Income Tax Appellate Tribunal - Madras
Deputy Director Of Small Savings vs Income-Tax Officer on 27 July, 1999
Equivalent citations: [2000]75ITD152(MAD)
ORDER
P. Mohanarajan, Judicial Member
1. These appeals are filed by the assessee directed against the orders of the learned CIT (Appeals)-XI, Madras, dated 23-12-1998.
2. ITA No. 273/MDS/99 relates to the imposition of penalty under section 271C of the Income-tax Act, to the extent of Rs. 29,17,792 for the failure to deduct tax at source under section 194B for the year ended 31-3-1998 whereas ITA No. 274/MDS/99 relates to charging of interest under section 201(1A) to the extent of Rs. 2,39,919.
3. ITA No. 273/MDS/99 - The assessee is the Dy. Director of Small Savings. During the relevant assessment year the Government of Tamil Nadu passed an Government Order under G.O. Ms. No. 277, dated 29-5-1997 whereby an order/sanction issued for implementation of District Level Gift Linked Savings Mobilisation Scheme during 1997-98. This was announced to implement the savings scheme introduced by the Government of India. The salient features of G.O. Ms. No. 277, dated 29-5-1999 by the Tamil Nadu Government are as follows :-
"In Government Order first read above, Orders issued to implement the District Level Gift Linked Savings Mobilisation Scheme during 1996-97.
In the letter second read above, the Director of Small Savings has sent proposal for the continuance of the District Level Gift Linked Savings Mobilisation Scheme during 1997-98 also with slight modification.
The Government after careful consideration accept the proposal of the Director of Small Savings and direct that the District Level Gift Linked Savings Mobilisation Scheme be implemented during 1997-98 also with the following salient features :-
(i) Period of the Scheme 1-4-1997 to 31-3-1998.
(ii) Each District in Tamil Nadu shall form a separate unit with District Collector as Manager of the Scheme. The Director of Small Savings shall be the Manager of the scheme for Chennai District.
(iii) There shall be a draw for each series consisting of one lakh gift coupons. The draw will be conducted for each series after all the one lakh gift coupons in that series are distributed to the investors.
(iv) Every investment of Rs. 1,000 paid by both individuals and institutions in Tamil Nadu in any one of the following Small Savings series in the Post Offices/Sub-Post Offices within the District of Tamil Nadu from 1-4-1997 to 31-3-1998 is eligible for a gift coupon :-
The scrips prescribed for the scheme are as follows :
(a) Kisan Vikas Patra
(b) National Savings Certificate (VIII Issue)
(c) National Savings Schemes (1992)
(d) Public Provident Fund
(e) Monthly Income Scheme
(f) Post Office Recurring Deposit Scheme
(g) Deposit Scheme for Retiring Government Employees (1989)
(h) Deposit Scheme for Retiring Employees of Public Sector Undertakings (1991)."
4. Based on the aforesaid G.O. of the Tamil Nadu Government, the Director Small Savings, Tamil Nadu bad issued pamphlets inviting for deposits under the Savings Schemes of various kinds as introduced by the Government of India.
5. Clause 3(v) and (vi) of the G.O. of the Tamil Nadu Government are as follows :-
"(v) The Director of Small Savings shall be the co-ordinator of the scheme. The Director of Small Savings shall arrange to print the gift coupons at the Government Central Press, Chennai and distribute the same to the District Collectors. The Director of Small Savings shall call for tenders as per codes and rules as provided in G.O. Ms. No. 345, Finance (Small Savings), dated 17-5-1993 and identify the company, rate, mode of supply etc. of the prize articles for procurement and distribution of gift articles by the District Collectors in District and the Director of Small Savings in Chennai.
(vi) The draw shall be conducted by the Director of Small Savings in the case of Chennai City and by District Collectors in respect of District through the panel of Judges/Members constituted for the purpose. They are also responsible to announce the results in proper way and distribute the prize. The procurement of gift articles shall be done by the Director of Small Savings for Chennai City and by the District Collectors for the Districts."
6. As per the aforementioned clause the Director of Small Savings had conducted the draw for the distribution of prizes based on the gift coupons issued to the depositors in Saving Schemes introduced by the Government of India. Consequently the prizes were distributed after the draw.
