Medonza v. Conmieeioner of Inland Revenue
Present: Samerawickrame, J., Udalagama, J. and
B. P. MEDONZA, Appellantand
THE COMMISSIONER OF INLAND REVENUE, RespondentS. C. 2/1970—Inland Revenue Board of Review Appeal 348
Income Tax Ordinance (Cap. 242), section 6(1)—Profits tax—Winningsby betting cm horse races—Betting activities amounting to a busi-ness—Whether winnings taxable—Profits Tax Act (Cap. 243),section 2.
Where betting on horse races is organized and carried on syste-matically a3 a business, winnings from such betting are taxableunder the provisions of the Income Tax Ordinance and the Profit?Tax Act, No. 5 of 1948.
160 S AMKR AWICICKAMH, J.— Mcdonza v. <!ammi»»ioucr of Inland RevenueCases referral to :
Ceylon Tea Propaganda Board v. Commissioner of Inland Revenue,67 N.L.R. 1.
Commissioner of Income Tax v. Shaw Wallace & Co., 59 IndianAppeals 206..
Graham v. Green, 133 L.T. 367.
Cooper v. Stubbs, 133 L.T. 590.
Down v. Campston, (1937) 2 All E.R. 475.
Burdge v. Pyne, (1959) 1 All E.R. 467.
Commissioner of Inland Revenue v. Indra Son, (1940) Allahabad 154.Jalal Sahib v. Commissioner of Income Tax, (1961) A.I.R. 20.Jones v. Federal Commissioner of Taxation, 2 A.T.D. 16.Vandenberg v. Commissioner of Taxation, 2 A.T.D. 343.
Trautwein v. Federal Commissioner of Taxation, 56 C-.L.R. 196.Commissioner of Income Tax v. Me. Farlene, 5 A.I.T.R, 264,
Walles v. Commissioner of Income Tax, 38 N.L.R. 325.
Ram Iswara v. Commissioner of Inland Revenue, 65 N.L.R. 393.Morrison v. Commissioner for Inland Revenue, (1950).
CASE STATED for the opinion of the Supreme Court on applica-tion made by the assessee-appellant.
H. W. Jayewardene, Q.C., with L. C. Seneviralne, R. D. C. deSilva, D. C. Amerasinghe and J. C. Ratwatte for the appellant.
S. Pasupati, Solicitor-General, with G. P. S. de Silva, SeniorState Counsel, and D. Premaratne, State Counsel, for therespondent.
Cur. adv. vult.
December 20, 1976. Samerawickrame, J.
Assessment of income tax for the years 1955/56, 1956/57 and1957/58 and assessments of profits tax for the years 1955 and1956 were disputed by the assessee on the ground that theassessments included sums of money won by betting on horseracing, which sums were not assessable to tax as income underthe Income Tax Ordinance and not assessable to tax as profitsunder the Profits Tax Act.
Originally the assessments were based on discrepancies foundon an inquiry into the capital position of the assessee. Theauthorised representative of the assessee took up the positionthat the apparent discrepancies were actually race winnings andthat they were not taxable. The tax authorities did not acceptthe position that the race winnings were not taxable. At theappeal before the Deputy Commissioner of Income Tax thematter in dispute was formulated—•
Are the admitted discrepancies which were actually bettingwinnings taxable ?
SAMERAWICKliAME, J.—Medonza v. Commissioner of Inland Revenue 461
In other words, are the above amounts which are winnings fromgambling on horse racing taxable. The Deputy. Commissionerupheld the assessments and the assessee appealed to the Boardof Review.
The order of the Board made by the Chairman contained thefollowing findings : —
*' For reasons given above I hold that the sum ofRs. 190,900, Rs. 210,559 and Rs. 16,917 gains made by assesseeduring years 1955/56, 1956/57 and 1957/58 respectively arenot profits of a casual and non-recurring nature and areincome derived by him placing bets on horse racing as abusiness and are taxable under section 6 sub-section 1 (1)and (h).
I also hold that the sums of Rs. 190,900 and Rs. 210,559 areprofits derived by the assessee from a business during theyears 1955 and 1956 respectively and are taxable undersection 2 of Act No. 5 of 1948. ”
On application made by the assessee a case has been stated forthe opinion of this Court on the following questions : —
Whether winnings from betting on horse races are
taxable under the provisions of the Income TaxOrdinance (Cap. 242) or the Profits Tax Act, No. 5 of1948 ?
Whether the betting on horse races during the relevant
years by the appellant-assessee constituted a vocationof the said appellant ?
'iii) Do the bets placed by the appellant-assessee duringthe relevant years of assessment on horse racing cons-titute a “ business ” of the appellant within the mean-ing of the said terms in section 6(1)(a) of the
Income Tax Ordinance (Cap. 242) ?
*iv) Were the winnings of the appellant-assessee from betsplaced by him on horse races during the relevant yearsincome taxable under provisions of section 6 (1) (hiof the Income Tax Ordinance (Cap. 242) ?
Do the winnings of the appellant-assessee from bets onhorse races during the years 1955 and 1956 constituteprofits derived by the assessee from a business withinthe meaning of the said terms in section 2 of the Profit*Tax Act, No. 5 of 1948 ?
