74A(3) of the Act and held that the income from the sale and lease of horses should be assessed under the head 'other sources' and not either under the head 'capital gain' or under the head 'business'. He therefore held that the Income Tax Officer was justified in assessing the income under the head 'other sources' and thus, dismissed the appeal preferred by the assessee. 10. The assessee carried the matter in further appeal before the Income Tax Appellate Tribunal, Chennai and before the Tribunal also the assessee raised the same contentions which were raised before the Commissioner of Income-tax (Appeals); one on the question of jurisdiction and another on the question of merits. The Appellate Tribunal held that the Inspecting Assistant Commissioner was well within her jurisdiction in giving a direction in respect of the taxability of the receipts from the sale and lease of the horses. However, on merits the Tribunal held that the activity of the assessee was only a hobby and the receipts arising from the hobby cannot be regarded as its income. The Tribunal therefore held that there was no material to indicate that the activities were carried on by the assessee for the purpose of earning the income. As far as Section 10(3) of the Act is concerned, the Tribunal held that Section would apply only if the receipts are income in nature and since the receipts are not income in nature, Section 10(3) of the Act has no application to the facts of the case. The Tribunal also held that Section 74A of the Act has no application as Section 74A deals with the loss arising from the running of race horses and the said provision is confined to earning of stake money and the receipts by way of leasing of the horses or by way of the sale of horses are not covered under Section 74A of the Act. The Tribunal also gave a direction that the maintenance expenditure of the horses should be set off against the stake money winnings received from the betting of horses and not from the lease income or the capital gain arising from the sale of horses. The Tribunal also held that there was no cost of acquisition for the fillies or the colts as they were nature's bounty and did not have any cost of acquisition and therefore the sale of the horses did not result in capital gain. The Tribunal therefore held that the income from the horse races has to be computed only with reference to the receipts by way of stake money and winnings from betting the horses and in this view of the matter, the Tribunal set aside the order of the Income Tax Officer and directed him to re-compute the income taxable under the other sources separately. The Tribunal allowed the appeal in part preferred by the assessee. It is against this order of the Appellate Tribunal,the assessee as well as the Department has come in reference before us. 11. Mr.R.Meenakshisundaram, learned counsel appearing for the assessee submitted that the Inspecting Assistant Commissioner had no jurisdiction at all to give a direction to assess the receipts from the sale or lease of the horses. According to him, the Income Tax Officer in the draft assessment order has dealt only with three items, namely, the sources for the purchase of the two race horses and the source for the loss claimed under the racing account and the assessee in his explanation dated 14.4.1981 has fully explained the sources for the sum of Rs.1,53,250/- which was proposed in the draft assessment order and the Inspecting Assistant Commissioner has also noticed that the Income Tax Officer on scrutiny of the account has reported that the sum of Rs.1,53,250/- was fully explained. He therefore submitted that the direction given by the Inspecting Assistant Commissioner was not in relation to the draft assessment order and the directions were given by the Inspecting Assistant Commissioner in respect of a matter not covered in the draft assessment order and his submission was that the direction should be confined only to the matters considered in the draft assessment order and it is not open to the Inspecting Assistant Commissioner to give a direction in respect of an item not covered in the draft assessment order. 12. Mr.T.C.A.Ramanujam, learned senior standing counsel appearing for the Department has submitted that the the subject matter dealt with by the Inspecting Assistant Commissioner was not at all different from what was proposed by the Income Tax Officer and since the proposed addition made by the Inspecting Assistant Commissioner was in relation to the race horses owned and maintained by the assessee, the Inspecting Assistant Commissioner was well within her jurisdiction in issuing the direction in respect of the taxability of the receipts from sale or lease of race horses owned and maintained by the assessee. He also submitted that while the Income Tax Officer in the draft assessment order suggested a source of income of Rs.1,53,250/- on account of the race horse, the Inspecting Assistant Commissioner has quantified a smaller amount of income from races viz., Rs.1,51,252/- and the assessee is not prejudiced in any manner and therefore, it cannot be said that the Inspecting Assistant Commissioner had acted beyond the jurisdiction in giving a direction to assess the income of Rs.1,51,2 52/- as income from other sources. 