Ita/13/2017 Of Principal Commissioner Of Income Tax v. M/S. Meenakshy Enterprises

IN THE HIGH COURT OF KERALA AT ERNAKULAMPRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR. JUSTICE BECHU KURIAN THOMASWEDNESDAY, THE 23 DAY OF JUNE 2021 / 2ND ASHADHA, 1943 ITA NO. 18 OF 2017 AGAINST THE ORDER IN ITA 512/2013 OF I.T.A.TRIBUNAL,COCHIN BENCH,ERNAKULAM APPELLANT/S: THE PRINCIPAL COMMISSIONER OF INCOME TAXKOTTAYAM. BY ADVS.SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES)SRI.JOSE JOSEPH, SC, FOR INCOME TAXSRI.CHRISTOPHER ABRAHAM, INCOME TAX DEPARTMENT RESPONDENT/S: USHA MURUGANWIFE & L/H OF T.MURUGAN,M/S. MEENAKSHY LUCKY CENTRE,YMCA ROAD, KOTTAYAM - 686 001. BY ADV SRI.ANIL SIVARAMAN THIS INCOME TAX APPEAL HAVING COME UP FOR HEARING, ALONG WITH ITA.13/2017, 29/2017, THE COURT ON 23.06.2021 DELIVERED THE FOLLOWING: -2- IN THE HIGH COURT OF KERALA AT ERNAKULAMPRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR. JUSTICE BECHU KURIAN THOMAS WEDNESDAY, THE 23 DAY OF JUNE 2021 / 2ND ASHADHA, 1943 ITA NO. 13 OF 2017 AGAINST THE ORDER IN ITA 510/2013 OF I.T.A.TRIBUNAL,COCHIN BENCH,ERNAKULAM APPELLANT/S: PRINCIPAL COMMISSIONER OF INCOME TAXKOTTAYAM. BY ADVS.SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES)SRI.JOSE JOSEPH, SC, FOR INCOME TAXSRI.CHRISTOPHER ABRAHAM, INCOME TAX DEPARTMENT RESPONDENT/S: M/S. MEENAKSHY ENTERPRISESYMCA ROAD, KOTTAYAM-686001. BY ADVS.SRI.ANIL SIVARAMANSMT.RAJI VINCENT THIS INCOME TAX APPEAL HAVING COME UP FOR HEARING, ALONG WITH ITA.18/2017 AND CONNECTED CASES, THE COURT ON 23.06.2021 DELIVERED THE FOLLOWING: IN THE HIGH COURT OF KERALA AT ERNAKULAMPRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR. JUSTICE BECHU KURIAN THOMAS WEDNESDAY, THE 23 DAY OF JUNE 2021 / 2ND ASHADHA, 1943 ITA NO. 29 OF 2017 AGAINST THE ORDER IN ITA 511/2013 OF I.T.A.TRIBUNAL,COCHIN BENCH,ERNAKULAM APPELLANT/S: THE PRINCIPAL COMMISSIONER OF INCOME TAXKOTTAYAM. BY ADVS.SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES)SRI.JOSE JOSEPH, SC, FOR INCOME TAXSRI.CHRISTOPHER ABRAHAM, INCOME TAX DEPARTMENT RESPONDENT/S: SMT.USHA MURUGANWIFE AND L/H OF T. MURUGAN, M/S. MEENAKSHY LUCKY CENTRE, YMCA ROAD, KOTTAYAM-686001. BY ADV SRI.ANIL SIVARAMAN THIS INCOME TAX APPEAL HAVING COME UP FOR HEARING, ALONG WITH ITA.18/2017 AND CONNECTED CASES, THE COURT ON 23.06.2021 DELIVERED THE FOLLOWING: I.T.A. Nos. 18, 13 & 29/2017 J U D G M E N T [ITA Nos.18/2017, 13/2017, 29/2017] S.V. Bhatti, J. These appeals are under Section 260A of the Income Tax Act, 1961 (for short 'the Act'). The Principal Commissioner of Income Tax, Kottayam (for short 'the Revenue') is the appellantin these Tax Appeals. M/s.Meenakshy Enterprises, a proprietaryconcern, represented by T. Murugan, since deceased,represented by his wife Usha Murugan, is the respondent inthese appeals (for short referred to as 'the assessee'). 2.The appeals deal with common questions of law andfact, hence are taken up together for hearing and disposal. Thedetails of orders till the date of filing of the tax appeals are asfollows: The appeals deal with common questions of law and Sl. No.AssessmentOrder date ofOrder ofOrder of Income TaxI.T.A. No.YearAssessingCommissioner ofAppellate TribunalOfficerIncome Tax(Appeals)12008-0931/12/10ITAITA No.510/Coch/201313/2017No.78/Ktm/CIT(A)-dt.25.10.2016IV/10-11dt.04.06.201322008-0931/12/10ITAITA No.512/Coch/201318/2017No.79/Ktm/CIT(A)-dt.25.10.2016IV/10-11dt.04.06.201332006-0728/12/09ITAITA No.511/Coch/201329/2017No.37/Ktm/CIT(A)-dt.25.10.2016IV/09-10dt.05.06.2013 3.Heard learned Senior Standing CounselMr.Christopher Abraham for Revenue and learned CounselMr.Anil Sivaraman for assessee. Both the counsel refer to andrely on the details covered by I.T.A. No.18/2017 and stated thatadvertance to the details in I.T.A. No.18/2017 would besufficient for disposing of the other two appeals as well. Sl. No.AssessmentOrder date ofOrder ofOrder of Income TaxI.T.A. No.YearAssessingCommissioner ofAppellate TribunalOfficerIncome Tax(Appeals)12008-0931/12/10ITAITA No.510/Coch/201313/2017No.78/Ktm/CIT(A)-dt.25.10.2016IV/10-11dt.04.06.201322008-0931/12/10ITAITA