!»•—A 46744 (79/12)
462 SAMERAWICKRAME, J.—Mcdonza v. Commissioner of Inland Revenue
Has the Board of Review misdirected itself in law incoining to a finding that on the evidence of theappellant-assessee led at the inquiry before theDeputy Commissioner, the appellant-assessee wascarrying on a business of betting on horse racing ?
Under the Income Tax Ordinance tax is payable on the profitsor income of every person. In terms of section 6(1) profits andincome or profits or income mean inter alia :—
(a) the profits from any trade, business, profession, or voca-tion for however short a period carried on or exercised.
Winnings from bets, as bets, have been held not to be a profitor gain within the meaning of an income tax provision. InGraham v. Green, 133 L.T. p. 367 at 368, Rowlatt, J. said: —
“ In the course of my judgment I said that a mere receiptby finding an object of value, or a mere gift, was not aprofit or gain, and I do not feel much doubt about that. Ifurther said that the winning of a bet did not result in aprofit or gain. Until I am corrected, I think I was right inthat. Whether it is a gift, or whether it is a finding, thereis nothing of which there is a profit. There is no increment,no service, but merely the picking up of something eitherby the will of the person who possessed it before or becausethere is no person to oppose that picking up.
In considering the question of a bet, it seems to me thatthe position is substantially the same. What is a bet ? A betis merely an irrational agreement that one person shouldpay another person something on the happening of an event.A agrees to pay B something if C’s horse runs more quicklythan D’s. There is no relevance at all between the eventand the acquisition of property. The event does not reallyproduce it at all; it rests, as I say, on a mere irrationalagreement.”
On the above reasoning with which I respectful1 y agree, winn-ings from bets, as bets, are not profits or gains within the mean-ing of section 6(1) (a) as in the case of bets there is no relevanceat all between the event and the acquisition of gain. Thisprovision was considered in Ceylon Tea Propaganda Board V.Commissioner of Inland Revenue, 67 N.L.R. p. 1. The Tea Propa-ganda Board is an institution established by the Tea PropagandaOrdinance, Chapter 169. By section 8 of the Ordinance it wasprovided that a special export duty was to be levied on theexport of tea from Ceylon the proceeds of which duty was to
SAMERA W1CKRAME, J.—Medonza v. Commissioner of Inland Revenue 463
be paid over to the Board by the Principal Collector of Customs.
H. N. G. Fernando, J. said at p. 4 : —
“ Having regard to the language and form o'f section 6, theproper contention would appear to be that those proceedsare not within the meaning of the section profits from anytrade or business. Sub-section (1) contains a comprehensivedefinition of the terms “ profits and income ”, “ profits ”, and“ income ”, giving to each of them the same meaning.Accordingly, each such term, when used in any provisionof the Ordinance other than the definition itself, bears thatcomprehensive meaning, even though that meaning may bewider than or different from the ordinary meaning of theterm. But in my opinion, the word “ profits ”, when it occursin paragraph (a) of the definition section 6(1), bears onlyits ordinary meaning, namely “ advantage, benefit, pecuniarygain, or excess of returns over outlay ” (Concise OxfordDictionary), and the question therefore is whether the pro-ceeds of the duty can be regarded as an advantage orpecuniary gain from the business carried on by the Board.No doubt the Board does carry on a business, namely thatof tea propaganda, and may incidentally carry on someother business or some trade, and the proceeds of the dutyare received and utilised for the purpose of carrying on thebusiness. But these proceeds are not properly profits fromthe business, because they are not earned or produced inthe course of or as a result of the business which is carriedon.”
This position is supported by the view expressed by the PrivyCouncil in respect of an analagous provision in the Indian IncomeTax Act in Commissioner of Income Tax v. Shaw Wallace & Co.,59 Indian Appeals, 206 at 213. Sir George Lowndes who deliveredthe judgment stated : —
“The claim of the taxing authorities is that the sum inquestion is chargeable under head (iv) business. By s. 2,sub-s. 4, business “ Includes any trade, commerce ormanufacture, or any adventure or concern in the nature oftrade, commerce or manufacture. ” The words used are nodoubt wide, but underlying each of them is the fundamentalidea of the continuous exercise of an activity. Under s. 10the tax is to be payable by an assesset under the head busi-ness “ in respect of the profits or gains of any busi-ness carried on by him ”. Again, their Lordships think,the same central idea : the words italicized are an essentialconstituent of that which is to produce the taxable income tit is to be the profit earned by a process of production.”
