Income Tax Appellate Tribunal - Delhi
Iqbal Chand Khurana vs Income-Tax Officer on 31 August, 1994
Equivalent citations: [1995]52ITD551(DELHI)
ORDER
Vimal Gandhi, Judicial Member
1. These three appeals - two by the assessee for assessment years 1984-85 and 1985-86 and one by the revenue for assessment year 1985-86, are directed against orders of CIT(A). As common points are involved, these appeals were heard together and are being disposed of through this consolidated order for the sake of convenience. The main controversy relates to denial of deduction Under Section 80TT of the Income-tax Act on the sum of Rs. 2,14,78,116 and Rs. 3,16,09,892 in the A.Ys. 1984-85 and 1985-86, respectively which according to the assessee were "winnings from lottery".
2. Facts of the case briefly stated are that as per agreements in writing, the assessee was appointed "agent" to organise and conduct lotteries on behalf of Governments of Nagaland and Manipur on All India basis. The agreements provided that the assessee was to get lottery tickets printed of different denominations, carry and conduct lotteries for State Governments, realise sale proceeds against payment of guaranteed stipulated profit to the Governments. The number of tickets to be printed, printing press wherefrom the tickets were to be printed, the design of the tickets etc. was to be got approved from the State Governments. All incidental expenses necessary for organising different draws of lotteries were to be borne by the assessee. The payment of lottery prizes of draws was the responsibility of the assessee. Prizes less than Rs. 1,000 were to be directly paid by the assessee, whereas prizes of denominations higher than Rs. 1,000 were to be paid by the State Governments after recovery from the assessee. The unclaimed prizes, unclaimed bonus and prizes on unsold tickets belonged to the assessee. These amounts were claimed as "winnings from lotteries" within the meaning of Section 80TT of the Act. The assessee thus claimed sums of Rs. 1,07,41,858 and Rs. 1,58,07,446 as deductions Under Section 80TT in A.Ys. 1984-85 and 1985-86, respectively.
3. The AO on consideration of terms of agreements with Governments of Nagaland and Manipur and the provisions of I.T. Act concluded that in respect of unsold tickets, there was cessation of liability of the assessee. There was no winning from lottery. It was further observed that person responsible for paying the winnings cannot include winnings in his income. There cannot be a liability to pay to himself. It was further observed that on the facts and the circumstances of the present case were entirely different from those prevailing in earlier years and, therefore, orders of ITAT of earlier years were not applicable. The earlier years related to prize bonus and winnings on stocks left over and unsold tickets in the hands of the stockist. In the instant case the assessee was the source of payment of prizes on tickets of denomination higher than 1,000 which was paid by the Governments. In case of winnings less than Rs. 1,000, the prize was to be directly paid by the assessee. The AO also referred to provisions of Section 41(1) and held the same to be applicable to unrealised prize or prizes on unsold tickets. It being a case of cessation of trading liability cannot be treated as "winnings from lottery". The claim made by the assessee was accordingly rejected. Similar order was passed in A.Y. 1985-86.
4. The assessee impugned the assessment in appeal before the CIT(A). The 1d. CIT(A) again noted relevant terms under which the assessee was to organise lottery tickets. The CIT(A) found that in profit and loss account relevant to the A.Y. 1984-85, the assessee has credited a sum of Rs. 2,14,85,751 under the head "prizes" besides, share of purchases, agent bonus, stock bonus, unclaimed prize bonus, unclaimed stocks bonus and other miscellaneous receipts. The assessee charged unsold stock of three lotteries at Rs. 5,01,90,394 to profit and loss account with other items of expenses like salary, postage, publicity, depreciation paid, unsold tickets, unsold stock etc. Before him it was contended that total sum of Rs. 2,14,55,751 included Rs. 1,72,92,444 as prices of unsold tickets. The assessee was thus ticket holder/owner of unsold tickets and should be equated with any other person who purchased the lottery ticket. It was further pointed out that the above figure also included Rs. 22,965 representing share in price of tickets purchased and sold by the assessee. It was further emphasised that TDS of Rs. 1,97,140 on unclaimed prize money of Rs. 5,97,392 in respect of certain prize money was deducted which clearly showed that prize money was nothing but income as "winnings from lottery".
