Commissioner of Income Tax vs Madras Race Club

R. Jayasimha Babu, J.—The Madras Race Club is a company registered under the Companies Act. It has a committee of management

elected from among its members. The managing committee in turn elects stewards. The managing committee also includes nominees of the State

Government who by virtue of such nomination are also stewards. The income of the club is assessed to tax. The club conducts racing at Madras

and Ootacamund. The racing is conducted under the rules of racing framed by the club. The rules, inter alia, require the jockeys, trainers and

others to obtain licences for which they are required to pay a licence fee. The stewards under the rules are empowered to impose fines and levy

penalties. The relevant rule providing for levy of licence fees, fines and penalties are rules 36, 37, 84, 91 and 92.

Rule 36 is in Part IV of the rules of racing which part enumerates powers of the stewards of the club and the relevant portion reads thus :

The stewards of the club may impose any fine not exceeding Rs. 10,000.

Rule 37(a) and (k) reads thus :

In addition to any other powers conferred upon them by these rules the stewards of the club have power at their discretion :

(a) To grant, withdraw and suspend licences to officials, trainers, jockeys and others, to refuse, or cancel entries.

(k) They may at any time remove or modify any disqualification, or remit any penalty.

Rule 84 of the rules of racing is in Part X, which deals with jockeys'' and riders'' licences, etc., and it reads thus :

(i) No person shall ride in any race under these rules until he shall have obtained the permission of the stewards of the club to do so except as

provided for in rule 85.

(ii) No person, who has ridden or who wishes to ride for fee or reward shall, except with the permission of the stewards of the club, ride in any

race until he shall have obtained a jockey''s licence from the stewards of the club. Such licence must be applied for annually with full name and

address at the office of the club, and shall only remain in force for the season.

(iv) Any person who shall employ a jockey in contravention of this rule, shall be liable to be fined by the stewards of the club.

(vi) Every jockey shall pay a fee of Rs. 30 when granted a licence and every apprentice shall pay a fee of Rs. 15 when granted permission to ride

in races. Every riding boy shall pay a fee of Rs. 10 when granted a licence. The fees shall be paid annually and shall be credited to the benevolent

fund.

Rule 91 of the rules deals with trainer''s licences, and reads thus :

No person shall train a horse registered under these rules for fee or reward without having first obtained a licence from the stewards of the

club.

No such licence shall remain in force for more than one racing season.

The fee for such licence shall be the sum of Rs. 50.

No person not holding such a licence shall train, or run any horse on any course, under the club rules, without the written permission of the

stewards of the club. Any such licence or permission may be revoked at any time.

Any person training a horse in contravention of this rule may be warned off the course, and shall then be subject to all the disabilities specified

under rule 174.

A person whose licence has been withdrawn is a disqualified person unless the stewards of the club, in their discretion, shall otherwise determine.

Rule 92 deals with the bookmakers'' and assistants'' licences and reads thus:

(a) No person shall be permitted to carry on or assist in carrying on the business of a bookmaker, or act as clerk or assistant to any person

carrying on such business at any race meeting held under these rules, without having first obtained a licence from the stewards of the club.

The fee for a bookmaker''s licence shall be Rs. 200 and for an assistant''s licence Rs. 10 payable annually.

No licensed bookmaker shall, without the permission of the stewards of the club, act as a betting agent of any person other than a person licensed

as a bookmaker by the stewards of the club, or permit any such person to have any pecuniary interest whatsoever in his business of a bookmaker

either as a partner, guarantor or otherwise.

The amounts realised by way of licence fees, the penalties imposed and fines levied are, by rule 175 of the Rules in Part XXIII of the rules of

racing, required to be credited to a fund called Madras Race Club Benevolent Fund. Rule 175 as it stood prior to April 1, 1978, reads thus :

All fines imposed under these rules shall, on realisation, be remitted to the secretary of the club,

(i) a fund shall be kept under the name of the benevolent fund for the relief of trainers, jockeys, apprentices, riding boys and other dependants.