4(54 SaMERAWICKRAME, J. — Medonza v. Commissioner of Inland Revenue
There is the further question, whether assuming that the winn-ings from bets themselves are not profits or gains, the aggregateof the assessee’s winnings as the result of his sustained and con-tinuous actions are the prpfits or gains or vocation or businesscarried on by him. In Graham v. Green, Rowlatt, J. said: —
“ But then there is a doubt that, if you set on foot ah orga-nised seeking after emoluments, which are not in themselvesprofits, you may create, by way of a trade, or an adventure,or a vocation, a subject-matter which does bear fruit in theshape of profits or gains. Really a different conception arises,a conception of a trade or vocation which differs in its nature,in my judgment, from the individual acts which go to buildit up, just as a bundle differs from its odd sticks. You maysay, I think, without an abuse of language, that there issomething organic about the whole which does not exist inits separate parts. ”
He later said :—
“As I have said, there is no doubt that one can create atrade by making an organised effort to obtain emoluments,which are not in themselves taxable as profits, and the mostfamiliar instance of all, of course, is a trade which has forits object the securing of a capital increment. A person whobuys an object which subsequently turns out to be merevaluable, and then sells it, does not thereby make a profitor gain But he can organise himself to do that in a commer-cial and mercantile way, and the profits which emerge aretaxable profits, not of the transactions but of the trade. Inthe same way, he may carry on the same trade or part of thetrade by selling things which he has not got and buy themwhen the price has fallen. That is a capital accretion, onlythe operations are reversed. He sells first and buys after-wards. In that way he may make losses or he may makeprofits. If he makes losses, the losses cannot be said to be theresults of the individual acts, they are the results of the tradeas a whole. The following test may be applied : A person mayorganise an effort to find things. He may start a salvage orexploring undertaking and he may make profits. The profitsare not the profits of the findings, they are the profits of theadventure as a whole. Applying the corresponding test: Hemay make a loss. It cannot be said that the loss was due tothe failure to find. The loss was due to the trade. That testsit very well, because it shows the difference between thetrade as an organism and the individual acts.”
SAMERAWICKRAME, 3.—Medonza v. Commissioner of Inland Revenue 406
Having said that, he turns to the man who places the bet andsaid : —
“ Now we come to the other side, the man who bets withthe bookmaker, and that is this case. These are mere betseach time when he puts on his money, at whatever maybe the starting price. I do not think he could be said toorganise his effort in the same way as a bookmaker organi-ses his. I do not think the subject-matter from his point ofview is susceptible of it. In effect all he is doing is justwhat a man does who is a skilful player at cards who playsevery day. He plays to-day, and he plays tomorrow and heplays the next day and he is skilful on each three days,more skilful on the whole than the people with whomhe plays, and he wins. But I do not think that you can findin his case any conception arising in which his individualoperations can be said to be merged in the way that parti-cular separations are merged in the conception of a trade.I think all you can say of that man, in the fair use of theEnglish language, is that he is addicted to betting. It isextremely difficult to express, but it seems to me that peoplewould say he is addicted to betting, and could not say that hisvocation is betting. The subject is involved in great difficultyof language, which I think represents great difficulty ofthought. There is no tax on a habit. I do not think “ habitual ”or even “systematic” fully describes what is essential inthe phrase “ trade, adventure, profession, or vocation. ”
In the same year in which Graham v. Green was decided, thatis tn 1925, two Judges of the Court of Appeal expressly reservedtheir opinion on the question whether betting transactions maynot result in profits which are assessable to tax. In Cooper v.Stubbs, 133 L.T. at 590, Warrington, L.J. said: —
“ I desire to reserve for consideration when, if at all, itever comes before this court, the question of whether or notbetting transactions which produce a revenue to the personwho engages in them may not result in profits which areassessable to tax. That question, when it arises, will have tobe decided on the facts of the particular case, but I think,so far as I am concerned, I should like to reserve that forconsideration when the question arises.”
466 SAMERAWICKRAME, J.—Medonza v. Commissioner oj Inland Revenue
At page 592, .Lord Justice Atkin said : —
“ Like my brother Warrington, I wish to reserve the ques-tion of what the position would be if these transactions hadturned out to be bets, but if the bets had proved to be ascontinuous as these particular bets were, I express noopinion about it. I suppose the matter may someday arisein the courts.”
No case has arisen in England in which the view expressed byRowlatt, J. in Graham v. Green fell to be considered by theCourt of Appeal.
In Down v. Compston, (1937) 2 A.E.R. 475, liability forwinning on bets made on private games of golf was considered.The head-note of the case reads : —
“ The respondent, a professional golfer, had in addition tohis other activities, for a number of years habituallyengaged in private games of golf for bets of varyingamounts. The respondent was assessed under Sched. D. toinclude, inter alia, the balance of gains over losses arisingout of the bets made on such games, on the ground that thewinnings could not accurately be called mere bettingreceipts, but were profits arising out of his vocation as aprofessional golfer :— Held : the respondent’s winnings didnot arise from his employment or vocation, and they werenot analogous to gratuities for services rendered, nor wasthere any organisation to support the view that the respon-dent was carrying on a business of betting. The assessmentought, therefore, to be discharged.”
In the case of Burdge v. Pyne, (1969) 1 A.E.R. 467, it wasfound that the taxpayer was carrying on the business of a club :on the club premises he habitually played the game of Three-Card brag with other members of the club ; and in the mainhe was invariably successful. It was held that there was noreason to think that that particular activity on thepart of the club proprietor is not an activity in the course ofcarrying on the business of a club and consequently winning fromthat activity fell into the receipts of the club for the purpose ofascertaining the profits from its business.
