Ita/1216/2009 Of The Commissioner Of Income Tax, Kannur v. M/S.manjoo & Company, Kannur

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE K.SURENDRA MOHAN WEDNESDAY, THE 8TH SEPTEMBER 2010 / 17TH BHADRA 1932 ITA.No. 1216 of 2009() -------------------------------- ITA.470/COCH/2004 of INCOME TAX APPELLATE TRIBUNAL,COCHIN BENCH .................... APPELLANT/APPELLANT ------------------------------------- THE COMMISSIONER OF INCOME TAX, KANNUR. BY SRI.P.K.R.MENON, SENIOR ADVOCATE (TAXES), ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX. RESPONDENT/RESPONDENT: -------------------------------------------- M/S.MANJOO & CO., MUNICIPAL BUS STAND, KANNUR. BY ADV. SRI.GEORGE POONTHOTTAM. THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 08/09/2010, ALONG WITH ITA NO. 1410 OF 2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: rs. C.N.RAMACHANDRAN NAIR &K. SURENDRA MOHAN, JJ. ------------------------------------------------------------ I.T.A. NOS: 1216 & 1410 OF 2009 ----------------------------------------------------------- Dated this the 8[th] September, 2010. JUDGMENT Ramachandran Nair, J. The question raised in the connected appeals filed by thedepartment is whether the Income Tax Appellate Tribunal wasjustified in holding that lottery prize money received by therespondent assessee is assessable as business income and not asincome assessable under the special provisions contained in Section115BB of the Income Tax Act, 1961. The respondent assessee is awholesale distributor of lotteries organized by the State of Keralaand under the distribution agreement respondent is entitled tocertain discount on the purchase of lottery tickets. If the ticketspurchased are not fully sold out by the respondent before the drawdate then loss will be to the account of the respondent. For theprevious years relevant to the assessment years 2000-01 and 2001-02 certain unsold tickets held by the respondent assessee were theprize winning tickets and on production of those tickets the LotteryDirectorate paid the prize money to the respondent after recoveryof tax at source treating the payments as “winning from lottery”. ITA 1216 & 1410/2009 Even though respondent assessee accounted the receipt of incomein the profit and loss account as prize won from lottery, in theincome tax returns filed, the respondent claimed that the prizemoney received from the Lottery Department represents income notassessable under the special provisions contained in Section 115BBof the Income Tax Act but assessable as business income. TheIncome Tax Officer however rejected the claim holding that prizemoney received in lottery is assessable at the special rate providedunder Section 115BB and so much so it cannot be treated asbusiness income. The first appeal filed by the respondent wasallowed and the Tribunal confirmed it on second appeal filed by thedepartment against which these appeals are filed. 2. We have heard standing counsel for the Income TaxDepartment for the appellants and Adv. George Poonthottamappearing for the respondent assessee. 3. Appellant's case is that winnings from lottery have to beassessed strictly in terms of special provisions contained in ChapterXXII of the Act which in Section 115BB provides as follows:- ITA 1216 & 1410/2009 “Tax on winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sortor gambling or betting of any form or nature whatsoever. Where the total income of an assesseeincludes any income by way of winnings from anylottery or crossword puzzle or race including horserace (not being income from the activity of owningand maintaining race horses) or card game andother game of any sort or from gambling or bettingof any form or nature whatsoever, the income taxpayable shall be the aggregate of--- 3. Appellant's case is that winnings from lottery have to beassessed strictly in terms of special provisions contained in ChapterXXII of the Act which in Section 115BB provides as follows:- ITA 1216 & 1410/2009 “Tax on winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sortor gambling or betting of any form or nature whatsoever. Where the total income of an assesseeincludes any income by way of winnings from anylottery or crossword puzzle or race including horserace (not being income from the activity of owningand maintaining race horses) or card game andother game of any sort or from gambling or bettingof any form or nature whatsoever, the income taxpayable shall be the aggregate of--- i) the amount of income-tax calculated onincome by way of winnings from such lottery orcrossword puzzle or race including horse race orcard game and other game of any sort or fromgambling or betting of any form or naturewhatsoever, at the rate of forty per cent; and ii) the amount of income-tax with which theassessee would have been chargeable had his total ITA 1216 & 1410/2009 income been reduced by the amount of income referred to in clause (i).” 