I.T.AS. NOS. 4811/LB AND 4810/LB OF 1980-81, DECIDED ON 11TH FEBRUARY, 1988. Versus I.T.AS. NOS. 4811/LB AND 4810/LB OF 1980-81, DECIDED ON 11TH FEBRUARY, 1988.
ORDER
These two appeals have been filed at the instance of the Department to assail consolidated order, dated 20-12-1980 which, inter alia, pertains to assessment years 1975-76 and 1976-77. The respondent in this case is an 'individual' who is a wholesale vendor of cloth.
2. The learned Member who earlier heard these appeals (in a Single Member Bench.) suggested that the matter may be assigned to a larger Bench as these related to an important issue, namely Income said to have been earned from betting, on race horses and claimed as exempt, relying, on this Tribunal's decision reported as 1980' P T D (Trib). 10 which, apparently contained a view contradictory' to the one expressed by the learned Judges of the Karachi High Court in re: New China Glassware Company P. L. D 1975 Kar. 260. The learned Chairman, therefore constituted a Full Bench vide his order, dated 20-9-1986, passed under section 136(4); of the income Tax Ordinance hence the present hearing.
3. The two Representatives before us are unanimous that the issue, as referred to the Full Bench is obtaining only in the assessment for 1976-77 and not in 1975-76. It is, therefore, decided that this Full Bench should take up appeal only for 1976-77 and the one relating to 1975-76 would come up before a Division (Or Single Member) Bench in the normal course.
4. The D.R. explained that while framing the -assessment for the year 1975-76 it was discovered that the respondent had purchased a plot of land (=No. 223 Shadman Colony, Lahore) measuring one Kanal and made construction thereon during the period ending 30-6-1976. When called upon to explain the source of investment, it was inter all submitted that an income of Rs.29,300 arose from betting on race horses. In support of this claim the respondent submitted seven photo copies of betting cards shoring innings aggregating Rs.29.300 during the period 4-11-1975. The assessing officer then made inquiries from the Race Club who informed that although horses mentioned in the cards did participate 9n the races on the dates specified, but, pit the face of, the cards the names of the horses were not mentioned which is almost, a1ways done. It also was pointed out by the Race Club that the cards, (as a rule, bear the stamp of the Race Club which was not available on the photo copies of the cards in question. It is not without significance that the original cards were never presented to the assessing officer on the plea that for enchasing the winnings cards are surrendered to the bookies. In the final analysis the assessing officer rejected the claim for exemption from tax of the income said to represent winnings from betting on race horses, and held: the amount of 85.29,300 is, therefore, ...:..: added in the income from 'other sources' not disclosed to the Department. This would be taxed in the year 1976-77 as periods of bettings have been claimed in the period relevant It this assessment year.
5. On appeal, the learned A.A.C. deleted the addition firstly because, in his view, the issue stood decided by the Karachi High Court in re: New China Glassware Company P L D 1975 Kar. 260 wherein it was held that when a person remains engaged in horse besting activities for a number of years and earns substantial profit, even then the dealings do riot constitute a business within the meaning of Section 2(4) of the Income Tax Act. Moreover, the learned A.A.C. field the addition was intended to be made under section 4(2-C) of the repealed Act for which the prior approval, as was mandatory in law, was not obtained.
6. The learned D.R. now submitted that the facts in the case relied upon by the learned A.A. C. were different from those obtaining in the case of the present respondent. It was insisted with vehemence that in the New China Glassware 'Company the assessee owned the horses and the prize money was mostly earned on their winnings. In addition betting was also made on those horses. The learned D.R, expressed the view that in the present case the entire winnings came from betting alone. Therefore, even if 50% chance of winning is accepted (for argument's sake) there could not be winning in all the seven races in which the respondent claims to have participated. Moreover, it was emphasized by the learned D.R. in the reported decision of the Karachi High Court that there was no dispute that the amount came from race club winning and that the assessee had in fact maintained his own horse and also did some betting. On the other hand, in the present case, the respondent's claim of having participated in the horse-racing and having earned by betting was seriously doubted. Therefore, the question before the Tribunal is not: whether the income from horse betting constituted a regular business (or not). But what is to be decided is whether the respondent has convincing proof to establish the fact that the sum of Rs.29,300 came from horse betting and thus exempt being a casual receipt. The D.R. went on to contend that for considering the matter from this angle even Tribunal's decision reported as 1980 P T D (Trib..) 10 had little relevance because in that case also factum of the disputed sum having originated from betting on horses was an established fact:. The D.R. convassed that the respondent had no satisfactory explanation to offer about the nature and source of Rs. 29,300 hence it is being characterised as a casual and non-recurring receipt coming from winnings in horse running for which no reasonable and acceptable evidence is available.