No.512/Coch/201318/2017No.79/Ktm/CIT(A)-dt.25.10.2016IV/10-11dt.04.06.201332006-0728/12/09ITAITA No.511/Coch/201329/2017No.37/Ktm/CIT(A)-dt.25.10.2016IV/09-10dt.05.06.2013 3.Heard learned Senior Standing CounselMr.Christopher Abraham for Revenue and learned CounselMr.Anil Sivaraman for assessee. Both the counsel refer to andrely on the details covered by I.T.A. No.18/2017 and stated thatadvertance to the details in I.T.A. No.18/2017 would besufficient for disposing of the other two appeals as well. 4.One T Murugan was the Proprietor ofM/s.Meenakshy Lucky Centre/a proprietory concern doing business as a wholesale dealer of lottery tickets. The assesseewas engaged in the said business as Stockist for the sale oflottery tickets of various government/quasi-governmentagencies and State governments. The assessee purchases lotterytickets from the agencies referred to above and claim to sell thelottery tickets to the retailers. In the subject financial year, theassessee purchased lottery tickets from the State of Kerala andclaims to have sold to the retail vendors. The assessee in theTax return for the Assessment Year 2008-09 returned totalincome of Rs.1,62,45,266/-. The return filed for the subjectAssessment Year was taken up for scrutiny and resulted inissuance of notice under Section 143(2) of the Act. The noticerefers to alleged impermissible deduction of Rs.7,72,66,051/-received and transferred by the assessee, to agents towardsincentive for the prize money realised from the tickets sold bythem. According to the assessee, there is no relationship of Principal and Agent between the assessee and the end sellers oflottery tickets to the general public and the retailers havebecome eligible for receiving their entitlement as successfulagents' prize money/commission, etc. The assessee is not theseller of lottery ticket to the end recipient and the assesseeacted as post-office between the State government and thebuyers of lottery tickets from Stockist/wholesale dealers, suchas assessee. Therefore, the deduction claimed is expenditureand the notice issued for addition of the said amount isimpermissible. The Assessing Officer, from the details andmaterials available on record, held that the relationshipbetween the assessee and the end buyers of lottery tickets isone of Principal and Agent; the incentive/commission has beenpaid after deducting tax at source and the total payment isliable to be disallowed under Section 40(a)(ia) of the Act. TheAssessing Officer further held that Section 194H is attracted to the subject entry. For argument sake even if one assumes thatSection 194H has no application, Section 194G will be attracted. The Assessing Officer determined the net income assessable totax for the Assessment Year 2008-09 at Rs.9,01,24,618/- anddemanded Rs.3,96,11,900/- towards difference of tax from theassessee. 5.The assessee filed I.T.A. No. 79/KTM/CIT(A)-IV/2010-11 before the Commissioner of Income Tax (Appeals),Ernakulam. The CIT (Appeals), through Annexure-B Order dated04.06.2013, allowed the appeal and the Revenue filed I.T.A. No.512/COCH/2013 before the Income Tax Appellate Tribunal,Cochin. Through Annexure-C Order dated 25.10.2016 theTribunal dismissed the appeal. Hence the appeal. The appellantraises the following substantial questions of law in the instantappeal: I.T.A. Nos. 18, 13 & 29/2017 “1.Whether, on the facts and in the circumstances of the case- i)The payment made by the assessee to the Sub-agents fallwithin the clutches of Section 194G/194H of the Income TaxAct? ii) The provisions of section 40(a)(ia) are attracted to the abovepayments? 2.Did not the Tribunal err in deleting the disallowance made I.T.A. Nos. 18, 13 & 29/2017 “1.Whether, on the facts and in the circumstances of the case- i)The payment made by the assessee to the Sub-agents fallwithin the clutches of Section 194G/194H of the Income TaxAct? ii) The provisions of section 40(a)(ia) are attracted to the abovepayments? 