Income Tax Appellate Tribunal - Jaipur
Mahaveer Kumar Jain vs Income-Tax Officer on 26 February, 1993
Equivalent citations: [1993]45ITD634(JP)
ORDER
M.A.A. Khan, Judicial Member
1. Aggrieved by CIT (Appeals)'s order dated 31-10-1988 the assessee in appeal and the Revenue in cross objection have come up before the Tribunal.
2. The assessee is a Resident Indian Citizen earning income, from business and property, at Jaipur, Rajasthan. He won the first prize of Rs. 20 lakhs in the 287th Bumper Draw of the Sikkim State Lottery, held on 20-2-1986 at Gangtok by the Director, State Lotteries, Govt. of Sikkim, Gangtok. After having deducted a sum of Rs. 2 lakhs on account of payment of agent's/seller's commission and another sum of Rs. 1,79,088 on account of Income-tax, as per Sikkim State Income-tax Rules, the Director of Lotteries paid the balance of Rs. 16,20,912 to the assessee through Demand Draft Nos. TL 891807, dated 27-3-1986 for Rs. 8,10,000 and TL 891010 of even date for Rs. 8,10,912.
3. The assessee declared net income of Rs. 8,21,375 claiming deduction under Section 80TT of the IT Act, 1961 (the Act) on Rs. 20,00,000 i.e., the gross amount of the prize money. The ITO, however, allowed such deduction on Rs. 18 lakhs only and in appeal the learned CIT (Appeals) agreed with him in this behalf.
4. The extent of allowability of assessee's claim for deduction under Section 80TT made the main ground of assessee's appeal before the Tribunal. But on 7-7-1992 the assessee sought permission of the Tribunal to raise the following additional ground, viz.
The authorities below have grossly erred in law in treating lottery income of Sikkim Govt. as taxable under the Income-tax Act, 1961.
5. The Tribunal accorded the required permission to raise the above ground vide its order dated 5-8-1992. Since the additional ground becomes the main ground in the appeal, we would like to decide it first.
6. The main contention of Mr. N.M. Ranka, the learned Counsel for the assessee is that since the income in question accrued to the assessee in Sikkim and the same was charged there to Income-tax as per provisions of Sikkim Laws contained in the Sikkim State Income-tax Manual 1948 (Sikkim Manual 1948) and the notifications issued thereunder, the same income cannot again be subjected to the charge of Income-tax under the provisions of the Income-tax Act, 1961, ('the Act'). It was explained that prior to the application of the Act, 1961 to the State of Sikkim w.e.f. 1-4-1990 the Sikkim Manual 1948 was a law in force in Sikkim State and that was corresponding to the Act, 1961. It was submitted that despite Sikkim becoming a component State of the Indian Union by and under the Constitution 36th Amendment Act, 1975 w.e.f. 26-4-1975, the Sikkim Manual 1948 and the notifications issued thereunder continued to remain in force by virtue of Article 371F(k) and (n) of the Constitution of India inserted by the Constitution 36th Amendment Act, 1975. In this behalf Mr. Ranka referred to paragraph 93 of Finance Minister's speech at page 19 and Section 26 of Finance Bill 1989 at page 46 (176 ITR St. pp 19/46 and 176 ITR St. 182) and relied upon Delhi SMC Bench decision in Anuj (Toffee) Garg v. ITO.
7. Replying to the above mentioned arguments of Mr. Ranka, the learned Senior Departmental Representative submitted that the factual and legal positions as stated by Mr. Ranka were subject to no dispute but the conclusions drawn by the learned counsel were not acceptable to Revenue. It was submitted that Sikkim Manual 1948 and the notifications issued thereunder by the Sikkim Govt. from time to time were applicable to Sikkim people residing within the territorial limits of the Sikkim State and it was in respect to those persons only that the Sikkim Laws continued to remain in force upto 31-3-1990 despite merger of the erstwhile Sikkim State with the Indian Union w.e.f. 26-4-1975. It was submitted that the assessee herein was a Resident and Ordinarily Resident of India and the provisions of Section 5 of the Act were applicable to him. The learned Departmental Representative specifically pointed out that Section 5(1) was a charging Section and brings the global income of the assessee in its net. He thus submitted that the winnings from Sikkim Lottery have rightly been included in the computation of total income of the assessee in this case.