7. The learned counsel for the respondent on his turn placed reliance on the observation by the learned Judges in New China Glassware Company decision. It was further asserted that the assessing officer, towards the end of his reasoning on this issue, remarked: 'in view of the above observation and discussion, the betting income of Rs.29,300 claimed as exempt from tax being of casual nature'. Therefore, he indirectly admitted that the income came from betting on horses and, therefore, it was not correct for the D.R. to submit at this stage that the factum of income from this source was in dispute. The learned counsel could not, however, carry his arguments any further when told that the assessing officer, in the above mentioned observation, was simply referring to a label given by the respondent to the income while claiming it as exempt being of casual nature but this definitely was not a finding (or acceptance) by him of the source of the amount.
8. After considering the arguments from both the sides we feel no hesitation in forming the view that though the income was attributed as having come from betting on horses, no conclusive, or even reasonably convincing,- evidence was tendered to show that the amount was earned from such an activity. In fact the inquiries from the Race Club demolish the claim of the respondent inasmuch as the Club pointed out that the names of the horses has not been mentioned on the cards nor these bore the stamp of the Race Club and (furthermore) had visible overwriting and tampering. It also is significant that the cards do not contain the name of the respondent and, therefore, there is hardly any basis to accept that these belonged to the respondent and that these related to the horses who won the races on the respective dates or that winnings were collected by the respondent for himself. Furthermore, it is beyond comprehension as to how the photo copies of the cards could be made out in a short period of time before the finish of a race and collection of the win money against surrender of the cards, when no such arrangement of photo copying is available at the Race Club premises. For all these deficiencies and infirmities in the explanation as also the evidence led by the respondent, we see no scope for acceptance of the plea that the amount was earned by successful betting on horse-racing. Obviously, the learned A.A.C. clearly erred in holding that the decision of the Karachi High Court in re: New China Glassware Company (supra) applied in the present case, completely ignoring the clearly distinguishable facts. Our conclusion therefore, is that the respondent failed to make out a case for exemption under clause '(vii)' of subsection (3) of section 4 of the repealed Income-tax Act for receipts of casual and non-recurring nature. For forming this view we have benefited from the pronouncement by the learned Judges of the Supreme Court of Pakistan in the case of Mrs. Samina Shaukat Ayub Khan P L D 1981 S C 85 where it was unequivocally held that if the nature of the receipt and its source are not satisfactorily explained by the assessee, the assessing officer may legitimately presume that the amount in question is an income of the assessee from an 'undisclosed source'. The upshot of the above discussion is that the amount of Rs.29,300 is clearly a receipt which, not being exempt as casual and] non-recurring in nature, is to be treated as taxable income from an undisclosed source, as was rightly done by the assessing officer.
9. As respects the absence of prior approval from the I.A.C. for making addition under section 4(2-C) read with section 4(2-E) of the repealed Income-tax Act, we are of the view that this alleged deficiency was unduly emphasized by the learned A.A.C. on a clearly erroneous presumption that the assessing officer made the addition by resort to deeming provisions of the repealed Act. A bare reading of the two provisions referred to by the learned A. A. C. leaves room for doubt that:
Section 4(2-C): relates to a situation where the value and quantum of money or value of the article is " not recorded in the books of accounts---nor shown by him in any statement" furnished under subsection (4-A) of section 22.
In the present case, though books of accounts were not maintained, a wealth statement was filed and did contain the disclosure, which generated the controversy. This provision of law is obviously not applicable.
Section 4(2-E): relates to those assessees, who incur an expenditure but "offer no explanation about the nature or source of the money from which the expenditure was met" (or the explanation is not found satisfactorily) whereupon "the amount of expenditure-----be deemed to be the income".