The dictum of Rowlatt, J. to the effect that betting can in nocircumstances constitute a business and that winnings frombetting cannot amount to gains chargeable to tax has not beenapproved in decisions in other jurisdictions. In Commissioner ofInland Revenue v. Indra Son, (1940) Allahabad 154, a full Benchdealt with a money lender who was owning three horses and
SAMERAWICKRAME, J.—Medonza v. Commissioner oj Inland Revenue 467
betted on them. He incurred a loss of Rs. 7,354 on bis betting anda loss of Rs. 610 running his horses. He claimed a tptal deductionof Rs. 8,154 in the computation of his income. The majority ofthe Bench held that he was not carrying on the business of racingbut all three Judges expressly stated that they could not agreewith the d-ctum of Rowlatt, J. Braund, J. said:—
“ In this case, the assessee was, as far as we can tell, a manwell able to afford the pleasure both of keeping race horsesand of betting. I think that in India, as in England, men ofmeans take a pride in possessing racehorses and in exhi-biting their horses, and themselves, on racecourses. And theinstinct to gamble is not the perquisite alone of a man ofbusiness. Prima facie, I think that, where the only factsknown are that a well-to-do man owns and runs three horsesand bets on them and other horses, he does so for his pleasureeven though that pleasure costs him Rs. 7,000 odd in a year.And nonetheless is this so by reason of the fact that hemakes a note in his books of account what his pleasure costhim. Many men of method do that. And, indeed, one cannotdismiss from one’s mind the possibility that such entriesmay be made for the very purpose of raising a claim such asthe assessee is now making. Though I express this view, Ido not desire it to be thought that, in my opinion, there areno circumstances in which a man can ever be said to be anowner of racehorses, or a gambler, as a business proposition.
think that that would be going much too far. I think thatit may well be that there are cases in which by the scaleon which he conducts his racing or his gambling (whetheron horses or in other ways), by the commercial methodsadopted, by his declared intention or by the absence of anyother means of livelihood, he may make it clear that hisobject is to make a ‘business’ of it. With great respect tothat learned Judge, I am doubtful whether the decision ofRowlatt, J. in (1925) 2 K.B. 37 really faces the fact that how-ever irrational it may be, gambling in some form is,nevertheless, for some people a means of livelihood. In(1925) 2 K.B. 753 at pp. 769 and 776 the English Court ofAppeal, notwithstanding that (1925) 2 K.B. 37 was cited tothem, expressly guarded themselves from deciding the ques-tion whether betting transactions which produce a revenueto the person who engages in them may not result in profitswhich are assessable to tax. I do not myself think that (1925)
K.B. 37 is necessarily an authority wh:ch ought to be reliedupon in India in a matter arising under the Income TaxAct.”
468 SAMAREWICKRAME, J.—Medonzn v. Commissioner of Inland Revenue
In Jalal Saliib v. Commissioner of Income Tax, (1961) A.I.R.p. 20 at p. 26, Rajagopalan, J. cited the dictum of Braund, J. withapproval and went on tq say : —
“ We are in respectful agreement with these observationsof Braund, J. To adopt the words of Braund, J. where theonly facts known are that a well-to-do man like the assesseeowns horses and bets on them and other horses the primafacie view should be that he does so for his pleasure, eventhough that pleasure brought him substantial sums of money.Obviously it is not the ultimate success or failure from apecuniary point of view that really decides whether a givenset of activities constituted the business of a person. If theracing and betting activities of the assessee constituted hisbusiness, it would continue to be his business whether hemade profits or sustained losses in any given year or evenover a series of years.
The amount won or lost in a given period again may notbe a relevant factor in deciding whether it was his business.The activities organised on normally accepted commerciallines constitute the essence of any business ; and, as we havepointed out, there was no evidence of that at all in the caseof the assessee. There was nothing to rebut what Braund, J.held should be a prima facie view of such racing activities,that a person of comparative affluence and means undertakesthem for his pleasure. To that must be added the furtherfactor to which we have already adverted, the very natureof a bet, with something wholly irrational abov :Ls results aspointed out by Rowlatt, J. Again we have to guard curselvesagainst being understood to say that gambling could never beorganised on a commercial basis and could never constitutea business.”
In Jones v. Federal Commissioner of Taxation, 2 A.T.D, p. 16,Uvatt, J. said : —
“ I am prepared to assume in the appellant’s favour despitethe reasoning of Rowlatt, J. in Graham v. Green that thereis nothing in the operations of betting with, i.e. against abookmaker which forbids the inference that a person maybe engaged in such operation by way of trade or business.”