8. In order to appreciate the arguments advanced on behalf of the parties in right perspective, a brief reference to the history behind the merger of Sikkim State with Indian Union and retaining its law in force for sufficiently long time despite such merger is required to be made.
9. During British rule, Sikkim was an Indian State subject to British paramountcy. She used to be ruled by a hereditary monarch called 'Chogyal'. When India became independent the princely ruler of that State and its strategic position stood in the way of its merger with India. Hence, after the end of British paramountcy a treaty was entered into between Sikkim and the Govt. of India by virtue of which Sikkim became a Protectorate of the Union of India; defence, external affairs and communication becoming the responsibility of Govt. of India. In May 1974 the Sikkim Assembly passed Govt. of Sikkim Act 1974 and later passed a resolution expressing its desire to be associated with the political and economic institutions of India and for seeking representation for the people of Sikkim in Indian Parliament. The Constitution (35th Amendment) Act, 1974 was accordingly passed conferring the status of an "associate State" on Sikkim by inserting Article 24 and the 10th Schedule in the Constitution, though the concept of an "associate State" was quite alien to the Indian federal system.
10. It may be recalled that while the Indian Parliament was enacting the Constitution (35th Amendment) Act the Chogyal resented and sought to revoke the treaty. This provoked the progressive Section of the people of Sikkim and led to a resolution being passed by the Sikkim Assembly on 10-4-1975 declaring that the activities of the Chogyal were prejudicial to the democratic aspirations of the people of Sikkim and ran counter to the agreement of May 1974. The resolution so passed further declared and resolved that "the institution of the Chogyal is hereby abolished and Sikkim shall henceforth be a constituent unit of India, enjoying a democratic and fully responsible Government". At the referendum the resolution was approved by people of Sikkim with overwhelming majority and the Chief Minister of Sikkim urged the Govt. of India to implement the result of the resolution. This led to the passing of the Constitution (36th Amendment) Act, 1975 by the Indian Parliament.
11. By the 36th Amendment Act, Sikkim has been admitted into the Union of India as a State. Article 371F has been, further, inserted to make some special provisions relating to the administration of Sikkim, to meet the special needs and circumstances of that State. Clauses (k) and (n) of Article 371F, which are relevant for our purpose, run as under:-
371F. Notwithstanding anything in this constitution,-
(a) to (j) ** ** **
(k) all laws in force immediately before the appointed day in the territories comprised in the State of Sikkim or any part thereof shall continue to be in force therein until amended or repeated by a competent Legislature or other competent authority, (1), (m) ** ** **
(n) the President may, by public notification, extend with such restriction as he thinks fit to the State of Sikkim any enactment which is in force in a State in India at the date of the notification, (O), (p) ** ** **
12. It may be appreciated that Clause (k) permits all such laws as were in force before 26-4-1975 in the territories comprised in the State of Sikkim to remain in force until amended or repealed by the Competent Legislature or authority. likewise Clause (n) restricts the application of such enactments to the territories in the State of Sikkim as may be in force in a State in India on 26-4-1975 unless the President of India is pleased to extend such enactment by public notification to the territories comprising the State of Sikkim. The object behind enactment of Clauses (k) and (n) of Article 371F of the Constitution seems to be, in the first stage, to safeguard the application of those laws which the people of Sikkim were accustomed to follow and, in the second stage, to apply such laws as are in force in any Indian State or States to them at such appropriate time as is deemed fit and proper by the President of India. The protective umbrella of Clause (k) of Article 371F was thus meant for the benefit to the people of Sikkim and not to persons residing outside the territories in the State of Sikkim.
13. The Sikkim Manual of 1948 made provisions regarding levy of Income-tax on persons and for association of persons enjoying taxable income, as per such Manual, from assets held in and/or activities being carried on in the territories comprising the State of Sikkim. It had the following five categories of assessments, namely:-
(1) Business (2) Agricultural produce (3) Salaries (4) Patta Estate Income (5) Principal income in cash or kind.
14. The relevant terms were defined in Rule 2 as under :-
(i) "Gross-sale proceeds" means all proceeds accrued from the turnover of a business, within the territory of Sikkim.