4. There is no dispute as to whether winnings from lottery is income or not because under Section 2(24)(ix) of the Act amongother items winnings from lottery is specifically brought within themeaning of 'income' defined under the Act. So far as classificationof the income for the purpose of assessment is concerned“winnings from lottery” is “income from other sources” underSection 56(2)(ib) of the Act. However, contention of the respondentassessee is that in Sub Section (2) of Section 56 it is specificallyprovided that items of income referred under Sub Section (2) will betreated as income from other sources only if such income does notfall under any other head specified in Section 14, items A to E.Counsel for the respondent further submitted that respondentassessee is engaged in the business of purchase and sale of lotterytickets as wholesale distributor of Lottery Department of the Stateand so much so the lottery tickets held as on the date of draw isstock in trade. Admittedly the prize winning tickets constitute partof stock in trade and so much so prize won on such tickets isincome from business, though incidental in nature is the claim. The counsel has also relied on various decisions of the High Courtsparticularly decision of the Gauhati High Court in Director of StateLotteries v. Assistant Commissioner of Income-tax (238 ITR 1)and the two decisions of the Karnataka High Court reported inVisveswaraiah Lucky Centre v. Commissioner of Income Tax(189 ITR 698)andMysore Sales International Ltd. v.Commissioner of Income Tax (117 ITR 64) and contended thatincome received is business income assessable at the slab ratesprovided under the Act. The standing counsel on the other handrelied on the decision of the Madras High Court reported inCommissioner of Income Tax v. G.Krishnan (228 ITR 557)wherein that Court had taken the view that even bonus received bylottery distributor which is 10% of the prize money received for theticket sold by him is also winnings from lottery which is subjectedto tax at the special rate and the deduction under Section 80TT ofthe Act is admissible. Even that the issue is apparently consideredboth by the Karnataka High Court and by the Gauhati High Court,the scope of Section 115BB is not the question considered in any ofthe decisions. The question raised and decided by the Gauhati HighCourt pertains to the liability of the Lottery Directorate to deduct ITA 1216 & 1410/2009 ITA 1216 & 1410/2009 tax at source on the prize money payable for the unsold ticketsretained by the agents. However, on going through the judgmentwe find that there the State was not running lottery by itself but thelottery business was given on contract to the agent calledorganiser. The specific contention there was that: “All prizes from unsold tickets of the lotteries shall be property of the organising agent. Similarly,all unclaimed prizes shall also be property of theorganising agent and shall be refunded to theorganising agent.” Under the scheme of that lottery, prize money has to be depositedby the organiser (agent) with the Lottery Department in advance. Ifnobody claims the prize money the deposit amount will berefundable to the agent. In other words, it is not a case of agent ororganiser claiming any prize money by producing the prize winningtickets. What entitles him for refund in the form of prize money isthat there is no other claimant for the prize money. In other wordsthe benefit accrues to the organiser of the lottery viz., the agentonly by virtue of agreement which entitles him for refund of theprize money deposited by him with the Lottery Departmentirrespective of whether he has any ticket which won the prize or ITA 1216 & 1410/2009 not. On the other hand in the case before us admittedlyrespondent has claimed prize money by producing the prizewinning ticket like any other purchaser of lottery ticket whoparticipated in the draw. Therefore, we do not think there isanything wrong in the Gauhati High Court holding that the amountreceived by the organiser of the lottery in that state which isnothing but refund of the amount deposited by him is in the natureof a business income and not as prize money paid for the prizewinning ticket. 