The fund shall be under the charge of the stewards of the club and shall be administered by them in their discretion. There shall be credited to such

fund :

(a) all fees received by the club on account of licences granted to trainers, jockeys and apprentices ;

(b) unless otherwise provided or directed by the stewards of the club, all fines imposed under these rules and received by the secretary of the club;

(c) such other sums as the stewards of the club may from time to time determine.

On April 1, 1978, a trust was created under a registered deed. Thereafter, rule 175 was recast. That rule, which is captioned as ""the benevolent

fund and fines"", now, reads as under :

(i) A trust named ""The Madras Race Club Benevolent Fund'' has been formed on April 1, 1978, for the relief of trainers, jockeys,

apprentices, riding boys, stable employees and their dependants. This fund shall be maintained with the object of providing assistance to the above

mentioned persons in terms of the constitution and rules of the benevolent fund.

(ii) The said fund shall be in the custody of the trustees as separately constituted and the stewards shall render all assistance for the proper

maintenance of the fund to enable the trustees to fulfil the objects of the trust.

(iii) The following sums on realisation will be deposited to the credit of the bank account of the trust,

(a) All fees received by the club on account of licences granted to the trainers, jockeys and apprentices.

(b) Unless otherwise decided by the stewards of the club, all fines imposed under the Madras Race Club Rules of racing.

(c) Such other sums as the stewards of the club may determine from time to time as relatable to the trust.

(iv) The said fund shall be a separate one and will not be part of the general funds of the Madras Race Club, and shall be maintained under a

separate entity.

(v) In the event of the trust coming to a close by voluntary dissolution or by operation of law, the funds of the said trust shall accrue to the

Benevolent Fund of the Madras Race Club/ and be administered by the stewards of the club, herein, in such manner as its identity is maintained,

apart from the general funds of the Madras Race Club.

The assessee-club in its assessment for the assessment years 1978-79, 1980-81, 1981-82, 1982-83, 1984-85 and 1985-86 took the stand

that the amount of the licence fees, penalties and fines realised by the club did not form part of its income and was therefore to be excluded from

the computation of total income, as according to the assessee, those amounts by overriding title became part of the funds of the benevolent fund.

That claim of the assessee having been rejected by the Assessing Officer and the appellate authority, the assessee went up in further appeal to the

Tribunal, which accepted the asses-see''s stand. The correctness of that view of the Tribunal is being questioned before us in these references.

The questions referred to us at the instance of the Revenue are :

(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the collections by way of licence fees, fines,

etc., do not constitute the income of the assessee ?

(2) Whether, on the facts and in the circumstances of the case and a proper interpretation of the rules of racing of the Madras Race Club, the

Tribunal was right in holding that the receipts by way of fines, licence fees, etc., got diverted by reason of overriding title to the benevolent fund

constituted by the club ?

Learned counsel for the assessee submitted that the view taken by the Tribunal is the correct view and that view is supported by the decisions of

the apex court in the case of Commissioner of Income Tax, West Bengal Vs. Tollygunge Club Ltd., and in the case of Commissioner of Income

Tax (Central), New Delhi Vs. Bijli Cotton Mills (P.) Ltd., , as also by the decision of the Karnataka High Court in the case of Commissioner of

Income Tax, Karnataka-I Vs. Bangalore Turf Club Benevolent Fund, .

Counsel further submitted that the decision of this court in the case of Commissioner of Income Tax Vs. Salem Co-operative Sugar Mills Ltd., ,

also supports the stand of the assessee.

The Supreme Court in the case of Commissioner of Income Tax, West Bengal Vs. Tollygunge Club Ltd., dealt with the case of an assessee,

which was a social and sports dub and which conducted horse races with amateur riders and collected the charge as also a surcharge from those

seeking admission to witness the races. The surcharge had been levied by the assessee in terms of a resolution which it had passed by which it had

resolved to levy a surcharge over and above the admission fees, the proceeds of which were to go to the Red Cross Fund. That resolution had

been modified by the assessee in the year 1950, earmarking the proceeds of the surcharge for local charities and not solely for the Indian Red

Cross. The assessee therein had taken the stand that the surcharge levied by it being one meant for local charities, the same did not constitute its

income. That stand of the assessee was upheld by the apex court. The court held that (page 781) ""when the race-goers paid the surcharge to the

assessee, they did so for a specific purpose and thereby imposed an obligation on the assessee to utilise it for local charities"".

