Income Tax Appellate Tribunal - Hyderabad
Lakshmi Gnaneswara Enterprises And ... vs Income Tax Officer on 22 February, 1999
Equivalent citations: [2000]72ITD295(HYD)
ORDER
O.K. Narayanan, A.M.
1. These are two appeals filed by the assessee. One appeal, ITA No. 254/Hyd/1997 arises out of the proceedings initiated by the AO under s. 201 of the Act for failure of the assessee to deduct tax at source, and the other appeal, viz., ITA No. 253/Hyd/1997 arises out of the proceedings initiated under s. 201(1A) levying interest on the amount of tax not deducted by the assessee at source.
2. Assessee was carrying on a prize scheme, in which 250 members are enrolled. Those members are required to subscribe an amount of Rs. 300 every month for a period of 52 months. Every month, there will be a lucky draw. The winner of the lucky draw will either get a scooter or an equivalent value of Rs. 15,100. Once a subscriber is declared a winner in any such draw, he need not make any payment thereafter. All others, who were not successful in the previous draws have to go on paying the monthly subscription till the completion of the scheme of 52 months. After the completion of the scheme on the expiry of 52nd month, all the remaining subscribers, who were not successful in the monthly draws would get back their contributions without any interest. This is the modus operandi of the prize scheme, which commenced in September, 1985. We are concerned in these appeals with the continuation of the scheme till financial year 1988-89.
3. The AO treated the scheme as a lottery scheme, and cast a liability on the assessee to deduct tax at source as provided in s. 194B. He found that the assessee was at default of not deducting tax at source. So, he passed an order under s. 201(1) directing the assessee to pay the amount that should have been deducted by it as tax at source. He also passed another order imposing interest on this amount under s. 201(1A) in a sum of Rs. 34,378. This order was rectified by another order, whereby the interest charged was modified as Rs. 44,440. The CIT(A), when all these orders were appealed against, set aside the same, by his orders dt. 30th August, 1989, and 26th December, 1989, with a direction to re-examine the matter and give a fresh finding with regard to the applicability of s. 194(B) to the scheme run by the assessee.
4. In pursuance of the said order of the CIT(A) dt. 30th August, 1989 and 26th December, 1989, the AO again passed orders under s. 201 and s. 201(1A) both dt. 29th December, 1995, holding that provisions of s. 194B are applicable to the case of the appellant, and demanding from the assessee, the tax that ought to have been deducted at source by it, and interest thereon. When these orders were agitated in first appeal by the assessee, the CIT(A) by the impugned common order dt. 19th November, 1996, confirmed the view taken by the AO, and dismissed the appeals of the assessee. Hence, assessee has come up in second appeal before this Tribunal.
5. We heard Shri K. S. Viswanathan, the learned counsel for the assessee, and Shri T. Jaya Shankar, the learned senior Departmental Representative for the Revenue. The learned counsel for assessee has raised three sets of arguments before us. The first contention is regarding limitation. The learned counsel argued that even though there is no period of limitation prescribed in statute for a proceeding under s. 201, the Courts of law have consistently taken a view that any order under IT Act has to be passed within a reasonable time. According to the learned counsel, this is especially true in these matters, for which no prescription of limitation is made in the statute itself.
6. According to the learned counsel, the orders originally passed by the AO were set aside by the CIT(A) way back in 1989, but the impugned orders have been passed by the AO only in 1995. According to the learned counsel, this delay of six years, is very undue and unreasonable and unexplainable by the Revenue, and therefore, by virtue of law declared by the Court of this land, these orders have to be found as barred by limitation. In support of this contention on limitation, the learned counsel has relied on the following authorities :
(1) Govt. of India vs. Citadel Fine Pharmaceuticals Ltd. (1990) 184 ITR 467 (SC); (2) K. P. Narayanappa Setty & Co. vs. CIT (1975) 100 ITR 17 (AP); and (3) Raymond Woollen Mills Ltd. vs. ITO (1996) 57 ITD 536 (Bom).
