Walles v. Commissioner of Income Tax.
Present; Moseley J. and Fernando A.J.
WALLES v. COMMISSIONER OF INCOME TAX.
S. C. (Inty.) 155—Income Tax.
Income tax—Trainer and dealer in racehorses—Stakes won at races—Separateactivities—Stakes not liable to tax—Bad debt—Not capable of beingdeducted within year of assessment—Income Tax Ordinance, No. 2 of1932, ss. 6 (I) (a), 9 (I) (d), 13 1 (b) and (c), and s. 74.
Where a person who carried on the business of trading in and trainingracehorses also indulged in the racing of horses for sport,—
Held, that the racing of horses did not form part of the businesscarried on by him and that the stakes won at the races were not liableto income tax.
Where the assessee claimed the deduction of a debt under section 9 (d)of the Income Tax Ordinance and it was disallowed on the ground thatit cannot be regarded as incurred within the period for which profits wereascertained,—
Held, that the deduction may be claimed under section 13 (b) of theOrdinance.
HIS was a case stated for the opinion of the Supreme Court under
section 74 of the Income Tax Ordinance by the Board of Reviewconstituted under the Ordinance.
The assessee was a veterinary surgeon, a dealer and trainer of racehorses,who also indulged in horse-racing from love of sport. His wife also owneda string of racehorses. The Commissioner of Income Tax held that theracing of horses by the assessee and his wife formed part of the businesscarried on by him and that the stakes won by his wife and himself wereliable to income tax.
The assessee also claimed the deduction of a bad debt which he con-tended became bad within the year preceding the year of assessmentwhich the Commissioner disallowed.
Walles v. Commissioner of Income Tax.
The assessee thereupon appealed to the Board of Review which heldthat the racing of horses was an activity that formed part of the businesscarried on by the assessee the profits of which formed part of an enterprise,which is conducted on commercial lines and therefore fell within profitsand income under section 6 (1) (a) of the Income Tax Ordinance. On thequestion of bad debt the Board was of opinion that it was not incurredduring the period for which profits are ascertained for the purposes of theassessment.
H. V. Perera (with him E. G. P. Jayatileke and N. M. de Silva), forassessee, appellant.—The points for decision are : —
Is the activity of horse-racing carried on by the appellant and hiswife part of an enterprise carried on on commercial lines thus making theprofits and income “taxable under section 6 (1) (a) of the Income TaxOrdinance ?
Is the Board of Review correct in its view of the alleged bad debt ?Person doing a business must do so habitually. There must also bean element of holding out—an invitation, to the public to do business.This has been recognized in the two cases of Graham v. Green1, the caseof a man who habitually bets, and Partridge v. Mallandaine7, where abookmaker was held to carry on a business. Although not expressed thedistinction seems to be that in the case of the man who habitually betshe is not taxable because there is no holding out or invitation,- while inthe case of the bookmaker, he invites the members of the public to takebets with him.
[Moseley J.— What of a person who only deals with one person—aGovernment contractor ?]
A holding out is necessary.
In the case of the Earl of Derby v. Bassom’, the Commissioners ofInland Revenue took up the position that where a person combined abusiness with a hobby the one could be separated from the other andtaxed. The Earl of Derby carried on a racing and a breeding establish-ment. It was conceded that his racing activities were not taxable buthe was liable to tax on the fees received by him by the letting of theservices of his stallions.
The same principle should be applied in the case of Mr. Walles. He istaxed on his business as trainer and importer of racehourses but hisracing activity should be separated from his business. If it is not donehe will be entitled to his losses during the bad years.
The House of Lords took up the same attitude in the case of Glanely v.Wightman'.
The test of separability was laid down in the cases of Commissioners ofInland Revenue v. Maxse and Commissioners of Inland Revenue v.Ransom’.
On the second point the debt only became bad when the propertypurchased on the bond was sold. The property was not purchased as a
1 9 Tax Cases 209.4 17 Tax Cases 131.
2 2 Tax Cases 179.<• (1919) 1. K. B. 647.
10 Tax Cases 357.4 (1918) 2 K. B. 709.
MOSELEY J.—Walles v. Commissioner of Income Tax.
speculation but to realize the debt due to the appellant. The loss there-fore was suffered after the property was sold. A debt is bad at a timewhen the loss is calculable.