The court after having so held applied the test, which had been formulated by Hidayatullah J. in The Commissioner of Income Tax, Bombay

City II Vs. Shri Sitaldas Tirathdas, , a test which had been explained in that decision thus (page 374) :

In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no

doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a

person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the

assessee. Whereby the obligation income is diverted before it reaches the assessee, it is deductible ; but where the income is required to be applied

to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment

which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one''s own income, which

has been received and is since applied.

The court in the case of Commissioner of Income Tax, West Bengal Vs. Tollygunge Club Ltd., held applying the test that (page 782) ""the

surcharge being impressed with an obligation in the nature of trust for being applied to local charities was by this obligation diverted before it

reached the hands of the assessee and, at no stage, it became a part of the income of the assessee"".

In the case of Commissioner of Income Tax (Central), New Delhi Vs. Bijli Cotton Mills (P.) Ltd., , the court considered the question as to

whether the amount collected as ""dharmadaya"" by a private company carrying on business of manufacturing and selling yarn, such amount having

been shown in the bills issued to the customers in a separate column headed ""dharmada"", can be regarded as the income of the assessee or as to

whether by overriding title, that amount of ""dharmada"" had stood diverted for the purpose of being applied for charity. The court rejected the

argument for the Revenue that the collection of ""dharmada"" was a result of compulsory levy by the seller and formed part of the consideration for

the goods sold and therefore, that amount was includible in the income of the assessee. The court examined the true nature or character of the

receipts as to whether they constituted a part of the price received by the assessee and as to whether the realisations are properties held under

trust for a charitable purpose. The court held that the ""dharmada"" was not part of the price for the goods and that (page 72) ""right from inception,

these amounts were received and held by the assessee under an obligation to spend the same for charitable purposes only with the result that these

receipts cannot be regarded as forming any income of the assessee"".

The court reaffirmed the law laid down in the case of Commissioner of Income Tax, West Bengal Vs. Tollygunge Club Ltd., and on a parity of

reasoning held that (page 73) ""the ''dharmada'' amounts paid by the customers cannot be regarded as part of price or a surcharge on price of

goods purchased by the customers"". The court further held that (page 73) "".. the purchase of the goods by the customer would be the occasion

and not the consideration for the ''dharmada'' amount taken from the customer"". The court also held that the fact that (page 74) ""the assessee

would be having some discretion as regards the manner in which and the time when it should spend the dharmada amounts for charitable purposes

would not detract from the position the assessee held qua such amounts, namely, that it was under an obligation to utilise them exclusively for

charitable purposes"".

This court in the case of Commissioner of Income Tax Vs. Salem Co-operative Sugar Mills Ltd., was concerned with the case of an assessee

which carried on a sugar mill and which like other sugar mills, was subject to the Molasses Control Order, a statutory order issued under the

Essential Commodities Act, which, inter alia, required that a portion of the sale price realised by the sugar manufacturers from the sale of sugar

should be accounted for and funded separately for providing adequate storage facilities in accordance with the guidelines prescribed by the

Government. Failure to comply with that direction would result in the Government constructing the molasses storage tank and recouping the costs

thereof from the sugar mill. In that background this court held that even before the collection of the proceeds of the sale of sugar, a portion of the

consideration stood diverted to the molasses storage fund, as the assessee had no control over the same and that amount was compulsorily to be

credited to that fund. It was therefore, held that the amount so required to be credited to that fund did not form part of the income of the assessee.