7. Based on the above transactions, the Assessing Officer initiated penalty proceedings under section 271C and charged interest under section 201(1A) for contravening the provisions of section 194B of the Act against the Dy. Director of Small Savings, Chennai. The Assessing Officer had considered this transaction as lottery and proceeded against the assessee as aforesaid. The Assessing Officer while doing so placed reliance on the decision of the Hon'ble Madras High Court in the case of Sesha Ayyar v. Krishna Ayyar 59 ILR Mad. 562. The relevant extract from the order of the Assessing Officer is as follows :-
"As per Oxford Dictionary the word 'Lottery' has been given the following meanings :-
'Arrangement for distributing prizes by chance among purchasers of tickets. (fig.) thing that defies calculation'.
As per the prize scheme, for every investment of Rs. 1,000 in Post Offices of Tamil Nadu in specific schemes such as NSC, PPF, NSS etc. a prize coupon is given. This indicates that to become eligible for a prize coupon, the person has to make investment for Rs. 1,000 i.e., there is a cost factor involved in getting the prize coupon. The prize winners are determined on the basis of draw conducted for each series. Prize winners are selected on lucky draws conducted. Hence, in the selection of prize winners, there is no method of calculation, i.e., it defies calculation. In the course of the judgment in Sesha Ayyar v. Krishna Ayyar 59 ILR Mad. 562 the Madras High Court has observed "A Lottery is a distribution of prizes by lot or chance without the use of any skill".
8. The issue when came up before the CIT (Appeals) the learned Commissioner (Appeals) confirmed the orders of the Assessing Officer relying on the decision of Punjab & Haryana High Court in the case of CIT v. Sanjiv Kumar [1980] 123 ITR 187/4 Taxman 97 and also the Madras decision referred to above.
9. Shri V. Ramachandran, Senior Advocate, appearing on behalf of the assessee submitted that the authorities below failed to appreciate the facts of the case in proper perspective. In order to constitute 'lottery' the transaction should involve distribution of money or prize by a lot or chance to persons who have purchased a ticket for the said lottery. The transaction should be among persons who have paid consideration for buying a ticket with the sole intention of participating in the lot and have, thus, paid for the chance. A lottery will have to satisfy various statutory regulations and laws. The assessee is a department of State Government and acted on the basis of the advice of the Government. In the case of lottery, there is a chance of winning or losing. The existence of a chance of losing the investment is essential to constitute a lottery. In the instant case, there is no such chance of losing as there is no investment made by any person for the coupon. The coupon is given to every investor/depositor of Rs. 1,000 each free of cost and no consideration is collected for the same. Therefore, he vehemently contended that even on the basis of general law and the general concept of lottery, the draw in the present case does not satisfy the requirements of a lottery. He reiterated the grounds taken in the grounds of appeal. The learned counsel also filed written statements. The same is perused and kept on record. It is contended that (i) the Dy. Director of Small Savings is not the proper assessee; (ii) section 194B is not applicable to the distribution of prizes in kind; (iii) section 201 comes into play only where section 194B comes into operation and that the interest under section 201(1A) is leviable only in the event of committing default in contravening the provisions of section 194B. Besides that the learned counsel reiterated the points mentioned in the written submissions.
10. On the other hand, the learned departmental representatives, vehemently contended that the assessee is conducting draws. The assessee has distributed prizes without deduction of tax at source under section 194B of the Act. There is no violation of the provisions of section 194B, according to which in a case where the winnings are wholly in kind or partly in cash and partly in kind but the part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of the winnings, the person responsible for tax paying shall, before releasing the winnings, ensure that the tax has been paid in respect of the winnings. The learned departmental representatives heavily relied on the observations made by the Commissioner (Appeals) in his order in para 4.1, which is as follows :
"It is true that the word 'lottery' is not defined under the Income-tax Act. In the context of allowability of deduction under section 80TT, the Punjab and Haryana High Court in CIT v. Sanjiv Kumar [1980] 123 ITR 187 has outlined the basic ingredients of lottery. The view taken by the Punjab and Haryana High Court is supported by the decision of the Full Bench of the Madras High Court in Sesha Ayyar v. Krishna Ayyar AIR 1936 Mad. 225. In that case, periodically, chits are taken out and whosoever's name comes, is entitled to get the full amount without further making any contribution in the scheme. Under these facts and circumstances, it was held that the income of the assessee from the chit fund company was an income from lottery." The Hon'ble High Court before holding the income as winnings from lotteries, observed as under : (123 ITR 189-190) :
In Webster's New International Dictionary, the word 'lottery' has been defined to mean a scheme by which one or more prizes are distributed by chance among persons who have paid or promised a consideration for a chance to win them, usually as determined by the number on tickets as drawn from a lottery wheel. In legal and commercial Dictionary by S. D. Mitra, the word 'lottery' has been defined as under :
'A lottery has been compendiously defined as a scheme for the distribution of money by chance. It usually, if not always, takes the form of the creation of a fund by the participants in the lottery, who buy tickets or pay subscriptions in consideration of an offer by the promoters to award them a prize on some contingency the happening whereof depends on chance'."