(ii) "Agricultural Income" means gross produce income derived by a landowner from land under maize and paloy.
(iii) "Salaries" means the aggregate emoluments paid to a Government employee including pay, special pay, personal pay and allowances but excluding travelling, house, vehicle and horse allowance.
(iv) "Patta Estate Income" means the difference between whatever moneys a landlord of an estate realises from the Bustiwallas of his estate and whatever amount he pays to the Government.
15. Rules 4 to 6 dealt with the taxability of business income. Rule 7 made provisions for deduction of income-tax at source in the case of nonresident assessees. It provided that-
Rule 7. Payment of income-tax in advance. The Income-tax Officer will maintain a Register of non-resident assessees and income-tax will be realised in advance subject to adjustment on submission of accounts by such assessees.
Rule 7 as reproduced above, clearly gives the indication that the position of non-resident assessees had been visualised and in their cases payment of income-tax in advance was effected. In other words the concept of Tax deducted at source" was not alien to the Sikkim Regulation 1948 and this mode of recovery of tax was, in fact, adopted in the case of non-resident assessees earning income at a place beyond the territories of Sikkim State. In his case the tax realised in advance was to be adjusted on submission of accounts by him.
16. Rules 8 to 11 regulate the procedure of assessment of income-tax on agricultural products. Rules 12 to 14 lay down the procedure for recovery of income-tax from the Sikkim State employees. The scope of Rule 12 seems to have been widened by Notification No. 155-500/IT & ST, dated 21-4-1970 whereby it was inter alia provided that income accruing or arising directly or indirectly from the salaries received either from the services rendered to the Sikkim Government or to any private individual firms or companies will be assessed to income-tax at specified rates. Rule 15 deals with the procedure of assessment in the cases of landlords of Sikkim State and Rule 16 lays down the procedure of assessment in the casts of principal loans in cash or kind.
17. Winnings from Sikkim Lottery and commission from the sale of such lottery were made liable to be assessed to income-tax, (as per rates notified under Notification No. 155-500/IT & ST, dated 21-4-1970, referred to above) by Notification No. 4091-100/IT & ST, dated 5-2-1974. Prior to this Notification the position obviously was that an assessee, as per definition of the term in Clause (v) of Rule 2 of the Sikkim Regulation 1948, was not at all liable to pay any sort of income-tax on winnings from Sikkim State lottery. But in the case of a person to whom the provisions of Income-tax Act, 1961 were applicable, particularly between 1972-1974, winnings from Sikkim Lottery were assessable as per provisions of Section 80TT of the Act (inserted w.e.f. 1-4-1972 but since omitted w.e.f. 1-4-1987). That would mean that the citus was on person and not on income, insofar as Sikkim Manual 1948 and the Income-tax Act 1961 were concerned. The issue of Notification No. 4091-100/IT & ST, dated 5-2-1974 should not and would not affect the position of a person to whom the provisions of the Act are applicable on the date of winnings from Sikkim Lotteries. A notification issued by the Sikkim Government for the benefit of the people of that State should not be read as excluding the operation of the FT Act to a person to whom it is otherwise legally applicable. Tax on winnings from Sikkim Lottery by a person not a resident of Sikkim State but to whom the Act applies would be deducted in the State of Sikkim as per Notification No. 4091-100/IT & ST dated 5-2-1974, referred to above and then computation of such income would be made as per provisions contained in Sections 56 to 58, read with Section 80TT of the Act. It would necessarily mean that the tax deducted by the Sikkim Income-tax authorities as per provisions of the Sikkim Regulation 1948 read with the Notification dated 5-2-1974 would be in the nature of tax deducted at source credit of which would be given while computing such income under the head "Income from other sources", contemplated by the Act. We think the same conclusion is arrived at on a study of the relevant provisions in the Act.
18. Section 5, which deals with the scope of total income of a person for the purposes of taxability thereof reads as under :-
5.(1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which -
(a) is received or is deemed to be received in India in such year by or on behalf of such person ; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year; or
(c) accrues or arises to him outside India during such year :
Provided that, in the case of a person not ordinarily resident in India within the meaning of Sub-section (6) of Section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.
Explanation 2: For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.