7. The second set of contentions of the learned counsel for the assessee is that the scheme of the appellant does not partake the character of a lottery, as erroneously construed by the lower authorities. According to him, a scheme of lottery essentially has two characteristics. The first is that any subscriber to a lottery scheme should have only a chance of winning. He may or may not win. The second essential condition is that the subscriber irrespective of winning or losing the lottery, should lose the amount paid for participating in the lottery. In support of these contentions, he relied on the following authorities :
(a) Visveswaraiah Lucky Centre vs. CIT (1991) 189 ITR 698 (Kar);
(b) CIT vs. Sanjeev Kumar (1980) 123 ITR 187 (P&H)
(c) Extract from Black's Law Dictionary; and
(d) Extract from Pollock & Mulla's Indian Contract Act.
8. According to the learned counsel, this is a scheme, where irrespective of winning or losing the chance in the draw, one continues to be a member of the scheme, during the entire period of scheme, and at the end of the scheme, all those, who were not successful winners in the draw were to be returned the monies paid by them. Thus, 52 subscribers out of 250 who get the chance of winning the monthly lottery would get scooter or its money worth of Rs. 15,100 and the remaining members are returned the contributions paid at the end of the scheme. Therefore, by any stretch of imagination, according to the learned counsel for the assessee, this scheme cannot be termed as a lottery and assessee cannot be made liable to deduct tax at source.
9. The third contention of the learned counsel is that none of the subscribers to whom the prizes or money equivalent thereto has been given was assessed to income-tax or assessable to income-tax. At this point of time, if such assessments have to be made, they cannot be made as they would be time-barred. Therefore, according to the learned counsel either there is no liability to income-tax as far as the subscribers are concerned or no liability to income-tax could be fastened at this stage, as the proceedings are already time-barred. Therefore, when no liability to income-tax could be legitimately made out by the AO, there cannot be any corresponding liability on the assessee to deduct tax at source. For this proposition, the learned counsel has relied on the decision of the Tribunal in IAC vs. Tata Chemicals Ltd. (1999) 64 TTJ (Mumbai) 26 : (1999) 68 ITD 205 (Mumbai).
10. On the other hand, the learned Departmental Representative strenuously supported the orders of the lower authorities. He argued that the five year or six year period taken for redoing the assessment could be held unreasonable, considering peculiar nature of the facts and circumstances involved in this case. He argued that in the case of reassessment proceedings under s. 147/148 the law has given a longer period of limitation upto 10 years. As compared to such provisions, the period of five or six years taken in this case cannot be treated as unreasonable. He further argued that the scheme of the assessee in this case is clearly a lottery scheme. In this case also, the subscriber has only a chance of winning scooter or its equivalent, which is a mere change, as in a lottery. There is no warrant or rule that subscriber should necessarily lose the contribution made by him to the scheme. Depending on the rules of the scheme, one may or not lose the contribution made by him to participate in the draw. According to him, the crucial aspect is that there is an element of speculation in the scheme, and there is only a chance of winning prize or its money's worth. He has relied upon the decision of the Punjab & Haryana High Court in CIT vs. Sanjeev Kumar (supra).
11. Regarding the third contention of the learned counsel, he contended that the assessee has never proved before the AO that the subscribers to the scheme were not assessable to income-tax. Therefore, that contention has no merit, and the facts of the decision rendered in (1999) 64 TTJ (Mum) 26 : (1999) 68 ITD 205 (Mum) (supra) are distinguishable.
12. We heard both sides and considered the matter in detail. We have gone through all the materials placed by the learned counsel before us, and also the case laws cited by the learned counsel. We find that it would be better if we examine the second contention of the assessee that the scheme was not a lottery. Since the outcome of this contention will decide the necessity or otherwise to consider the other two contentions on limitation, and non-liability of the members to income-tax.
