COMMISSIONER OF INCOME TAX Vs. RAMASWAMY MUDALIAR V

JUDGEMENT

(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 :

(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.