Whether when assessee is engaged in business of race horses and has betting income it cannot set off losses incurred in earning such income - YES: HC

THE issue is - Whether when the assessee is engaged in the business of race horses, and has betting income it cannot set off losses incurred in earning such income. And the answer is YES.

Facts of the case

The assessee is a breeder and owner of race horses. The assessee had shown betting income and while computing the total income, the assessee had adjusted the losses suffered under the head 'business' against the income earned under other heads, including betting income, and after setting off such losses, and the betting income was brought to tax by the assessee at the flat rate of 40% as prescribed u/s 115BB of the Act. This computation was refused by the AO and held that the total winnings are to be taxed u/s 115BB and losses cannot be set off against such income. Accordingly, the total winnings from betting were brought to tax at the rate of 40% as envisaged u/s 115BB of the Act. The CIT(A) allowed the appeal of the assessee that tax is to be computed on the net betting income receipts. This was further confirmed by the Tribunal and hence this appeal by the Revenue.

Having heard the parties, the High Court held that,

++ by the Finance Act, 1986, with effect from 1.4.1987, the legislature while inserting Section 115BB of the Act, thought it fit to delete Sections 74A(1) and 74A(2) of the Act. The scope and effect of these amendments was explained by the Board in Circular No.461, dated 9.7.1986. A bare reading of the above circular and the provisions makes it clear that Section 115BB of the Act envisages taxation at the flat rate of 40% on the total amount of winnings from betting etc., and the losses from the same source also cannot be set off against such income;

++ the above view is fortified by the Board Circular No.14 of 2001, dated 12.12.2001 explaining the intent of the legislature in amending Section 115BB of the Act by reducing the rate of tax from 40% to 30% with effect from 1.4.2001, as amended by Finance Act, 2001, dated 1.4.2002;

++ from the above, it is clear that the intent of the legislature, as a measure of rationalization, was to reduce the rate of tax on such winnings from 40% to 30%, with effect from 1.4.2002. Even though the said amendment is not applicable to the case of hand, what can be deduced from the same is the fact that the higher rate of tax as applicable to winnings from betting, etc. has been brought down to 30%, on a par with the rate applicable for other incomes as a measure of rationalization. Therefore, the intent of the legislature to levy tax at the rate of 40% for the relevant assessment year on the winnings from betting, etc. is apparent as otherwise, the very existence of the said provision in the Act would be meaningless;

++ on a careful perusal of the above provisions of law and the legislative intent, this Court is not inclined to accept the view as propounded by the Tribunal and the Commissioner (Appeals), as Section 115BB of the Act is a standalone special provision, which makes it clear that income of an assessee, not being income from activity of owning and maintaining race horses, would fall under Section 115BB of the Act. In view of the specific provision contained in Section 115BB of the Act under Chapter XII of the Act, which provides for determination of tax in certain special cases, the special rate of tax is applicable for the entire income of winnings from horse racing and should be subject to tax at the special rate provided therein. It is not the case of the assessee that the income being brought to tax is earned from owning and maintaining the horses. Therefore, in our considered opinion, the provisions of Section 58(4) of the Act will not come into play;

++ the methodology of computing tax on Long Term Capital Gain vis-a-vis Section 112 of the Act for which the assessee relied on the CBDT Circular No.721 dated 13.9.95, though found favour with the Commissioner of Income Tax (Appeals), this Court is not inclined to accept the same for the simple reason that whenever tax is levied based on special provisions envisaged under the Act, the method of calculating tax has to be strictly in accordance with such provisions and not otherwise. If the circular relied on by the assessee is taken into consideration, then what is envisaged by the statute would be given a go-by and the purport and intent of the Parliament in enacting that special provision in the statute would become a futile exercise. Therefore, the reliance placed on the said circular by the Commissioner of Income Tax (Appeals) as also by the Tribunal is misconceived and does not stand legal scrutiny. We are, therefore, of the considered view that the total winnings from betting of the assessee should be brought to tax at the rate of 40% as contemplated under Section 115BB of the Act. The order passed by the Tribunal, which affirmed the order of the Commissioner of Income Tax (Appeals), is liable to be set aside.