5. The 1d. CIT(A) was unable to agree with the submissions advanced on behalf of the assessee. He found no infirmity in the reasoning of AO and in his approach refusing to allow deduction Under Section 80TT. He agreed with AO that prize money of Rs. 2,14,55,751 did not relate to winnings from any ticket held by the appellant as investment but represented reduction of his liability to this extent. The assessee was holding tickets as stock-in-trade and not investment and out of tickets sold some winning friends did not claim prize which belonged to the assessee. Such prize on the unsold tickets cannot be treated as lottery prize as "winnings from lottery" by the assessee. The fact that tax at source was deducted from an unclaimed prize money did not advance the case of the assessee. The 1d. CIT(A) in support of his conclusion relied upon decision of ITAT, Bangalore Bench in the case of First ITO v. Visweswaraiah Lucky Centre [1983] 5 ITD 132. He accordingly upheld rejection of claim of deduction under Section 80TT. Similar order was passed for A.Y. 1985-86.
6. The assessee has come up in appeal. Shri R. Santhanam, C.A. 1d. counsel for the assessee strongly assailed orders of CIT(A). He submitted that similar claim of assessee Under Section 80TT out of unprize money was allowed by the Tribunal in assessment years 1973-74 to 1975-76. Even reference application was dismissed as withdrawn in assessment year 1976-77. The ITO himself had allowed the claim in assessment year 1983-84 as per assessment order available on page 58 of the paperbook. In the light of the above orders of the Tribunal, the rejection of claim Under Section 80TT was totally unjustified.
7. Shri Santhanam further submitted that the CIT(A) in the impugned order was wrongly influenced by the fact that unsold tickets were charged to the profit and loss account. He did not appreciate that similar amounts were shown as closing stock in the trading accounts. The unsold tickets after the draw had no value and, therefore, figure was required to be squared up. But nothing turned on entries made in books and the question was to be decided on legal principles. Thus the CIT(A) took into account extraneous consideration.
8. Shri Santhanam drew our attention to the meaning of word "lottery" as available in Shorter Oxford Dictionary 3rd Ed. Vol. I. He also drew our attention to Law Lexicon explaining the word "lottery" to be a "scheme for distribution of prizes by draw or chance". Shri Santhanam placed strong reliance on decision of the Supreme Court in the case of H. Anraj v. Government of Tamil Nadu AIR 1986 SC 63 wherein essential elements of a lottery namely, chance, consideration and prize were discussed and considered. It was submitted that the assessee paid consideration by incurring cost of printing of tickets and other expenses. The assessee held tickets but could not be sure of winning the prize, thus other two elements, chance and prize were duly involved in the prizes allotted on the unsold tickets. The character and nature of unclaimed prizes could not be different in the hands of the assessee. Therefore, the sums received were nothing but "winnings from lottery". Shri Santhanam in particular drew our attention to last para of observations of Sabhya Sachi Mukherjee, J. (as he than was) to the following effect:
I, however, agree with my learned brother that the right to participate in the draw under a lottery ticket remains a valuable right till the draw takes place and it is for this reason that licensed agents or wholesalers or dealers of such tickets are enabled to effect sales thereof till the draw actually takes place and therefore lottery tickets, not as physical articles but as slips of paper or memoranda evidencing the right to participate in the draw can be regarded as dealer's merchandise and therefore goods which are capable of being bought or sold in the market. With these observations, I respectfully agree with the conclusion reached by my learned brother and concur with the order proposed by him.
Shri Santhanam fairly conceded that decision of Hon'ble Bombay High Court in the case of Commercial Corporation of India Ltd. v. ITO [1993] 201 ITR 348 and of Karnataka High Court in the case of Visveswaraiah Lucky Centre v. CIT [1991] 189 ITR 698 were against the assessee but in the above cases the decision of Hon'ble Supreme Court referred to by the Id. counsel was not cited or considered. Having regard to decision of Hon'ble Supreme Court, the assessee was entitled to deduction by way of "winnings from lottery".