SAMERAWICK-RAME, J.—Medonza v. Commissioner of Inland Revenue 469
Later in his judgment, he analyses the operation and bets of the-assessee and said : —
“ The appellant said in evidence that in July 1927, he com-menced betting ‘ as a business ’ btit in my view, he is endea-vouring to colour, and even to rationalize, his course of con-duct, in the light of the point raised with the commissionerby his taxation advisers. He acquired no property in con-nection with betting at races, he had no business premises, hehad no proprietary interest in any horse, he was not a trainerof horses, he kept no books and no records of his wins orlosses, he had no bank account of his own at all, let aloneany business account, he never hedged in any of his bettingtransactions, he did not set aside or determine upon anyamount of capital outlay for the purpose of ‘ investment ’ inhis supposed business, he never banked his winnings, hewas not a member of any recognized club associated withracing and the trades incident thereto, and the only personhe employed was one man for a short time to attend Tatter-sails Club and pay his bookmakers upon settling day. Withone or two exceptions, the appellant cannot remember thenames of the horses upon whose success he wagered largesums of money. When he first claimed the betting losses byway of deduction he stated that his losses were £ 6,500 forthe relevant year. In point of fact they were much greater,in amount. In order to prepare a detailed statement, exten-sive researches had to be undertaken at the public library inorder to find out in respect of what meetings the chequeswere paid to the bookmakers. When he originally came toreside at Sydney, the appellant was greatly interested inschool sport and I think that when he commenced to devoteattention to racing upon a large scale, the element of sport,excitement and amusement was the main attraction. He wasan obstinate man. When he lost, he betted more heavily andlost more and more. Instead of ceasing to wager, he kept itup until it become first a practice, and then something akinto a mania. Hope and obstinacy always triumphed overbitter experience. He would have been completely ruinedfinancially, but for the intervention of his brother, and thestopping of his cheques. All that I have said can best besummed up by saying that, during the relevant period, theappellant acquired and developed a bad habit which he wasin a special position to gratify. I do not think that the grati-fication of this habit was a carrying on of any business on hispart, despite his many bets and his heavy losses. ”
470 SAMERAWICKRAME, J.—Medonza v. Commissioner of Inland Revenue
In V andenberp v. Commissioner of Taxation, 2 A. T. D. 343,the assessee was registered as a bookmaker on racecourses con-trolled by the Associated Racing Clubs. He punted on courses con-trolled by the Australian Jockey Club on which he did not func-tion as a bookmaker. The question for decision was whether hiswinnings in bets as a punter on the latter courses were liable totax. Halse Rodgers, J. said : —
“ Whether or not betting transactions are carried on insuch a way that they may be regarded as a business is alwaysa question of fact and it seems to me that where we have asthe foundation fact or basic fact, if one may so call it, thebookmaking business carried on by the appellant whose solesource of income is, in any event, a racecourse activity, andwhen it is found that he not only fields but uses his know-ledge of racing in general and whatever information he isable to obtain because of his constant association withracecourses and not failing to recognise that the racecourseson which he fielded were not the same as those at whichhe betted ; when we have such a man systematically indulgingin a course of betting on a large scale and intermixingwithout record the proceeds of his betting with those of hisbookmaking, I think that the proper inference to draw isthat betting with him was a business. It may be that henever considered it as a business but in actual fact it was justas important a matter to him apparently on the figures ashis bookmaking business itself. ”
In Trautwein v. Federal Commissioner of Taxation, 56 C.LJR.196, Evatt, J. considered the case of a owner of a hotel businesswho also raced racehorses and betted on horse races. He said at
p. 206: —
“ In my opinion the present taxpayer occupies a verydifferent position to that of the taxpayer in Jones’ Case.From a long time antecedent to the seven years under review,he had become interested in racing and interested from thepoint of view of money-making. He had begun to devote asubstantial amount of time trouble and organizing effort toacquire what he could from the sport. He established a studfarm for the purpose of breeding race horses. He raced hisown horses and horses under lease sometimes operating toa very considerable extent. In these racing activities, heused the names of other persons so as to obtain better finan-cial results. He betted frequently and systematically. Heattended races regularly over all the years. He carefullyselected the races on which he would bet and acquired valu-able racing information from his trainers and others. He paid
SAMERAWICKRAME, J.—Medonza v. Commissioner of Inland Revenue 471
large sums of money in the purchase of horges in order torace them. He used agents both to better him and to settlefor him. He used to bet in large sums of mortey, putting asmuch as £ 1,000 on a single race. Prom the years 1915 to 1923he claimed deductions in his returns in respect of bettinglosses. It is contended that for him racing was merely apastime and an amusement and he was, of course, active inthe hotel trade. I have no doubt that he obtained enjoymentand amusement and sport from his racing activities es-pecially when he was sucessful with his horses or in hisbets. But it is not possible to find that the element of sportor pastime or amusement either dominated or was the mainfactor in these transactions. On the contrary, trying to lookat the matter over a long period of time and having specialregard to his employment and organization of all the meansof money making that are associated with the sport of rac-ing including prize money, betting on his own horses, andbetting on other persons’ horses, I reach the conclusion that,throughout the relevant period, his betting transactions werepart and parcel of the carrying on of a horse-racing businessby him, such business including systematic betting on hisown horses and also those of other persons. It is true that,under the statute law of New South Wales, a contract by wayof wagering is void. But of course this does not mean thatthe law treats such transactions as never having taken placebut only means that the policy of the legislature is to pre-vent the courts of the land from being invoked for the pur-pose of directly enforcing wagering transactions.