19. It may be noted that Section 5 casts a very wide net and all income received or deemed to be received, accrued or arisen or deemed to have accrued or arisen to a person in India or outside India has been brought within its ambit. Since Sikkim had become a component State of the Indian Union w.e.f. 26-4-1975 it would not be a place "outside India" for the purposes of application of Clause (c) of Sub-section (1) of Section 5 of the Act. In this behalf this Bench accepts the views expressed in the Single Member Bench case of Anuj (Toffee) Garg (supra). But this Bench, with all respects to the learned author of the decision in the case of Anuj (Toffee) Garg (supra), finds it difficult to agree with his further views that "mere fact that Section 5 would be applicable does not automatically mean that all the provisions of IT Act and the Finance Act would be applicable". In the opinion of this Bench once the provisions of Section 5 are found applicable to the case of a person computation of his total income of any previous year shall have to be necessarily made in accordance with the relevant provisions of the Act. It is altogether a different thing that a part of the total income is not liable to tax as per provisions contained in Explanation 2 to Section 5 or is deductible in the computation of the total income under any other provision of the Act or is entitled to double taxation relief under Chapter IX of the Act.
20. Now coming to the facts in the instant case the assessee herein is a resident and ordinarily resident of India to whom the provisions of the Act, do, unquestionably, apply. Income from winnings from Sikkim lottery was received (at Jaipur) in India by him during the year under consideration as the two demand drafts were encashed at State Bank of India at Jaipur. Such income was includible in the computation of his total income for the year under consideration as the same was not exempt under Chapter III of the Act. His case, therefore, clearly falls within the ambit of Section 5(1)(a) of the Act. The provisions contained in Clauses (k) and (n) of Article 271F of the Constitution would not, in our opinion, come into way in this case, once the provisions of Section 5 have started their operation. In the application of those provisions of the Constitution it shall have to be kept in mind that what is under consideration is inclusion of such income to the total income as is being received in India by a resident and ordinarily resident of India at a place outside the territories comprising State of Sikkim and to whom the Sikkim Regulation of 1948 and the Notifications issued thereunder were not applicable. The assessee herein is to be assessed as per provisions of the Income-tax Act, 1961 and not as per provisions of the Sikkim Regulation 1948 and the notifications issued thereunder. Therefore, deductions made from \winnings from Sikkim Lotteries on account of agent's/seller's commission and/or payment of tax called income-tax, would not debar the assessment of that income as per provisions of the Income-tax Act, 1961.
21. The next limb of Mr. Ranka's argument was that assessment of the same income under the provisions of the Act would suffer from the double taxation, as income-tax thereupon has already been charged by the Sikkim Income-tax authorities. Reliance in this behalf was placed on Laxmipat Singhania v. CIT [1969] 72 ITR 291 (SC), Tata Iron & Steel Co. Ltd. v. Union of India [1970] 75 ITR 676 (Pat.), T.N.K. Govindaraju v. Chetty & Co. Pvt. Ltd. v. CIT [1964] 51 ITR 731 (Mad.) and Anuj (Toffee) Garg [supra). The view point was explained by referring to the taxability of income in firm's hand and in the hands of partners. The learned Departmental Representative, however, relied upon the case of Jain Bros. v. Union of India [1970] 77 ITR 107 (SC) at page 112 and H.H. Prince Azam Jha Bahadur v. ETO [1972] 83 ITR 92 (SC) at page 99 and submitted that no such situation arises in this case. Cases reported in 131 ITR 74 (sic) 90, Beohar Singh Raghubir Singh v. CIT [1948] 16 ITR 433/441 (Nagpur) and Kanctwnjunga Properties (P.) Ltd. v. State of Sikkim [1991] 191 ITR 575 (Sikkim) were also referred to in this behalf.