9. Smt. Sinha 1d. D.R. supported the impugned order of CIT(A). She contended that earlier decisions of the Tribunal given in assessee's case were not applicable in the year before us as in those years assessee was a dealer of lottery tickets and not organising agent. Thus, on facts, decisions of Tribunal were distinguishable. The assessee as organising agent for Governments of Nagaland and Manipur carried on business of organising and conducting lotteries. The assessee was to derive different benefits like prize money, sale commission, prizes on unsold tickets, bonus etc. All these benefits were part of business regularly carried on by the assessee. Thus unrealised prize money or prizes on unsold tickets or bonus were business receipts and not income by way of winning from lotteries. This was more than clear from the profit and loss account maintained by the assessee. The assessee as agent of Nagaland and Manipur Governments, functioned under their control and supervision. The assessee cannot be deemed to have purchased lottery tickets. Smt. Sinha strongly relied upon decision of Hon'ble Punjab & Haryana High Court in the case of CIT v. Sanjiv Kumar [1980] 123 ITR 187. She also relied upon decision of Hon'ble Karnataka High Court in the case of Visveswaraiah Lucky Centre (supra) and on decision of Bombay High Court in the case of Commercial Corporation of India Ltd. (supra). Smt. Sinha pointed out that in the last decision their Lordships had considered and applied decision of Hon'ble Supreme Court in the case of H. Anraj (supra) relied upon by the counsel for the assessee. Smt. Sinha further submitted that w.e.f. 1-4-1987, the provisions of Section 80TT were amended and, thereafter in similar circumstances, the assessee did not claim similar receipts as "winning from lottery" but as business income. The above clearly showed that amounts in dispute were not "winnings from lotteries".
10. We have given careful thought to the rival submissions of the parties. The assessee, no doubt, succeeded in getting relief Under Section 80TT of the Act from the appellate Tribunal in earlier years, but those decisions are not applicable to the facts in the year before us and are distinguishable. The assessee in those years was not acting as organising agent as is the case in the years under considerations. The Tribunal further did not have the advantage of decisions of Karnataka and Bombay High Courts which as fairly conceded by the learned counsel for the assessee are against the assessee. Similar receipts were held to be business receipts and not from "winnings from lotteries" for the purposes of Income-tax Act. On consideration of detailed judgment of Hon'ble Bombay High Court in the case of Commercial Corporation of India Ltd. (supra), we find that assessee in that case was to organise lotteries on behalf of State of Goa against payment of guaranteed profit to the Government. The terms and conditions in the reported case are quite similar to the terms and conditions of agreements entered into by the assessee with the two State Governments. The question in the reported case was whether the prize money on unsold lottery tickets was income by way of "winnings from lotteries". Their Lordships after considering the terms and conditions of the relevant agreement held that "prize" on unsold tickets was not winnings from lotteries. Their Lordships held that the assessee merely acted on agent of the Government for organising lotteries and had neither purchased lottery tickets nor participated in the draws of the lotteries. In the said decision their Lordships considered dictionary meaning of the words "lottery ticket" and "lottery" and the relevant decisions of the different High Courts on the subject including the decision of Hon'ble Supreme Court in the case of H. Anraj (supra) and held :
It is clear that a lottery is a chance for a prize against a price and, therefore, the element of purchase of lottery ticket must be present and secondly, the purchaser of lottery ticket has a right to participate in the draw. Undoubtedly, it is a sale of goods and lastly it is an income liable to tax.
On consideration of agreement their Lordships held that assessee had entered into an agreement of agency where the Goa State were the "principal" and assessee-petitioner an "agent". By stretch of no imagination the said agreement could be treated as an agreement where sale-purchase of lottery tickets was involved. It is interesting to note that at page 372 of report their Lordships mentioned specifically that States of Nagaland, Manipur, Himachal Pradesh and Madhya Pradesh have entered into similar agreements with some parties to organise and conduct lotteries on behalf of State Governments.
Having regard to the aforementioned decision of the Hon'ble Bombay High Court and similarity between the terms and conditions of agreements involved in the present appeal and those considered by the Hon'ble Bombay High Court, we have no hesitation in holding that prizes on unsold tickets, commission bonus, unclaimed prizes etc., are business receipts and not "winnings from lotteries" in the hands of the assessee. The assessee acted as agent on behalf of the State Governments to organise and conduct lotteries and at no stage purchased lottery tickets. He paid no price for participating and take a chance at any draw. It cannot, therefore, he held that receipts in the hands of the assessee with which we are concerned in the present appeal were winnings from lotteries. The denial of relief to the assessee Under Section 80TT of the Act has to be upheld.
11. Learned counsel for assessee had placed strong reliance on decision of Hon'ble Supreme Court in the case of H. Anraj (supra) to contend that the assessee as organiser and promoter, had all the rights which the purchaser of the lottery tickets acquired. Those rights with all the elements of lottery were acquired by the purchaser from the assessee (promoter) only. The mere disability of the assessee to participate in the draw does not mean that assessee possessed lesser rights than holder of a lottery ticket. In this connection 1d. counsel for the assessee drew our attention to descriptions at page 181 of the report. He also drew our attention to separate observations made by S.S. Mukherjee, J. (as Hon'ble Chief Justice then was) and in particular to the remarks in the last para of the decision referred to above.