N. Nadarajah, C.C. (with him Crossette-Thambiah, C.C.), for Commissionerof Income Tax.:—Section 6 (1) (h) of the Ordinance enables the taxationof “ income from any other source whatsoever ”. The stakes won wouldif not caught up by 6 (1) (a) be liable wider 6 (1) (b). The activity ofhorse-racing is not an independent or separable activity but is part ofassesse’s business of training and selling horses. This is a question offact from which there is no appeal. The test of separability does notapply except to cases of super tax.
The terms business and trade are defined by Jessel M. R. in Smith v.Anderson
Supreme Court can under section 74 consider only questions of law.The horses of the appellant were run for purposes of his business. Thisis a finding of the Board of Review which cannot be overruled. The appel-lant is not entitled to separate parts of his activity from his businesswhich must be treated as a whole. (Gloucester Railway Carriage & WagonCompany v. Revenue Commissioner *.)
The bad debt is one which cannot be recovered from a debtor. Theappellant in entering satisfaction of judgment is deemed to have recoveredthe amount.
H. V. Perera, in reply.
Cur. adv. vult.
February 17, 1937. Moseley J.—
This is a case stated for the opinion of this Court under the provisionsof section 74 of the Income Tax Ordinance, No. 2 of 1932, by the Board ofReview constituted under that Ordinance.
The assessee, Mr. G. N. G. Walles, is a veterinary surgeon, a dealer inhorse fodder and saddling and a trainer of racehorses. He also importsand sells horses. According to his own account, since 1920 he hasindulged in horse-racing purely from the love of sport and his racingstring now numbers twenty-two. His wife has taken up racing on similarlines and now owns nine horses.
For the year of assessment 1933-1934 the assessee was assessed ashaving an income of Rs. 35,170. He was dissatisfied with that assessmenton two grounds, viz.: —
that the stakes won by horses belonging to himself and his wife are
not assessable, and
that no allowance had been made for an alleged bad debt of
Rs. 6,535, which debt, he contended, became bad within theyear preceding the year of assessment and which, he claimed,should be deducted from the assessment or his income.
The assessee appealed to the Commissioner of Income Tax on thesegrounds.
In regard to the first ground the Commissioner held that the racing ofhorses by the appellant formed part of the business carried on by him andthat the profits thereof were taxable. He held also that the profits
1 (1879) L. R. 15 Ch. 247.* (1925) A. C. 469.
MOSELEY J.—Walles t>. Commissioner of Income Tax.
resulting from the racing of horses belonging to the appellant’s wife wereprofits resulting from an enterprise conducted on commercial lines andfell within the meaning of “ profits and income ” as defined in section 6
(a) of the Ordinance.
In regard to the second point the Commissioner held that the debtof Rs. 6,535 became bad not later than December, 1931, at whichdate the appellant bought in the property of the debtor. He thereforedisallowed the deduction, and the appeal on both grounds was dismissed.
The appellant thereupon appealed to the Board of Review who decidedas follows : —
“Upon the evidence and the facts stated in the course of the argu-ment we are of opinion that the racing of horses by Mr. and Mrs. Wallesis an activity which forms part of the business carried on by Mr. Walles,the profits from which formed part of the profits of an enterprise whichis conducted on commercial lines, and therefore fall within * profitsand income ’ as defined in section 6 (1) (a) of the Ordinance.
“ On the question of the ‘ bad debt ’ we are of opinion that it was notincurred during the period of which the profits have to be ascertainedfor the purposes of this assessment. It is accordingly disallowed.The appeal is dismissed and the assessment is confirmed”.
The appellant is still dissatisfied and has requested the Board to statea case.
Now the decision of the Board on a question of fact is final, unless,ji suppose, this Court should be of opinion that there is no evidence tosupport such finding. It becomes necessary therefor to examine thefinding of the Board with a view to ascertaining the dividing linebetween the finding of fact and the Board’s view of the law which shouldbe applied.
It is somewhat difficult to dissect the finding of the Eoard on the abovelines, but if I may be permitted to paraphrase the finding, it seems to methat the question this Court is invited to decide is whether or not the“ activity ” of racing horses as carried on by Mr. and Mrs. Walles ^oes,for the purposes, of section 6 (1) (a) of the Ordinance, form part of thebusiness carried on by Mr. Walles.
I think we may take it as common ground that stakes won by an ownerwho races purely for sport are not liable to taxation under the abovementioned sub-section or any other provision of the Ordinance.