A lottery is a scheme for the distribution of prizes by lot or chance."
11. In Corpus Juris Secundum, the word "lottery" has been defined as follows :
"Pooling the proceeds derived from chances or tickets taken or purchased and then allotting such proceeds or a part of them or their equivalent by chance to one or more such takers or purchasers are indicia of a lottery."
12. From the definitions of the word 'lottery' as given by various authors, reference to which has already been made, it is clear that the element of chance is one of the important relevant factors for considering whether a particular scheme of things falls within the definition of the word 'lottery'. A lottery and a wagering contract are two distinct things. A scheme may amount to a lottery though none of the competitors is a loser. A scheme would be a lottery even if the prize money came out of the interest earned from the subscribers' contributions. The touchstone is that if the subscribers have purchased a chance of winning a prize, it can make no difference whether the prizes are paid circuitously from the interest earned on the subscriber's contributions or are paid directly from those contributions. The risk of loss is not necessary.
13. He further submitted that since there is an element of chance in the transaction it certainly amount to 'lottery' or 'raffle' and therefore, the assessee is duty bound to comply with the provisions of section 194B. The investors, by virtue of their making the sum of Rs. 1,000 has become eligible to obtain a coupon and ultimately some of them got prizes. Therefore, he argued that distribution of prizes to the investors on the basis of winning coupons amounts to 'lottery'. He also strongly supported the order of the Assessing Officer as well as Commissioner (Appeals) in every aspect.
14. We have heard rival submissions and perused the records. First of all it has to be seen whether the transactions under consideration amounts to 'lottery' or 'raffle'. In Law of Lexicon by P. Ramanatha Aiyar (1997 Edn.) edited by Justice Y. V. Chandrachud (former Chief Justice of India) (page 1603) a reference to 'raffle' has been given, as follows :
'Raffle' - A raffle is a game of perfect chance in which every participant is equal with every others in proportion to his risk and prospect of gain. The prize is a common fund. Each is an equal actor in developing chances in proportion to his risk. The successful party takes the whole prize and all the rest lose."
15. In this reference, the author also considered the definition as given in Webster - Raffle :-
"When used as a verb, to mean to cast dice for a prize for which each person concerned in the same lays down a stake, or at least part of the value, as to raffle for a watch. Used as a noun it means a game chance or lottery in which several persons deposit a part of value of the thing in consideration of the chance of getting it."
16. A close analysis of the above shows that in 'raffle' or 'lottery' there is an element of purchase of the chance for the participation. On the facts of this case, this is the most important element of factor to conclude a transaction as 'raffle' or not.
17. Further, in the same Law Lexicon at page 1151, the term 'lottery' is defined as "a hazard in which sums are returned for a chance of obtaining a greater value". Again it is stated that "the lottery is the distribution of prizes by chance where the persons taking part in the operation or a substantial in return for obtaining their chance of prize, where a significant number of the participant have made no contributions, the prize lot is not a lottery - Reader's Digest Association Ltd. v. Williams [1976] All ER 737, 739 (QBD) under section 41 of Betting, Gaining and Lotteries Act, 1963".