In the case of Commissioner of Income Tax, Karnataka-I Vs. Bangalore Turf Club Benevolent Fund, , the question before the court was as to

whether the trustees of that benevolent fund should be assessed as a body of individuals. The court held that ""they were required to be assessed in

that status"". It was the admitted position before the court that the amounts credited to the benevolent fund of the Bangalore Turf Club, which fund

was similar to the one maintained by the Madras Race Club did not form part of the income of the Bangalore Turf Club. The Revenue had only

sought to tax the amounts credited to the benevolent fund in the hands of the trustees in the status of a body of individuals. The court observed that

it is not in dispute that the sums collected by the ETC are not treated as part of the total income of the ETC in its assessment. The court also

observed immediately thereafter that ""the ETC is therefore not the owner of the said income since there is an overriding title created in favour of the

fund under the rules framed by the ETC. These sums are thus in the nature of voluntary contributions received by the assessee and earmarked for

being utilised for the benefit of the specified persons. The stewards administered the fund in their absolute discretion. They hold property, receive

income and administer the fund as an independent entity. These contributions, in our opinion, are sufficient to subject them to tax as a body of

individuals"".

Though the stand taken by the Revenue before us in relation to this assessee is at variance with the stand that was taken before the Kamataka

High Court in relation to the includibility of similar amounts in the income of the Bangalore Turf Club, we are required to consider the question

uninfluenced by the contradictory postures adopted by the Revenue in the two High Courts. The correctness of the answer to the questions

brought before us is not to be judged with reference to the consistency or lack of it on the part of the Revenue. The answer has to be given in the

light of the materials placed before us and after considering the facts relevant to the determination of the question as to whether, in fact, there has

been diversion of the amounts of the licence fees, penalties and fines by overriding title to the benevolent fund constituted, not under any statutory

rule or scheme or under compulsion of any statute, but by way of benevolent provision made by the assessee-club for the benefit of some of the

persons, who are participants in the enterprise of horse racing.

We have at the outset set out the provisions in the rules of racing, which require licences being obtained by the trainers, jockeys, apprentices,

etc. We have also referred to the provisions providing for the levy of fine and imposition of penalties. Those rules are clear and unambiguous. A

person, if he wants to be a jockey, a trainer, a bookmaker, an apprentice, etc., can do so only if permitted by the stewards of the club and only if

he takes out a licence after paying the licence fee therefor. Infraction of the rules of racing results in the imposition of fines and penalties. It is thus

evident that these amounts are in no way comparable to the payments which were considered in the decisions of the apex court and of this court

relied upon by the assessee. The payments made here are compulsory exactions, which if not complied with will result in the disqualification

altogether of the person, who has subjected himself to the levy of penalty, fine or the requirement to take out a licence from participating in the

assessee''s racing activity. The power to collect these amounts is the power of the stewards and of the club generally to regulate racing and to

ensure that it is carried on in an orderly fashion only with persons, who are considered competent and desirable, being allowed to take part,

subject to their complying with the rules of racing. The amount of the penalties, licence fees and fines collected, are amounts which are received by

the club as part of income, which it derives by conducting races. These amounts are not paid to the club by any of those, who become liable to the

payment of licence fees, penalties or fines, by way of voluntary contribution from them to the benevolent fund. The amounts are not paid by them

with the intention that it be a contribution to the charitable or benevolent fund.

The race club itself is under no statutory compulsion to earmark or divert any part of its income for the benefit of the jockeys, apprentices,

stable boys, etc. The race club was under no statutory obligation to create a trust fund for their benefit. The fact that the club has done so and had

done so with the best of intentions, does not on that score result in what is actually the income of the club, a part of which has been applied for

benevolent purposes by having those amounts credited to the benevolent fund, becoming the income of the benevolent fund even at the inception.

The income which the benevolent fund receives is by way of the amounts which the race club has allowed to be credited to that fund, the amounts

so allowed by the club to be so credited being the amounts which it has collected from the jockeys, trainers and others, who are required to take

out licences and pay licence fees and the penalties and fines, which it has levied and collected from those who are participants in racing but who

have not complied with the rules and had therefore become liable for a penalty or fine.

The amounts received by the club by way of licence fees, fines and penalties are amounts which reach the club as part of its income and which

amounts after they reach the club are applied by the club for benevolent purposes by allowing the benevolent fund to have the benefit of all those

amounts.