2.Did not the Tribunal err in deleting the disallowance made u/s 40(a)(ia) for non-deduction of tax at source u/s.194H/194Gof the Income Tax Act from the payment of commission to sub-agents? 3.Should not the Tribunal have considered the issues raised(declined to be considered in paragraph 12 of the order onmerits?” 6.The learned Counsel appearing for the parties have, in great detail, invited our attention to all the three orders of theauthorities filed as Annexures A to C. The arguments now madein support of the respective cases by the learned counsel are similar to the arguments made before the CIT(Appeals) and theTribunal. The Revenue contends that from the nature ofadmitted circumstances and the conduct of lottery business, theassessee, though a Stockist or wholesale dealer of lottery ticketsorganised by the State of Kerala, upon purchase of the lotterytickets, is dealing with conduit sellers as agents. Even assumingwithout admitting that the agents' prize money, commission,etc are received by the assessee, but is transferred to respectivesellers of lucky lottery tickets. The assessee is paying ortransferring the amount so received as commission etc to theagents. In the foremost consideration of entries, Section 194Gof the Act is attracted and the assessee failed to comply withSection 40(a)(ia) of the Act and the Department, therefore, isjustified in adding the commission etc paid by the assessee to itsagents in the net income of the assessee. At the cost ofrepetition, stated differently, the Revenue proceeds on the I.T.A. Nos. 18, 13 & 29/2017 assumption that in sale and purchase of lottery tickets betweenthe assessee and its purchasers, relationship of Principal andAgent exists, amount so transferred represents commission etc.,therefore, TDS should have been deducted and Section 194G isattracted in all fours. Alternatively, in the admitted factsituation of the subject assessment Section 194H is attracted. 7.Advocate Anil Sivaraman invites our attention to theexplanation given by the assessee to the notice under Section143(2) of the Act and contends that from the nature of lotteryticket business, the government is exclusively authorized toconduct lottery, and does not prefer to deal with severalthousands of retail sellers of State lottery tickets. In the modulefollowed by the State, the lottery tickets are sold toStockists/wholesale dealers; the Stockist/wholesale dealerspurchase tickets from the State government and sell the lotterytickets to the individual retailers. Thereafter, what had been undertaken between the assessee/wholesale dealer and theretailers is a sale for a margin of discounted price. The assesseeacts as a post-office. There is no relationship of Principal andAgent between the assessee and his retail buyers. The retailsellers did not provide service to the assessee thus entitling forreceipt of commission/incentive from the assessee. He placesstrong reliance on Section 194G of the Act and argues that thebasic ingredients warranting application of Section 194G are notavailable in the case on hand and levy of tax for the amountreceived and made over to agents is illegal. 8.We have heard the Counsel and perused the record. Questions 1 to 4 9.The short and long of substantial questions framed centers around the premise on which deduction is rejected andadded to the income of assessee and tax is levied, and, on the 8.We have heard the Counsel and perused the record. Questions 1 to 4 9.The short and long of substantial questions framed centers around the premise on which deduction is rejected andadded to the income of assessee and tax is levied, and, on the other hand, assessee contends: that the relationship betweenthe assessee and the buyers of lottery tickets from the assesseeis not an agent or purchaser. Stated simply, assessee claimedthat lottery tickets were purchased at discount from theorganising agency and, by retaining a margin of the discount soreceived, lottery tickets were sold to retail sellers. Hence, noneof the incidences covered by Section 194 G or Section 194 H isattracted. At this juncture, to avoid reiteration of what hasbeen held as a fact we deem it very