18. A close scrutiny of the facts in this case reveals that the persons who obtained the gift coupons are not the losers because when they invested a sum of Rs. 1,000 they become entitled to a coupon free of cost. In so far as the payment of Rs. 1,000 there was no risk of loss. On the other hand, the return is more than what is deposited by the depositors on maturity. The prize coupon in this case, in fact was not sold as has been done in the case of lottery or raffle. From the facts it is evident that the scheme was introduced to boost saving scheme introduced by the Government of India and to boost the savings by the public and thereby collect more funds/resources for the utilisation of the State Exchequer. Merely because prizes are distributed on the basis of gift coupons issued, the transaction never assumes the character of either 'raffle' or 'lottery'. As stated earlier, in the lottery there should be purchase of chance and risk of loss of the money of the participant. Issuing a gift coupon to the depositors and distributing prizes to the successful depositors after the draw, does not assume the character of lottery or raffle. In every raffle or lottery sale and purchase of chance (for instance sale and purchase of raffle ticket) is the prime essential element. But here in the instant case, there is no sale and purchase of coupon. Moreover, there is no risk of loss of the money by virtue of obtaining the gift coupon. The coupons, admittedly, are not sold. This itself will go to show that the authorities below were totally misconceived the facts and misquoted the provisions of law. Therefore, we find much force in the stand taken by the assessee.
19. The learned departmental representative and the learned CIT(A) placed much reliance on the decision of the Punjab and Haryana High Court in the case of Sanjiv Kumar (supra). In that case periodically chits were taken out and whosoever's name comes was entitled to get the full amount without further making any contribution in this scheme of chit. The successful bidder claim deduction under section 80TT. In the above cited case the Hon'ble High Court was pleased to observe -
"... the touchstone is that if the subscribers have purchased a chance of winding a prize, it can make no difference whether the prizes are paid circuitously from the interest earned on the subscribers' contributions or are paid directly from those contributions. The risk of loss is not necessary."
20. Thus, it is clear that the issue that came for consideration before the Punjab Haryana High Court is totally different and factually distinguishable. The issue was from the transaction of a chit where one of the depositors had been the successful by way of chance who received the full amount of chit without making further contributions to the chit. This is not so in the case in hand.
21. In the decision in Sanjiv Kumar's case (supra) at page 189, their Lordships were pleased to observe as follows :
"It is not disputed that the word 'lottery' is not defined under the Act. In Webster's New International Dictionary, the word 'lottery' has been defined to mean a scheme by which one or more prizes are distributed by chance among persons who have paid or promised a consideration for a chance to win them, usually as determined by the numbers on tickets as drawn from a lottery wheel.
22. A lottery is a scheme for distribution of prizes by lot or chance. In Corpus Juris Secundum the word "lottery" has been defined as follows :
"Pooling the proceeds derived from chances or tickets taken or purchased and then allotting such proceeds or a part of them or their equivalent by chance to one or more such takers or purchasers are indicia of a lottery.
23. On a careful consideration of the above, it is apparent that in lottery or raffle the participant has to pay for the chance in which he participates. The main criteria is sale and purchase of chance. We have already observed that in a lottery or raffle the person who takes part has to pay the cost for his participation for such a chance of lottery or raffle as the case may be. In such case the unsuccessful participant loses his cost paid for the participation. This is the factual position in every lottery or raffle as we see in daily walk of life. But in the case before the Punjab & Haryana High Court, the contributor in the chit did not lose his contribution paid. Their Lordships was of the view that risk of loss was not necessary while considering deduction under section 80TT of the Act.
24. In the case before us there is no sale or purchase of chance because the coupon was a gift to the investor. There is no risk of loss to the investors as they get their own deposit with dividend as announced by the Government of India on its maturity. Above all, it is quite obvious and apparent from the facts that the intention of the depositors were to invest their money in saving schemes as introduced by the Government of India. The primary object of the depositors was to take part in the savings scheme.
25. A reading of the orders of the Assessing Officer and the learned CIT(A) we find that much reliance has been placed on the decisions of Punjab & Haryana High Court and Madras High Court. We have already distinguished the decision of the Punjab & Haryana High Court on facts. However, it is pertinent to import the relevant ratio laid down by the Madras High Court in Sesha Ayyar's case (supra) at page 600, as follows :
"As stated above, the question for consideration is whether a kuri or chit fund of the said description is a lottery. A lottery is a species of gaming or wagering and may be described as an agreement whereby a prize or prizes are to be awarded by drawing lots or any other chance method to one or more of the persons who risk the payment of money or other valuable consideration for the chance of winning a prize. In Webster's Dictionary, "lottery" is defined as "a scheme for the distribution of prizes by lot or chance, especially a scheme by which one or more prizes are distributed by chance among persons who have paid or promised a consideration for a chance to win them, usually as determined by the numbers on tickets as drawn from a lottery wheel."