13. We have carefully considered the submissions of the learned counsel for the parties. Section 144B of the Act deals with the procedure when the Income Tax Officer proposes to make any variation to the income or loss returned by the assessee, which is prejudicial to the interest of the assessee and where the amount of such variation exceeds the ceiling limit fixed by the Central Board of Direct Taxes. Under section 144-B of the Act, the Income-tax Officer is first required to make draft assessment order and forward the proposed draft assessment order to the assessee for its objections. If the assessee does not file or intimate its objections to the proposed draft order of assessment within the stipulated period, it is open to the Income Tax Officer to complete the assessment on the basis of the draft assessment order. However, on receipt of the draft assessment order, it is open to the assessee to forward its objections to the draft assessment order to the variation of income suggested by the Income Tax Officer within the time prescribed in the Act. Sub Section (4) of Section 144B deals with the procedure in case where the objections are received from the assessee to the draft assessment order and the said sub section (4) of Section 144B reads as under:- 144b(4)- If any objections are received,the Income-tax Officer shall forward the draft order together with the objections to the Inspecting Assistant Commissioner and the Inspecting Assistant Commissioner shall, after considering the draft order and the objections and after going through (wherever necessary) the records relating to the draft order, issue, in respect of the matters covered by the objections, such directions as he thinks fit for the guidance of the Income Tax Officer to enable him to complete the assessment: Provided that no directions which are prejudicial to the assessee shall be issued under this sub section before an opportunity is given to the assessee to be heard. Under Section 144B(4) of the Act, if the assessee intimates its objections to the draft order of assessment, the Income Tax Officer is required to forward his draft assessment order together with the objections raised by the assessee to his next higher authority, viz., the Inspecting Assistant Commissioner and the Inspecting Assistant Commissioner is required to consider the following matters:- i) The draft order of assessment. ii) The objections raised by the assessee. It is open to the Inspecting Assistant Commissioner to go through ( wherever necessary) the records relating to the draft assessment order and he is empowered to issue directions in respect of the matters covered by the objections as he deems fit for the guidance of the Income Tax Officer to enable him to complete the assessment. Under the Proviso to sub section 4 of Section 144B of the Act, the Inspecting Assistant Commissioner is required to give an opportunity to the assessee if he intends to issue any direction which is prejudicial to the assessee. The rest of the provisions of Section 144B deals with the follow up procedure to be done by the Income Tax Officer and it says that the direction is binding on the Income Tax Officer and it also deals with the other matters which are specified in the other sub sections. Sections 144A and 144B were inserted by the Parliament by the Taxation Laws (Amendment) Act, 1975 on the basis of the recommendations of the Wanchoo Committee. The said committee has recommended that the higher officer in rank in hierarchy of the officers of the Income Tax Department should be associated in the process of assessment so that the Inspecting Assisting Commissioner, who is higher in rank than that of the Income Tax Officer, is empowered to issue notice calling for the records from the Income Tax Officer and then issue directions for completion of assessment and the association of a higher officer in the pre-assessment proceedings would avoid the high pitch assessments that may be made by the Income Tax Officer. Section 144B like Section 144A of the Act is a procedural provision and both the Sections were introduced to operate as a check and balance against arbitrary assessment that may be made by the Income Tax Officer so that the faith of the tax payers in the revenue administration is maintained . It is not necessary to refer to the statement of objects or circulars issued by the Central Board of Direct Taxes explaining the scope, powers and duties of the Inspecting Assistant Commissioner as it is clear that Sections 144A and 144B were introduced with the object of preventing multiplicity of proceedings and unnecessary appeals. The object of Section 144B is that the higher Officer is associated in the completion of assessment and the functions of the Inspecting Assistant Commissioner are not administrative in nature but are of quasi judicial in nature in the making and in the completion of the regular assessment. It is in the light of the object of the Act, the provisions of Section 144B has to be construed and interpreted. 14. The crucial words as found in Section 144B of the Act relevant for the purpose of the case are, "in respect of matters covered by the objections". There are four expressions employed in section144-B of the Act which are relevant for th f this case and they are as under: (i) draft order, (ii) objections of the assessee, ( iii) the records relating to the draft order and (iv) matters covered by the objections. The crucial words found in section 144B of the Act are not terms of art with a specialised legal meaning, but they are ordinary English words. We are of the view that the employment of different expressions in the same sub section would indicate that they do not have the same meaning and different meanings should be given to the each one of the expressions. We are of the view that what is material to determine the scope of the jurisdiction of the Inspecting Assistant Commissioner is not the draft order of assessment or the objections raised by the assessee, but whether the direction is issued in relation to the matter covered by the objections. In our view, it is perfectly open to the Inspecting Assistant Commissioner to issue direction with respect to the matters covered in the objection raised by the assessee and he is not confined or limited to the various items of addition or disallowance made by the Income Tax Officer in the draft assessment order. In other words the powers of the Inspecting Assistant Commissioner are wide and his jurisdiction would extend