The present case is quite distinguishable from that ofJones. Jones had no horses of his own nor did he ever leaseany horses. He was not associated with racing at all exceptas a “ punter ”. His period of betting was extremely limitedin point of time and the element of sport, excitement andamusement rather than that of organised effort was sup-reme. But the case of the present taxpayer is much moreanalogous to that of the bookmaker himself than to that ofthe mere punter at starting price who was being consideredby Rowlatt, J. in Green’s Case. ”
In Commissioner of Income Tax v. McFarlane, 5 A.I.T.R. 264,the assessee was a jockey and it was held that his gains were frombetting activities so organised with his vocation as to form part
472 SAMEBAWICKBAME, J.—Medonza v. Commissioner oj Inland Revenue
and parcel of it. This was the basis of the decision but Adams,
J.went on to express the view in regard to the liability to taxof a punter or^ winnings from bets. At p. 279 Adams, J. said:—
“ The Court is not Galled upon to determine whether or inwhat circumstances a mere punter may be chargeable withincome tax in respect of his profits or gains, or whether ajockey, or any other person engaged in racing activities, ischargeable only if his transactions are “ organised ” in someway or amount to a “ business ” connected with his callingor are “ associated ” with the vocation as part and parcelthereof. These are matters which have not as yet, so far asI am aware, been decided or discussed by any appellateCourt, except perhaps in South Africa. Even the decision inTrautwein v. Federal Commissioner of Taxation, though adecision of the High Court of Australia, is a decision of asingle Judge exercising the original jurisdiction of thatCourt, and subject to appeal to the same Court in its appel-late jurisdiction (Income Tax Assessment Act, 1922, s. 50,sub-section 8, and s. 51, sub-section 8 ; Gunn’s CommonwealthIncome Tax Law and Practice (3rd ed.) paras. (2154) —(2176). ) Sitting in this Court, I am not prepared to acceptas binding on general questions any of the decisions whichhave been cited. I doubt, with respect, whether Down v.Compston, or even Graham v. Green, should be followed inNew Zealand ; and this doubt does not rest entirely on diffe-rences between English legislation and our own. I suspectthat, in some of the decisions, undue emphasis may havebeen put on “ organisation ”, or on the necessity for findingsomething in the nature of a “ business. ” It may well bethat the true distinction is between betting for sport or pas-time and betting for the purpose of producing an income. Itseems clear that gambling for sport or pastime does notproduce taxable income ; but the idea that, whether bettingis indulged in as a means of producing an income, the profitsor gains derived therefrom are not to be taxed except underspecial conditions not applicable to other forms of income isnot one that should be lightly accepted. ” I
I do not think that the true distinction is between betting forsport and betting for gain. If a person is betting merely for sportthat will certainly exclude the betting activities amounting to abusiness, vide Walles v. Commissioner of Income Tax, 38 N.L.R.325. But the fact that his motive is that of gain will not sufficeto render his net receipts the profits of a business. As indicatedearlier, there is no such relevance between the event and theacquisition of gain that one can say that there is a profit earnedby a process of production. Adams, J. however does not say the
SAMBRAWICKRAME, J.—Medonza v. Commissioner of Inland Revenue 473
true distinction is between betting for sport and betting for gainbut betting for sport or pastime and betting for the purpose ofproducing an income.
Where the event does in fact produce gain as in the blockingout of land and the selling of blocks at an aggregate sum verymuch in excess of the purchase price, the motive of making again at the time of the purchase may render the transaction anadventure in the nature of trade and its proceeds taxable, videRam Iswara v. Commissioner of Inland Revenue, 65 N.L.R. 393.
Mr. Jayewardene submitted that it was only where bettingactivities were shown to be part of a business of a jockey ortrainer or an owner of race horses that it was considered a busi-ness and that it was common ground that the bets taken by theassessee on his own horses were few and inconsiderable incomparison with bets placed by him on other horses and that itwas so set out in paragraph 18 of the case stated. He also reliedon a passage in Gunn’s Commonwealth Income Tax Laws andPractice. That passage has been cited in 5 A.I.T.R. at p. 273 andreads : —
“ It is impossible to state any invariable rule for decidingwhether or not betting winnings are assessable income. Thefacts of each case require examination and the decision mustrest on the particular facts. It can, however, be said withtruth that only where the taxpayer carries on a business orvocation directly associated with horse-racing, such as anowner, lessee, breeder, trainer, bookmaker, commission agent,or jockey, that betting has been held to be a business. In thatevent, the taxpayer is assessable in respect of winning bets,prize money, etc. and is entitled to a deduction of losingbets. It does not follow, however, that in every case wherea taxpayer is identified with racecourse activities, such asthose mentioned above, his winnings from betting are liableto tax and that his losses are deductible. ”
It appears to me that betting activities can be shown to be soorganised and systematic as to amount to a business more readi-ly where they are part of the activities of a jockey, trainer or
474 SAMERAWICKRAME, J.—-Medonza v. Commissioner of Inland Revenue