22. In the case of Jain Bros. (supra) the Supreme Court held that -
It is not disputed that there can be double taxation if the legislature has distinctly enacted it. It is only when there are general words of taxation and they have to be interpreted, they cannot be so interpreted as to tax the subject twice over to the same tax (vide Channell J. in Stevens v. Durban Roodepoort Gold Mining Co. Ltd.). The Constitution does not contain any prohibition against double taxation even if it be assumed that such a taxation is involved in the case of a firm and its partners after the amendment of Section 23(5) by the Act of 1956. Nor is there any other enactment which interdicts such taxation. It is true that Section 3 is the general charging Section. Even if Section 23(5) provides for the machinery for collection and recovery of the tax, once the legislature has, in clear terms, indicated that the income of the firm can be taxed in accordance with the Finance Act of 1956 as also the income in the hands of the partners, the distinction a charging and a machinery Section is of no consequence. Both the Sections have to be read together and construed harmoniously. It is significant that similar provisions have also been enacted in the Act of 1961. Sections 182 and 183 correspond substantially to Section 23(5) except that the old Section did not have a provision similar to Sub-section (4) of Section 182. After 1956, therefore, so far as registered firms are concerned the tax payable by the firm itself has to be assessed and the share of each partner in the income of the firm has to be included in his total income and assessed to tax accordingly. If any double taxation is involved the legislature itself has, in express words, sanctioned it. It is not open to any one thereafter to invoke the general principles that the subject cannot be taxed twice over.
23. The same proposition had been laid down in Laxmipat Singhania's case (supra). In view of these decisions of the Supreme Court the views expressed by Madras High Court in T.N.K. Govindaraju Chetty & Co. (P.) Ltd.'s case (supra) and by Patna High Court in Tata Iron & Steel Co. Ltd.'s case (supra), which are also distinguishable on facts, confer no benefit upon the assessee in the facts and circumstances of this case.
24. In the instant case, as has been pointed out above, Explanation 2 to Section 5, which provides safeguard against double taxation does not apply for the obvious reason that the income in question had not earlier been included in the total income of the assessee. The provisions contained in Chapters III and IX are obviously not applicable hereto. Thus the inclusion of the income in question in the total income of the assessee for the year under consideration does not, in our opinion, suffer from the vice of double taxation.
25. To conclude, the additional ground is dismissed.
26. Now coming to the grounds raised in the appeal, we find that first ground relates to the controversy regarding deduction under Section 80TT. The assessee claimed deduction under that provision on the gross lottery income of Rs. 20 lacs whereas the income-tax authorities allowed such deduction at net income of Rs. 18 lacs.
27. Relying on Madras 'D' Bench decision in the case of Smt. J. Indirani Amrnal v. Sixth lTO [1985] 21 TTJ (Mad.) 246 Mr. Ranka no doubt urged that deduction under Section80TT was available on gross receipts but we are of the opinion that the issue in the point stands concluded by the decision of the Supreme Court in the case of CIT v. P.K. Jhaveri [1990] 181 ITR 79 where it has been held that in view of provisions of Section 8B(5) and 80AB, deduction under Section 80K was allowable to an assessee only on the amount after deduction of the interest paid on morieys borrowed specifically for investment in the shares and not on the gross amount received. In our opinion, the ratio in this decision applies on all fours to the facts of the instant case. Therefore, deduction under Section 80TT had rightly been allowed to the assessee after deduction of agent's/seller's commission of the gross receipts. Ground relating to this point is accordingly dismissed.
28. The next ground relates to the disallowance of Rs. 3,100 made on account of Misc. and legal expenses. The argument of Mr. Ranka that these expenses be allowed in subsequent year if not in this year is quite reasonable. We accordingly direct the ITO to allow the expenses of Rs. 3,100 in subsequent year.
29. In its cross objection the Department has raised the following two grounds, viz.
(i) The assessee's claim before the Hon'ble ITAT to treat the lottery income from Sikkim Government is not taxable under the IT Act is not legally tenable because no such claim was made either before the Assessing Officer or before the 1st Appellate Authority.
(ii) If the assessee's ground on the above claim is admitted for adjudication by the Hon'ble ITAT a finding may also be given to hold that the tax charged by the Sikkim State was merely a local tax and not the IT deducted or paid under the IT Act and hence the assessee had made a false claim under Section 199 for TDS amounting to Rs. 1,79,088 in the return filed before the Assessing Officer. ITAT may direct to withdraw the corresponding credit.
30. Since we have already dismissed the additional grounds giving rise to the grounds raised in the cross objection, Revenue' cross objection becomes infructuous and is liable to be dismissed as such.
31. In the result, assessee's appeal is partly allowed but Revenue's cross objection is dismissed.