26. In Murray's Dictionary, the following meaning is given :
"An arrangement for distribution of prizes by chance among persons purchasing ticket&."
27. In the latest Universal Dictionary of English Language, it is defined as follows :
Organised competition for money or other prizes the winners of which are selected by lots, the funds being subscribed by the competitors."
28. From a study of decisions both English Indian, the following four elements appear to be essential to constitute a lottery
(i) a prize or some advantage in the nature of a prize;
(ii) distribution by chance;
(iii) consideration paid or promised; and
(iv) risk or loss."
29. On a reading of the aforesaid ratio laid down by the Hon'ble Madras High Court it is clear that to constitute 'lottery' the four essential elements are necessary. As already mentioned in the present case no consideration has been paid by the depositors for the gift coupons which is the main nucleus of the draw. Further, as already stated there was no risk or loss to the depositors for their money invested in the schemes introduced by the Government of India and as implemented by the Government of Tamil Nadu. In fact the depositors either they get prizes or not in the lottery, they do not lose their deposit invested in the scheme. But the deposits are returned with dividend to the depositors on its maturity. In addition certain depositors get certain prizes according to the prize-scheme, without paying any prize for the coupons which they incidently obtained while depositing money in the specified savings scheme. Hence, the facts are clear that there was no element of risk or loss to the depositors. Out of the four cumulative conditions to hold a transaction as a lottery as held by the Madras High Court, two conditions, viz., consideration and risk of loss are totally absent in the present case on hand. Therefore, even the decision of the Madras High Court though relied on by the authorities below, only supports the case of the assessee, that the transaction will not come under the purview of section 194B. The ratio being rendered by the Full Bench of the Madras High Court and which is still a good law, this Tribunal is bound to follow the ratio laid down by the jurisdictional High Court. At the same time we do not accept the contention of Shri V. Ramachandran, the learned counsel for the assessee that section 194B is not applicable to the distribution of prizes in kind. In this aspect section 194B is very clear in view of the second proviso to section 194B.
30. In view of the above, we have no hesitation in holding that the transaction in question before us is not lottery and the provisions of section 194B is not applicable as viewed by the authorities below. At best it can be treated as an incentive by the State Government for encouraging the savings of the public at large. Therefore, the penalty imposed under section 271C of the Income-tax Act, 1961, is hereby cancelled and we order accordingly.
31. Now coming to the issue of charging of interest under section 201(1A), the points are two fold :-
(i) Whether the assessee (Dy. Director of Small Savings) had contravened the provisions of section 194B; and
(ii) Whether the Dy. Director of Small Savings can be said to be an assessee in default for the purpose of section 201(1A) of the Act ?
32. The learned counsel for the assessee had pointed out in his written submissions at page 4 that as per G.O. issued by the Tamil Nadu Government, the District Collector shall manage the scheme in each District and in Chennai District, the scheme shall be managed by the Director of Small Savings and the Dy. Director is only one of the functionaries of the Department of Small Savings. It is further submitted that the Dy. Director of Small Savings is not the person responsible for managing and distributing the gifts. We find much force in the stand taken by the assessee's counsel in view of G.O. Ms. No. 277, dated 29-5-1997. There is no dispute that the Director of Small Savings is responsible for the scheme and the gift linked draw. This being so, the responsibility cannot be shifted to the other subordinate Officers other than the Director of Small Savings. The Dy. Director is only a functionary and subordinate to the Director of Small Savings.
33. Now coming to the issue of interest under section 201(1A) of the Act, we have already held that the issue relating to the savings schemes and the gift linked programmes were implemented by the Government of Tamil Nadu will not come under the purview of section 194B of the Act. Therefore, we are not inclined to accept the stand taken by the revenue.
34. In view of the aforesaid discussions, in our opinion the assessee is bound to succeed and we order accordingly.
35. In the result, the appeals filed by the assessee are allowed.