It was urged before us by Counsel for the Commissioner that the racingof horses was an inseparable part of the appellant’s business as a traderin horses, and he relied upon the appellant’s evidence to the effect that“ he imported racehorses, trained them, ran them in races and sold them ;sometimes at a profit and at others at a loss ”. It was pointed out, nodoubt with truth, that the winning of a race enhances the value of a horseand that therefore the running of a horse with a view to winning raceswas part and parcel of the business of trading in horses.
Does, however, the business of trading in horses negative the possibilityof the same person engaging in racing from the love of sports ?
A number of authorities were cited by Counsel for the appellant. Ishall refer to a few.
MOSELEY J.—Walles v. Commissioner of Income Tax.
In the case of Earl of Derby v. Bassom it was held that where a personkept a racing and breeding establishment as a hobby and also let out toothers the services of his stallions, he was liable to pay income tax on thefees received for such services. The facts are on a converse footing tothose existing in the case before us, but the case is authority for theproposition that where a commercial proposition is carried on in conjunc-tion with a hfobby the profits from the former are taxable.
In Commissioners of Inland Revenue v. William. Ransom & Son, Limited *it was held that where two businesses carried on by the same person weretaxable on different bases, and it was possible for the Commissioners toseparate one from the other, there was nothing in law to prevent themfrom doing so. Sankey J. in the course of his judgment said : —
“ I can conceive of cases where the two branches of the business of aperson or a company are so interlaced that it is impossible to separatethem, and, although I express no definite opinion upon the point, it maybe that in those circumstances, if the main branch of the business issubject to excess profits duty the whole business is subject to the dutyon the ground of the impossibility of separating the main branch from therest of the business. There, again, the decision would depend very muchon the facts of the case. The case where an individual carries on twoseparate businesses, of which one is liable to the duty and the other is not,is a simple one, but it might be more difficult to arrive at a decision wherethe one business is ancillary and incidental to the other in such a way asto make them nearly inseparable ….”
The principle of severance of businesses was approved in Commissionersof Inland Revenue v. Maxse ’.
If I am right in my comprehension of the question which we are askedto decide, I am unable to arrive at any conclusion other than that thepursuit of horse-racing as carried on by Mr. Walles, and a fortiori ascarried on by Mrs. Walles, forms no part of the business of trading in andtraining horses. In my view therefore the stakes won by horses belongingto Mr. and Mrs. Walles are not assessable.
We now come to the matter of the alleged bad debt. This was inrespect of an account for horse fodder supplied to Mr. Coomber whichamounted to Rs. 11,172.89. To secure this sum Mr. Coomber executeda mortgage bond which Mr. Walles put in suit on March 23, 1931. Decreewas entered on May 8, 1931, and on December 22 of the same year,Mr. Walles bought in the property for Rs. 7,100 (appraised value) subjectto three mortgages. On May 23, 1932, Mr. Walles sold the property forRs. 45,000. After paying off the three mortgages he had a balance leftof Rs. 4,497.58 in his hands. He is therefore still Rs. 6,675.31 out ofpocket in respect of Mr. Coomber’s debt.
Mr. Walles claims that this amount became a bad debt at the date ofthe realization of the mortgaged property, i.e., within the year precedingthe year of assessment, and should therefore be deducted from theassessment of his income.
The Commissioner, on the contrary, held that it became bad not laterthan December, 1931, when the appellant bought in the property. .The
* 42 Times Law Reports 380.* (1918) 2 K.B. 7M
* (1919) 1 K. R. fU7.
FERNANDO A.J. —Wo lies v. Commissioner of Income Tax.
Board of Review contended themselves with expressing the opinion thatit was not incurred during the period of which the profits had to beascertained for the purposes of this assessment.
Now, it does not appear that any steps have been taken to recover thebalance due from Mr. Coomber since December, 1931, and unless and untilsuch steps are taken, I do not know how it can be said that the debt isbad. That the date of realization bears no relation to the date at whichthe debt becomes bad is evidence when it is appreciated that Mr. Coomber’sdebt would have remained even though the property had realized, for thesake of argument, Rs. 100,000. It seems to me therefore that the claimfor deduction is premature and on this point the appeal must fail
It is, however, apparent that in connection with the realization of thedebt the appellant has suffered a pecuniary loss. He bought the propertyin for Rs. 7,100, and after paying off the money due under the threemortgages the balance remaining in his hands was Rs. 4,497.58. Therewas therefore a loss on the transaction of Rs. 2,602.42. This loss becameapparent on May 23, 1932, and it may be that the appellant is entitled toa deduction in respect of this amount under section 13 of the Ordinance.