12. We have considered carefully the judgment of Hon'ble Supreme Court. We find nothing in the decision which would advance the case of the assessee. The relevant observations of their Lordships were considered and applied by the Hon'ble Karnataka High Court to arrive at conclusion that similar receipt was not "winnings from lotteries". The decision of Supreme Court does not suggest that assessee as organiser of lotteries on behalf of the State Governments can be said to have purchased lottery tickets for a price and was entitled to participate in the draw. In our considered view, decision of Hon'ble Karnataka High Court fully covers the controversy against the assessee. Respectfully following the aforesaid decision and after examining the facts of the case, we hold that assessee is not entitled to deduction Under Section 80TT of the IT Act.
13. In the next ground of appeal for the A.Y. 1984-85, the assessee has challenged the disallowance of Rs. 12,62,288 Under Section 37(3A) of the Act. The learned CIT(A) upheld the disallowance with the following remarks :
2. Next ground is against the disallowance made Under Section 37(3A). The ITO has considered (a) car expenses Rs. 23,609, (b) car depreciation Rs. 15,722, (c) car insurance Rs. 2,466, (d) hotel payments Rs. 2,321, (e) conveyance Rs. 4,940, (f) expenses on advertisement and publicity Rs. 1,23,09,883 for purposes of Section 37(3A). It was claimed that expenses on advertisement and publicity were obligatory and Section 37(3A) was not attracted as also expenses on result publication. The ITO did not accept the contention of the appellant when it was held that there was no clear line of distinction between advertisement and publicity as also result publication. Shri Gupta contends that the ITO misread the facts. It is contended that 106 draws were held in respect of lotteries organised by the appellant and result of each of these draws was liable to be published in a number of Newspapers as stipulated in the terms of contract. It is contended that the total amount involved on result publication is Rs. 72,23,861 out of the total claim of Rs. 1,23,09,483, the balance of Rs. 49,17,611 being scheme announcement or advertisement expenses. Shri Gupta contends that whereas the expenses at (a) to (e) only fall within the purview of Section 37(3A), the same on advertisement and result publications, do not fall within the meaning of Section 37(3A). We have heard Shri Gupta and seen the relevant record. While agreeing that result publications apart from being under the terms of contract cannot be called advertisement or publicity and not covered Under Section 37(3A), the same cannot be said of Scheme Announcement expenses being advertisement expenses. During the course of the appellate proceedings, the appellant was called upon to substantiate the claim with regard to the result publication expenses at Rs. 72,23,861 as per break up given. A certain number of bills were selected at random and the ITO was called upon to verify the contentions of the appellant that the expenditure was related to result publications. On verification, it was found that while publishing the results in the Newspapers, the assessee also announced the next Draw details in the same publication. This is nothing but Scheme Announcement expenses or advertisement expenses and stand covered within the meaning of Section 37(3A). Such expenses are between 15 to 20 per cent. Accordingly, it is held that the following amounts are covered Under Section 37(3A):
(a) to (e) .... Rs. 49,058
(f) Scheme Announcement or
publicity expenses .... Rs. 49,17,611
Further 20 per cent of result
publication expenses of
Rs. 72,23,861 .... Rs. 14,44,772
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Rs. 64,11,441
Less .... Rs. 1,00,000
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Rs. 63,11,441
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20 per cent of the above Rs. 12,62,288 as against Rs. 24,51,780 disallowed by the ITO. Relief Rs. 11,89,492.
In appeal before us it was contended that inclusion of Rs. 14,44,772 in expenses to which Section 37(3A) was applied is totally unjustified when after examination it has been seen that these expenses pertain to result publication which was mandatory for the assessee as per agreements with the State Governments. Merely because date of next draw was also announced, the result publication did not amount to advertisement. Likewise, announcement and publicity of schemes of different draws of lotteries was imperative for carrying the business of lotteries on all India basis. The assessee placed before us copies of result and other publications carried by the assessee. The 1d. D.R. supported the impugned order. After considering relevant material, we are of view that publication of results in the circumstances of the case cannot fall under any of items mentioned Under Section 37(3A) of the Act. We, therefore, delete inclusion of above amount from the purview of Section 37(3A). The other expenses have rightly been held to be falling Under Section 37(3A). There is no doubt that these expenses were incurred wholly and exclusively for the assessee's business falling u/ s 37(1) of the Act. Only to expenses covered by the above provision, Sub-section (3A) of Section 37 was made applicable. Therefore, the disallowance other than on Rs. 14,44,422 is upheld.