This provision is not applicable to the facts of the present case because here the dispute pertains to the receipt, which admittedly was disclosed by the respondent but was claimed exempt from tax. It involves no fictional income.
(underlined here for emphasis)
Therefore, the presumption by the learned A.A.C. that the addition pertained to these two subsections is only conjectural. We may, with advantage, reproduce the finding by the assessing officer for facility of proper appraisal of the factual position.
"In view of the above observations and discussion, the betting income of Rs.29 300 claimed as exempt from tax be ing of casual nature, is taxable. The amount o Rs.29,300. is, therefore, disallowed and added in the income from 'other sources' non-disclosed to the Department------"
(underlined here for emphasis)
The sagacity of the assessing officer's decision is understandable for the reason that the situations visualised 'by the other 'deeming' provisions were also not attracted to the circumstances of the present] respondent Section 4(2-A) stood ousted as no books of accounts were maintained; section 4 (2-B) because the receipt; was duly recorded in the wealth statement, and section 4(2-0) for The reason that no excess over the recorded/ disclosed figure was worked out. It is true, the assessing officer called for the details of funds, which went into the construction of the property but accepted the declared quantum of these. What he disputed was the purported casual nature of an amount of RS.29,300 which the respondent claimed exempt under section 4(3)(vii) of the repealed Act. There was thus no occasion for the assessing officer to treat this amount as "deemed income" by fiction of law. This amount very much existed, was admitted by the respondent and was declared as income though it was claimed to be exempt from I tax.
10. The learned. A. A. C. obviously failed to appreciate the subtlety inasmuch as the controversy was not about the extent and nature of the 'expenditure' but about the character of the 'receipt' (Le. casual or non-recurring). The conclusion, therefore, is inescapable that the learned A. A. C. fell in grave error in presuming that the assessing officer intended to make the addition under section 4(2-C) read with section 4(2-_E) of the repealed Act for which he failed to obtain the mandatory approval from the I.A.C. thus besetting the assessment with illegality. The factual and legal situation obtaining in the present appeal once again tempts us to revert to the decision by the Supreme Court of Pakistan in re: Mrs: Samina Shaukat Ayub Khan (supra) wherein while discussing the scope of 'income' the learned Judges, authoritatively pronounced:
"In the last analysis, the question whether a` particular kind of receipt is income or not would depend for its answer on the peculiar circumstances and facts of the case. If the nature of the receipt and its source are not satisfactorily explained by the assessee-----.the I.-T.O. may legitimately presume that the amount in question is income of the assessee from an undisclosed source. ,
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Once a finding is recorded that the amounts in question could be treated as income within the meaning of the charging section, namely, section 3 of the Income-tar .let, the burden of proving that the income qualified for exemption under any of the clauses of section 4 of the Act was on the assessee. Subsection (1) of section 4 of the Act provides- that "subject to the provisions of this Act; the total income of any previous year of any person includes all income, profits and gains from whatever sources derived-------"Subsection (3) of the same section then enumerates exemptions, and the operative words are "any income, profits -or gains falling within the following clause shall not be included in the total income of the person receiving them-----" It was for the appellant to show that she was covered by the exemption granted by clause (vii) of subsection (3).
11. For the reasons recorded hereinabove our conclusion remains' that the learned A.A. C.
(i) Erred in holding that the impugned addition to income at Rs.29,300 did not constitute 'income' (within the meaning of subsection (6-C) of section 2 of the repealed Act) and that being receipt from betting on horse races, it is of casual nature entitled to exemption as per' section 4(3)(vii) of the repealed Act; and
(ii) he misdirected himself in law in presuming that the addition was intended for an amount "deemed as income" by resort to the provisions of subsection (2-C) read with subsection (2-E) of, section 4 of the repealed, Income-tax. Act, for which prior approval of I.A.C. though mandatory was, not obtained thus causing illegality.
We, therefore, feel no hesitation in vacating the order of the learned" A.A.C, with the result that the assessment -as made by the assessing officer stands good.
12. In the result the Department appeal succeeds.
M.B.A./479/T Appeal accepted.