owner or horse races, as such than when they stand alone. Itdoes not follow that in principle the nature of betting transac-tions are such* that they cannot, taken by themselves, constitutea business. This particular point was decided in South Africa inthe case of Morrison v. Commissioner for Inland Revenue, (1950)2 S. A. p. 449 at 457. Schreiner, J. A. said : —
“ But it was open to Mr. Brink to argue, as he did thatbetting is in its nature so unlike ordinary forms of businessthat it falls outside the scope of the kinds of “ trade ” envi-saged by the Income Tax Acts, and accordingly, that, how-ever integrally they might be linked with the appellant’sracing business, his betting activities could not legally betreated as a source of “ gross income ”. What is won on a bet,he argued, is a fortuitous gain, and he instanced other ex-amples. In so far as they are fortuitous in the sense thatthey are not designedly sought for and worked for by thetaxpayer, it may be assumed that the receipts of the kindreferred to would not be taxable, but the same result wouldnot necessarily follow if the taxpayer obtained any suchreceipt by his planned efforts. Ventures to discover andretrieve supposedly buried treasure or the precious contentsof some vessel, wrecked long ago upon our coasts, might well,if successful, bring the finder within reach of the Income TaxActs. ”
After having referred to the cases of Graham v. Green, Cooperv. Stubhs and Trautwein v. Federal Commissioner of Taxation,he proceeded to say : —
“I do not think that a hard and fast line can be drawnbetween the case of the bookmaker and that of the punter.It may be true that the system commonly employed by book-makers is more businesslike than that ordinarily used bypunters and it may be that the bookmaker’s control over theodds he will give makes his activities less speculative. Butan inefficient bookmaker may presumbly run riskscomparable with those of a careful punter, andonce it is conceded that a bookmaker may be taxed on his
SAMERAWTCKRAME, J.—Medonza v. Commissioner of Inland Revenue 475
gains, it becomes difficult to exclude the systematic punterfrom liability on the ground of what Rowlatt, J. called the“ Irrationality ” of a bet. ”
It would appear that the balance of betting gains and losses is-assessable to tax where it appears that the betting is organizedand carried on systematically on business or commercial lines.
Before coming to the facts of this case it may be desirable topoint out that where betting activities constitute a business theconsequence is not only that gains arising from them are taxablebut that equally the losses arising from them are deductiblefrom other income. Many of the decisions deal with claims fordeductions.
The assessee gave evidence. In considering his testimony itis necessary to keep in mind that in racing parlance the term“ investment ”, “ return ”, “ profits ” are used in a metaphoricalsense to refer indiscriminately to the amount of any bet, to theamount of winnings from it and excess of winnings over theamount of the bet, respectively. No admission can therefore beimplied from the use of such terms. Again, when a punter sayshe fancies a horse or that such and such a horse is his fancy,he conveys that that horse is his informed choice as the proba-able or likely winner.
The assessee had been a member of the Ceylon Turf Club forvery many years and he took a keen interest in racing. He hadbeen a gentleman rider. He had owned two race horses at differ-ent times.
Towards the beginning of his evidence the assessee said—
“ Q. Have you regularly attended races ?
A. Yes all races.
Q. Races in Colombo ?
Q. Where else ?
A. In India, Galle and Nuwara Eliya. ”and in cross-examination he said—
“ Every month I bet—practically everyday. ” ; though he laterqualified these statements slightly there is no doubt that heassiduously attended race meetings and betted thereat.
476 SAMERAWICKRAME, J.—Medonza v. Commissioner of Inland Revenue
In the course of his evidence the assessee said :
“ Sometimes^I study the previous form and track work of ahorse. That is flow I select them. My annual betting may beover a million rupees. It is not done according to whims andfancies. I take a fancy to a horse and I back it. I know its form ;I study it. Sometimes you hear from friends whether this horseis good or that is good, and you back it. Sometimes I get tipsand watch the gallops. I decide which horse will come first. ”
Later in his evidence, the assessee said: “ Generally when Iplace a bet I expect to win. I do not do it for the fun of it.At times we place a sentimental bet but that is not a businessbet. My normal betting is a little more serious than just a casualbet. ”
He also said later that his normal betting was based on form.
According to his further evidence, he followed reports of racingin India and England that appeared in the newspapers. In regardto local races there were publications like the ‘ Racing Guide‘Racing News’, ‘Trespasser Racing Guide’ and different pro-grammes. The bookmaker gave them free without payment tohim since he was a regular customer. It was the normal practicefor his trainer to come and tell him that such and such horseis good to be backed. Even so he normally used his own discre-tion, though he added, that he did not slight the opinion of thetrainer. He sometimes went to the gallops before the race meet“ just to find out which horse has a better chance. ”
The assessee had arrangements with several bookmakers toplace bets on credit with them and he received a commissionor rebate of between 22 per cent to 25 per cent of the amountof the bets placed by him. Once he staked an aggregate sum ofRs. 41,300 with five different bookmakers on the same horse onthe same day. Explaining his procedure with the bookmakerhe said that the bets were recorded on chits generally in thebookmaker’s or collector’s handwriting. He said further “ I knowwhen the chit is brought to me that these are the bets placedby me. I work on them. I hardly pay cash even to the collector.