5. The first question to be considered is whether thewinnings from lottery received by the respondent is income frombusiness. The standing counsel submitted that receipt of winningsfrom lottery for the respondent is not on account of any physical orintellectual effort made by him and it is not “income earned” by himin business. After draw of the lottery, respondent cannot sell anyticket and the entire tickets held by him becomes waste paperexcept the prize winning ticket if any held held by him which ifproduced will entitle for the prize money. Therefore, according tohim the receipt of prize money is not in the capacity as a lotterydistributor but as a holder of the lottery ticket which was prized. ITA 1216 & 1410/2009 The Lottery Department also does not treat it as business incomereceived by the respondent but they also treat it as prize moneypaid on which TDS is recovered. However, counsel for therespondent contended that only by virtue of his being thedistributor of the lottery he retains stock of tickets with him andthe same constitutes stock in trade and whatever benefit he gotfrom stock in trade is income from business. Even thoughargument on the face of it is attractive and acceptable we feel thereis no business involved in the prize money received in a lottery. Ofcourse the purchase and sale of tickets by the respondent is abusiness. However, there is no business activity in claiming prizemoney from the Lotteries Department by producing the lotteryticket which got the prize. The entire lottery tickets cease to bestock in trade on the date of draw because after the draw thosetickets are unsaleable and have no value except waste paper valuethat the respondent will get on sale of the same. However, afterthe date of the draw since the tickets held by the respondent werealso included in the draw respondent becomes entitled to the prizemoney if any of the tickets held by him fetches the prize. This isbecause after having paid value for the entire tickets held by him he ITA 1216 & 1410/2009 ITA 1216 & 1410/2009 is entitled to participation in the draw for such of the tickets heldby him and when he gets the price he is entitled to receive the sameas a winner of the draw. In other words at the time of drawrespondent is only a participant in the draw for all the tickets heldby him and this does not involve any business activity and so muchso the prize won by him is only in his capacity as the holder oftickets. Further it is to be noted that business as defined underSection 2(13) of the Act includes any trade, commerce ormanufacture or any adventure or concern in the nature of trade ormanufacture which obviously means some effort physical orintellectual and since no activity which could be called businessactivity is involved in the participation in a lottery draw, we areunable to accept the respondent's contention that winning fromlottery is income earned by him in a business activity. Reliance byrespondent of Section 56(2) is of no help for him because no onecan do the business of participation in lottery draw wherein prize isonly a chance. In our view participation in a draw which alone canwin lottery prize does not involve any business. Therefore incomeby way of winnings from lottery is always “income from the source”under Section 56(4) (1b) of the Act. 6. Between the two decisions of the Karnataka High Courtonly in Mysore Sales International's case (supra) they are dealingwith the issue. However, we notice that in 1979 when the matterwas decided there was no specific provision like Section 115BB andso much so in our view the decision should not influenceinterpretation on the scope of Section 115BB of the Act. In our viewwinnings from lotteries is assessable under this special provisionirrespective as to under what head winnings from lottery falls.Therefore, assuming for argument sake the contention of therespondent that winnings from lotteries is received by him in thecourse of his business and is incidental to business and so such it isso his business income is right. Still, we feel in view of the specificprovision contained in Section 115BB, the special rate of tax isapplicable for all winnings from lottery. What is provided in thesaid Section is that where the total income includes any income byway of winnings from lottery or crossword puzzle etc, the incometax payable shall be calculated at the rate of 30%. Total incomeunder Section 2(45) read with Section 5 of the Act includes incomefrom all sources and necessarily all such income are computedunder five heads referred to in A to F of Section 14 of the Act. In ITA 1216 & 1410/2009 other words even after computation of income under various headsof income referred to in Section 14 in terms of specific provisions ofthe Act providing for computation of income under each head,Such of the incomes specifically covered by Chapter XII shall beidentified, separated and should be subject to tax at the specialrate provided there. So much so in our view the special rate of taxi.e 30% provided under Section 115BB of the Act is applicable evenif winning from lottery is in the nature of business income asclaimed by the respondent. We hold that the rate prescribed underSection 115BB is applicable for the winnings from lottery receivedby the respondent assessee irrespective of whether it is an incomeincidental to business or not. We therefore allow the appeal by setting aside the orders ofthe Tribunal and that of the Commissioner of Income Tax (Appeal)and by restoring the assessment. C.N.RAMACHANDRAN NAIR Judge jj K. SURENDRA MOHANJudgeJudge