In view of these findings the appeal is allowed, the assessment made bythe Board is annulled, and the case is remitted to the Board for revisionof the assessment as set out above. The appellant, having succeeded onthe main issue, will be entitled to a refund of the sum of Rs. 50 depositedby him under section 74 (1) and will also be entitled to his costs ofthis appeal.
I agree, but would like to add the following: —It was arguedbefore us that in this case, the Board had found against the appellanton the facts, and that the question, whether the racing of horseswas a part of the business of the appellant was itself a finding offact. In view of the provisions of section 74 of the Ordinance, it is, inmy opinion, the duty of the Board to set out separately their decisions onthe facts, and the questions of law, if any, that arise. The decision inthis case as set out by the Board is that “ the racing of horses by Mr. andMrs. Walles is an activity which forms part of the business carried on byMr. Walles ”. The contention for the appellant before the Board as wellas before us was that the racing of horses by him and his wife was donepurely for sport, and it was contended that the profits of such racing werenot liable to be taxed as in England, and as admitted by both parties inthe case of the Earl of Derby v. Basson.1 Now it was open to the Board tofind that in fact, the racing of horses by Mr. and Mrs. Walles was not doneby them for sport, but was a commercial enterprise; that the racing ofhorses was part of the business of importing and selling horses as contendedby Counsel for the Commissioner, and that the horses that they racedwere not, as contended by the appellant, the exclusive property ofMr. and Mrs. Walles kept by them for the purpose of racing, but only someof the horses which had been imported by them for the purpose of sale.Such a finding would be a finding of fact, and it may be that in view of
* Times Lata Heports 380.
FERNANDO A.J.—Walles v. Commissioner of Income Tax.
b'section (5) of section 74, this Court would not interfere with any such
Ending of fact. On the other hand, it was open to the Board to find thatthe racing was done for sport, that the horses kept for racing were otherthan the horses that were imported and sold, but that nevertheless, theracing done by Mr. and Mrs. Walles was an activity forming part of abusiness carried on by Mr. Walles, in which event their finding would nolonger be a finding of fact but a finding of law, and it would be open tothis Court to consider whether such a finding would be correct in law.
Counsel for the Commissioner stated that even on a finding of fact, itwas open to this Court to interfere if in fact such finding was not supportedby the evidence before the Board. It is clear from the order made by theBoard that certain evidence was recorded when the inquiry took placebefore the Board. The record of that evidence has not been placed beforeus as such, but in the case stated, there are certain extracts from theevidence of Mr. Walles. If we are to assume that these extracts were theonly evidence before the Board, then the question would arise whether theBoard was justified in holding that the evidence of Mr. Walles that he racedhorses for sport was not true, if in fact they did arrive at such a finding.
The appellant spoke of a number of horses which were owned by him,and which were kept by him for the purpose of racing. He also statedthat there was another string of horses belonging to his wife also kept forracing. If these horses were kept for racing, and if the appellant’sevidence that he engaged in racing for sport is to be accepted, then it isdifficult to see how the stakes won by these horses could form part of thebusiness carried on by Mr- Walles. It is' admitted that Mr. Wallestrained horses which belonged to others than himself and I do not thinkit is suggested that the stakes won by such horses would also be a partof the profit of Mr. Walles’s business. I cannot see any reason whyMrs. Walles’s horses would be in a different position to those owned byother owners who engaged the services of Mr. Walles as trainer. Forthese reasons I agree with my brother whose judgment I have had theadvantage of reading, that the stakes won by horses belonging to Mr. andMrs. Walles are not assessable.
It was also argued for the appellant that he should be allowed adeduction in respect of a bad debt of Rs. 6,535.
That sum was apparently claimed as a deduction under section 9D ofthe Ordinance as a bad debt incurred in the business. I agree that thedebt due to the appellant from Mr. Coomber cannot be regarded as a baddebt incurred within the period of which the profits were being ascertainedbut I agree that the sum of Rs. 2,602.42 was clearly a loss incurred by theappellant on May 23, 1932, and would be a deduction allowable undersection 13b or c of the Ordinance. I do not think it necessary to sayanything more on this point, and the Board of Review will no doubt havethis matter in mind when they fix the final assessment on the appellant.