SAMERAWICKRAME, J.—Mcdonza v. Commissioner of Inland Itteeim177
I would not say ‘ never ’ but apart from one in a hundred orthousand I do not pay cash. It is done entirely on credit. I settlemy account sometimes jin a week and sometimdfe the book-maker may be having a running account. ”
He has not kept an account of his winnings and losses butsome years prior to the relevant period he had been advised topreserve the chits as he may be called upon to prove his earnings.He thereafter kept his betting chits in a drawer. From thesechits his Accountants had, with some difficulty, prepared theaccounts which he had submitted. At the relevant time he had aseparate Bank account in his wife’s name in which he placed allhis winnings. Money credited to that account was only from racewinnings. When he lost he drew money from that account andpaid. He also drew from that account for the purpose of makingcertain investments.
The assessee was not otherwise actively occupied in any kindof position or any kind of employment. He did not even engagein any other kind of betting or any other kind of speculation ofthis nature. His gains from betting far exceeded his aggregateincome from other sources.
It may be possible to take separately this or that act done bythe assessee in relation to his betting activity and say that thatis what most punters would do but his acts taken cumulativelypresent a different picture. A punter may go to the gallops, studyform and place his bets with a bookmaker and receive his win-nings, or pay his losses due on them a day or two after the racemeeting. But the average punter does not place bets involvingas large a sum as a million rupees a year or maintain a separateBank account exclusively for his betting activity or have creditfacilities with a number of bookmakers or have a running ac-count with them or travel to India to attend race meetings orreceive a gain of approximately four lakhs of rupees in two years.
Where the evidentiary material discloses the facts which Ihave set out, it is not possible for this Court to hold that thereis no evidence to support a finding that the assessee’s betting
478 SAMERAWICKRAME, J.—Medon^a v. Commissioner of Inland Revenue
activities ampunt to to a business. In point of fact the evidence
amply supports such a finding.
The order of the Board states : “ The systematic and conti-nuous way the assessee had taken bets, the time and labour hehad put into them, the facilities he had built around himselfto place these bets and deposit the winnings clearly indicatethat betting was a vocation and his dominant intention was togain money. ”
I should myself prefer not to call betting a vocation of the
?3sessee but rather the carrying on of a business, but substan-tially the finding of the Board is correct.
Section 2 of the Profits Tax Act, Chapter 243 reads: —
“ This Act applies to every person who derives any profitsor income from any business, the term “ business ” for thispurpose being deemed to include—
any trade or gainful undertaking of any nature or des-
cription whatsoever ;
in the case of a registered company of which the func-
tions consist wholly or mainly in the holding of suchproperty or investments ; and
the practice or pursuit or conduct of any profession,
vocation, art, craft or skilled occupation of any des-cription, with a view to earning remuneration, fee orpecuniary reward,
irrespective of any break in the continuity of his businessor the length of time devoted by him thereto. The profits orincome derived by any person from any such business asaforesaid is hereinafter referred to as his “ taxable profitsor income ” for the purposes of this Act. ”
This provision is even wider than section 6(1) (a) of the In-come Tax Ordinance and would clearly apply to the assessee’sgains from betting which clearly amounted to his carrying ona business.
SAMERAWICKRAME, J.—Mtdonza v. Commissioner oj Inland Revenue 479
There is one further matter to which I should refer. Section6 (1) (h.) of the Income Tax Ordinance reads : —*
“ income from any other source whatsoever, Slot includingprofits of a casual and non-recurring nature. ”
By reason of the term of the provision—income from any othersource—profits and income which fall under seciton 6(1) (a) donot fall under this provision.
I hold that: —
winnings from betting on horse races constituting a busi-
ness are taxable under the provisions of the IncomeTax Ordinance and Profits Tax Act, No. 5 of 1948 ;
In view of this finding, it is not necessary in the circumstan-ces of this case to make any finding whether winnings from betsmerely as bets also would be taxable under these enactments.
the betting on horse-races during the relevant yearsby the appellant-assessee constituted a business carriedon by him rather than a vocation of his ;
the bets placed by the appellant-assessee during the
relevant years of assessment on horse-racing consti-tuted a business of the appellant within the meaningof section 6(1) (a) of the Income Tax Ordinance,Chapter 242 ;
as the winnings of the appellant-assessee from bets
placed by him from horse-races during the relevantyears constituted profits of a business and were there-fore taxable under section 6 (1) (a), they are not taxa-ble under the provisions of 6(1) (h.) of the IncomeTax Ordinance ;
the winnings of the appellant-assessee from bets on
horse-races during the years 1955 and 1956 constituteprofits derived by the assessee from a business withinthe meaning of section 2 of the Profits Tax Act, No. 5of 1948 ;
480 SAMEKAWICKRAilE, J.—Medonza v. Commiasioncr of Inland Revenue
(/) the Board of Review has not misdirected itself in lawin* coming to a finding that on the evidence of theapjoellant-assessee led at the inquiry before the DeputyCommissioner, the appellant-assessee was carrying ona business of betting on horse-racing.
The assessee-appellant will pay to the respondent the sum of
Rs. 1,050 as costs.
Uualaoama., J.—I agree.
Sharvananda, J.—I agree.
B. P. MEDONZA, Appellant and THE COMMISSIONER OF INLAND REVENUE Respondent