useful to refer to theconsideration of this aspect by the CIT (Appeals). In his orderdated 04.06.2013, the learned CIT (Appeals) first had taken upfor consideration the scope and applicability of Section 194H ofthe Act to the controversy in the subject assessment, and,thereafter, examined whether the sub-dealers purchasinglottery tickets from the assessee had rendered any service tothe assessee in the course of buying or selling of goods in relation to any transaction relating to any asset, valuable articleor thing. And on this crucial aspect, the first appellate authorityrecorded a finding that the buyers of lottery tickets from theassessee do not render service in the sale and purchase oflottery tickets between two of them. Therefore, in the absenceof any service being received to the assessee it cannot be heldthat Section 194H is attracted. Thereafter, applicability ofSection 194G is examined and held that in the transactions ofsale of lottery tickets to end buyers the assessee is a conduit ora postman. Therefore, Section 194G is not attracted anddeduction of tax at source by the assessee would amount todouble deduction of tax on the same amount. 9.1The CIT (Appeals) accepted the case of assessee thatthe assessee was not liable to deduct tax either under Section194H or under Section 194G in respect of the amount collectedfrom the government and paid or made over to the sub-dealers. I.T.A. Nos. 18, 13 & 29/2017 Section 40(a)(ia) does not contemplate dis-allowanceconsequent upon default under Section 194G. The Tribunalapproved the view of appellate authority. Stated very briefly,examined applicability of Section 194G and Section 40(a)(ia) ofthe Act and rejected the argument of the Revenue. TheTribunal categorically held that Section 194G of the Act is notapplicable and dis-allowance under Section 40(a)(ia) excludesSection 194G of the Act. 10.A bare reading of Section 194H together with thedefinition of expression 'commission or brokerage' in clause (i)of the explanation to Section 194H would be clear that thedefinition would not include any payment receivable, directlyor indirectly, for services in the course of buying or selling ofgoods. The converse of the applicability of the said explanationis that the payment received or receivable either directly orindirectly by a person acting on behalf of another person and the said amount is received: (i)for services rendered not being professional, or (ii)for any services in the course of buying or selling goods, or (iii)In relation to any transaction relating to any asset, valuable article or thing by discharging any of these functions referred to above, the element of agency is there between therecipient and the provider. The record does not disclose that any of the ingredients referred to above are attracted to the transactions covered for the addition made by the Revenue.. 10.1The alternative argument of the Revenue is thatSection 194G of the Act is attracted and addition of amount covered by payments made to buyers of lottery from assessee iscorrect. Section 194G reads thus: I.T.A. Nos. 18, 13 & 29/2017 Section 194G is attracted, which reads as under: (i)for services rendered not being professional, or (ii)for any services in the course of buying or selling goods, or (iii)In relation to any transaction relating to any asset, valuable article or thing by discharging any of these functions referred to above, the element of agency is there between therecipient and the provider. The record does not disclose that any of the ingredients referred to above are attracted to the transactions covered for the addition made by the Revenue.. 