14. In the last ground of appeal for A.Y. 1984-85 assessee has challenged charge of interest Under Sections 139(8) and 217 of the IT Act. It was contended that in the assessment order the A.O. did not issue any direction to charge interest. The charging of interest in the notice of demand was invalid. The learned counsel for assessee relied upon decision of Sudhinendra Nath Patra v. ITO [1980] 122 ITR 123 (Cal.) and on decisions of Calcutta High Court in the case of CIT v. Lalit Prasad Rohini Kumar [1979] 117 ITR 603 and in the case of Monohar Gidwany v. CIT [1983] 139 ITR 498. The learned CIT(A) rejected similar contention advanced before him. In his view, return was late and there was short payment of advance tax, and therefore provisions of Sections 139(8) and 217 were duly attracted. The interest demanded was duly charged and calculated in the notice of demand which was part of the assessment order. For the above view, the learned CIT(A) relied upon the decision of ITAT, Jaipur Bench in the case of ITO v. Thanmal Mohanlal [1988] 24 ITD 132 (TM). The learned counsel conceded that decision of the Tribunal was against the assessee. We further find that the Tribunal in the aforesaid decision had considered decision of High Courts relied upon by the assessee and the change made in the statutory provisions. We, therefore, hold that CIT(A) was right in applying the decision in the case of Thanmal Mohanlal (supra). The assessee then made an alternative submission that in this case on account of view taken by the Tribunal Under Section 80TT in earlier years, the assessee bona fidely paid advance tax and, therefore, the interest should be waived. We understand that an application for waiver of interest is already pending with administrative authorities. We do hope that said application would be expeditiously disposed of. With above observations, we confirm the order of CIT(A) on this ground.
Assessment year 1985-86 :
15. In the above assessment year the first ground of appeal relates to disallowance of Rs. 9,28,379 Under Section 37(3A) of the IT Act. This disallowance also includes 20 per cent of expenses amounting to Rs. 16,25,081 incurred on publication of results. For the reasons given in order for A.Y. 1984-85, we see no justification for sustaining this disallowance. It is hereby deleted. The balance amount of disallowance Under Section 37(3A) is upheld.
16. The next ground of appeal relates to disallowance of Rs. 4,51,490 claimed as embezzlement by an employee. The A.O. and on appeal the learned CIT(A) disallowed the claim as case of embezzlement came to the notice of assessee only in March 1986 when a report was lodged with S.H.O, Lajpat Nagar Police Station, New Delhi. The loss due to embezzlement, if any, thus according to the learned authorities arose in A.Y. 1985-86 and not in the assessment year under consideration. The loss claimed was accordingly disallowed.
17. The assessee has come up in appeal. We have heard submission of both the parties. Learned counsel for assessee did not dispute that assessee became aware of embezzlement only in March 1986 and not in the period under consideration. Thus, assessee cannot claim loss in the period under consideration. The learned counsel submitted that the loss be allowed in the next assessment year. The above question has to be determined in accordance with law and no directions can be issued in the appeal under consideration. We do hope that the matter would be considered judicially in the year in which it arises. The disallowance made is accordingly confirmed.
18. In their appeal, the revenue has challenged deletion of Rs. 11,87,875 added Under Section 69 of the IT Act. The AO noted the assessee had acquired a property in Golf Links, New Delhi relating to which IAC (Acquisition), Range-I, New Delhi had held that market value of property was more by sum of Rs. 11,87,878 than the stated cosideration. The above amount was added as undisclosed investment Under Section 69 of the IT Act. On appeal, order of IAC (Acquisition) was set aside by ITAT as per their order dated 18-12-1986. Taking note of order of Tribunal, learned CIT(A) deleted the addition. We have considered impugned order of CIT(A), New Delhi in the light of submissions advanced before us. There is absolutely no material to show that assessee made impugned investment in the acquisition of the property to apply provisions of Section 69 of IT Act. Thus, the addition has rightly been deleted by CIT(A). We confirm his order.
19. In the result, appeals of assessee are partly allowed whereas appeal of the revenue is dismissed.