In the case of Commissioner of Income Tax, West Bengal Vs. Tollygunge Club Ltd., , the persons, who made the payment were aware that

the surcharge was being paid for the use by the local charities, the club which collected the amount being the trustee for those amounts, which after

the collection was to be applied for charitable purposes. The court in that case distinguished the case of The Commissioner of Income Tax, Punjab

Vs. Shri Thakur Das Bhargava, Advocate, Hissar, , wherein the court had held that the money when it was received by the assessee therein was

the provisional income of the assessee though the assessee had expressed a desire earlier to create a charitable trust out of the money received by

him. That case of The Commissioner of Income Tax, Punjab Vs. Shri Thakur Das Bhargava, Advocate, Hissar, was distinguished in Commissioner

of Income Tax, West Bengal Vs. Tollygunge Club Ltd., by pointing out that the person, who had made the payment in the case of The

Commissioner of Income Tax, Punjab Vs. Shri Thakur Das Bhargava, Advocate, Hissar, had paid the amounts as fees and had not imposed any

obligation on the assessee therein that the amount would be utilised for purposes of charity and further that it was only the assessee therein, who

had voluntarily expressed the desire that he would create a trust out of the amount of fees paid to him. The court emphasised that the earmarking of

the amount for charity should be ab initio. The court observed that ""here the surcharge paid by the race-goers was earmarked for local charities ab

initio and the surcharge was received by the assessee with a legal obligation to apply it to local charities"". The position in the case of Commissioner

of Income Tax (Central), New Delhi Vs. Bijli Cotton Mills (P.) Ltd., was similar. There also ab initio the amount had been earmarked for charity

and, therefore, was not treated as forming part of the income of the recipient, who was regarded as a trustee for those amounts.

The observations made by the Karnataka High Court that there was diversion of income by overriding title was an observation, which was

made in the background of the position admitted by the Revenue before the court that the amount credited to the benevolent fund had not been

treated by it as forming part of the income of the Bangalore Turf Club. If those observations of the court are to be regarded as having declared the

true legal position, we must respectfully express our disagreement. The licence fees, penalties and fines at the time the payments were made by

those, who are required to make those payments were, at the time of payment, not regarded by them as amounts, which were earmarked for

charity and they did not regard those amounts as having been paid as contributions for a benevolent or charitable purpose. The levy as also the

payment was by reason of the regulatory power vested in the assessee-club to regulate racing in accordance with the rules framed by it, non-

compliance with which would result in the jockeys, trainers and others being excluded from participating in racing. The levy had direct nexus with

their activity as participants in racing and the levies were designed to ensure compliance with the requirement of the rules. There was no earmarking

of those amounts for the benevolent fund ab initio.

The amounts collected by the club as licence fees, fines and penalties were therefore, amounts which form part of its income. The execution of

a trust deed and the inclusion of a provision in the Rules of racing for crediting the sums to the benevolent fund was merely the application of a part

of the income of the assessee for benevolent purpose. Creation of the benevolent fund by the trust deed and the provision made for the benevolent

fund in the rules did not result in the amounts which the club was to credit to that fund being diverted at source by the overriding title of the

benevolent fund to those sums. The concept of diversion of income by overriding title is to be applied in situations which are clear and where the

existence of the title in the legal or natural person in whom an overriding title is to be recognised is also certain, and the facts are such as to warrant

the conclusion that the income is not that of the recipient, but in fact the income of the person in whose favour an overriding title is to be

recognised. The two decisions of the Supreme Court referred to earlier were cases, where the existence of a trust at the time of the receipt of the

amount by the assesses was recognised, the persons who made the payments being aware of the purpose for which the amounts were to be

applied and the person receiving the amounts being under an obligation in the nature of a trust to ensure proper application of those sums for

charitable purposes. The case of the molasses storage fund was an instance of diversion by reason of the overriding title created by the requirement

imposed by the statute. A rule framed by an assessee for its own internal management cannot be elevated to the level of statutory rule and the

decision on the part of the club to apply a portion of what it receives for benevolent purposes cannot be regarded as an instance of diversion by

overriding title when the amounts received by the club and allowed, by it to be used by the fund were not amounts, which had been paid voluntarily

with the object of making those payments for charitable purposes. Diversion of the income took place after, and not before the income had

reached the assessee.

The questions referred to us are, therefore, answered in favour of the Revenue and against the assessee.