10.1The alternative argument of the Revenue is thatSection 194G of the Act is attracted and addition of amount covered by payments made to buyers of lottery from assessee iscorrect. Section 194G reads thus: I.T.A. Nos. 18, 13 & 29/2017 Section 194G is attracted, which reads as under: “Any person who is responsible for paying, on or after the 1[st] day of October, 1991 to any person, who is or has been stocking,distributing, purchasing or selling lottery tickets, only incomeby way of commission, remuneration or prize (by whatevername called) on such tickets in an amount exceeding onethousand rupees shall, at the time of credit of such income tothe account of the payee or at the time of payment of suchincome in cash or by the issue of a cheque or draft by any othermode, whichever is earlier, deduct income tax thereon at therate of ten per cent” 10.2The assessee acts as a post-office by receiving counterfoils of prize winning tickets sold by different retailersin the organisation of lottery business presented to the Stategovernment and the prize/incentive/bonus received from thegovernment is transferred to retailers. In the circumstances ofthe case our attention has been drawn to the flow ofcounterfoils into the hands of assessee and presentation of counterfoils to government and receipt of incentive by assesseeand subsequent transfer of incentive to retailers. The personresponsible for making the payment is the government.Admittedly, the government after affecting TDS has paid theamount to the assessee towards prize incentive etc. Theassessee has collected the amount and claims to have made overthe incentive to the end retailers. Section 194G, as rightly heldby the Commissioner of Income Tax and the Tribunal, is notattracted to the instant payment inasmuch as assessee is notunder obligation to pay towards commission etc to any of thesepersons. 10.3The substantial questions of law framed by theRevenue are examined by keeping in perspective theconfirming order of the Tribunal. And the findings of factsrecorded by the Tribunal on which no exception is pointed outto the effect that Sections 194H and 194G are not attracted. It is definitely a case for consideration of substantial questions oflaw, had the Revenue established the basic ingredients requiredfor attracting any one of the sections to the controversycovered by the appeal. We are of the view that the assesseebeing a wholesale dealer/Stockist of lottery has purchased fromthe government and sold to the retailers. It is accepted as apurchase from the organizing agency of lottery and sale toretailers. The amount covered is incentive payable by theorganizing department to the agent and none of the ingredientsrequired for adding the disputed amount is established. Thequestions, in our view, do not arise for considerationparticularly having regard to the findings appreciated by theCIT (Appeals) and the Tribunal and accordingly the questionsare answered in favour of the assessee and against the Revenue.The consideration of the issues should be understood as madein the circumstances of the case and not relied on as precedent on the applicability of any of the sections referred to above vis- a-vislottery business and implications on tax liability. In otherwords, the decision is fact specific to the cases on hand. For the very same reasons ITA Nos.13 and 29 of 2017 aredismissed. Sd/- S.V.BHATTIJUDGESd/- BECHU KURIAN THOMASJUDGE jjj on the applicability of any of the sections referred to above vis- a-vislottery business and implications on tax liability. In otherwords, the decision is fact specific to the cases on hand. For the very same reasons ITA Nos.13 and 29 of 2017 aredismissed. Sd/- S.V.BHATTIJUDGESd/- BECHU KURIAN THOMASJUDGE jjj I.T.A. Nos. 18, 13 & 29/2017 APPENDIX OF ITA 13/2017 PETITIONER ANNEXURE ANNEXURE A ASSESSMENT ORDER U/S 143(3) DT. 31-12-2010 ANNEXURE B CIT (APPEALS) ORDER NO. 78/KTM/CIT (A)-IV/2010-11 DT. 04/06/2013 ANNEXURE C ITAT'S ORDER NO.510/COCH/2013 DT.25.10.2016 I.T.A. Nos. 18, 13 & 29/2017 APPENDIX OF ITA 29/2017 PETITIONER ANNEXURE ANNEXURE A ASSESSMENT ORDER U/S 143(3)/147 DT. 28/12/2009 ANNEXURE B CIT (APPEALS) ORDER NO. 37/KTM/CIT (A)-IV/2009-10 DT. 05/06/2013 ANNEXURE C ITAT'S ORDER NO.511/COCH/2013 DT.25.10.2016 I.T.A. Nos. 18, 13 & 29/2017 APPENDIX OF ITA 18/2017 PETITIONER ANNEXURE ANNEXURE-A ASSESSMENT ORDER U/S 143(3) DT. 31-12-2010 ANNEXURE B CIT (APPEALS) ORDER NO. 79/KTM/CIT (A)-IV/2010-11 DT. 04/06/2013 ANNEXURE-C ITAT'S ORDER NO.512/COCH/2013 DT.25.10.2016