13. 'Lottery' as generally understood is a scheme for the distribution of prizes by lot or by chance. Now, it is conducted even by some State Governments to raise funds for public purposes. The lottery by its strict generic sense may even reach upto the edge of gambling. But still, it is lawfully recognised and accepted scheme of gambling. The 'word' lottery is not defined under the IT Act. The Punjab & Haryana High Court had the occasion to examine the concept of 'lottery' in the decision reported at (1980) 123 ITR 187 (P&H) (supra). The Hon'ble High Court after considering the meaning and intent given in Webster's New International Dictionary, Legal and Commercial Dictionary by S. D. Mithra and Corpus Juris Secundum has held that the element of chance is one of the important relevant factors for considering whether a particular scheme 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 could be a lottery even if the prize money came out of the interest earned from the subscribers' contributions. Now the touch-stone is that if the subscribers have purchased a chance of winning a prize, it can make no difference, whether the prizes are given circuitously from the interest earned from the subscribers contribution or paid directly from their contributions. The Hon'ble High Court of Karnataka in Visweswaraiah Lucky Centre vs. CIT (supra) had examined the scheme, though in a different context. The High Court relying on the definition in the Corpus Juris Secundum held that all the ingredients set out in Corpus Juris secundum must be present to identify the winner and the winnings of the lottery. Therefore, according to the Hon'ble High Court, the winner must be not only a contributor to the prize amount, but also be a participant in the lottery. The subscriber should take the change and contribute the price amount with the hope and intention of winning the prize.
14. On going through the above scope and purview of the term 'lottery' stipulated by the Courts, we find that the following are the necessary ingredients of a scheme to be called a 'lottery' :
(1) Winning of the prize must be a chance.
(2) Subscriber should contribute to the scheme.
(3) The intention of the subscriber should be the winning of the prize, decided by the chance.
15. We also find that the following matters are not decisive in examining whether a scheme is lottery or not :
(i) Subscribers need not lose even the contribution.
(ii) Even if the amount of subscription in distributed or returned, that does not impair the character of the lottery, as losing something is not the essential characteristic.
(iii) The prize may be paid directly out of the proceeds received by way of subscription from the participants or from the interest earned thereon.
16. Let us examine the facts of the present case in the light of the tests laid down by the Courts in the cases discussed above. All the subscribers are contributing by way of monthly subscriptions to participate in the scheme. The monthly lucky draw is taken, and a winner is declared every month to win a scooter or its money worth of Rs. 15,000., Intention of all the subscribers is to win the prize. The subscription monthly made by the members might be refunded to all those who may not win any prize, at the end of the scheme. But such a refund is only an attraction for the members to join the scheme and try their luck. Whether the assessee is paying for the prizes of the lucky winners or for the refund of the contributions to the remaining members at the end of the scheme, it does not effect the character of the scheme, being a lottery. If there is no intention of winning the prizes in the minds of the members at the time of their joining the scheme, they would not have put their amounts monthly with the assessee for as many as 52 months, to get back just their own contributions without any interest because same amount of contributions to any bank account or anything of that sort would fetch them more money by way of interest. It has, therefore, to be concluded that what the assessee is running is not a mere deposit scheme, but a lottery scheme, with the guaranteed refund of the contributions made to participate in the monthly draws to the members who do not win any prizes.
17. So all the tests laid down by the Courts discussed in the above paras are satisfied in this particular case. Refund of the contributions might have been provided by the rules of the scheme run by the assessee, but the same would not alter the character of the scheme run by the assessee, being a lottery. Therefore, we hold that the scheme conducted by the assessee was a lottery, and the assessee was liable under s. 194B to deduct tax at source, while paying the prize money to the winners in the scheme. Therefore, this point is decided against the assessee.
18. Once we have found that the scheme conducted by the assessee is a lottery and the assessee was bound to deduct tax at source the other consequences under s. 201 and s. 201(1A) would follow. The next contention to be examined is whether the proceedings challenged before this Tribunal are barred by limitation. As rightly pointed out by the learned counsel for the assessee, even if no period of limitation is prescribed by the statute for initiating and concluding a proceeding, those proceedings must be initiated and concluded within a reasonable period. This is an accepted principle. The Hon'ble Supreme Court in Citadel Fine Pharmaceuticals case (supra), relied upon by the learned counsel, has stated what amounts a reasonable time, observing that it depends on the facts and circumstances of each case and no general principles could be laid down on this point. The jurisdictional High Court in the decision reported at (1975) 100 ITR 17 (supra) has also held that no specific period within which penalty may be levied is fixed by IT Act, but there should not be any inordinate delay and penalty should be levied within a reasonable time. In the present case before us, the original proceeding were set aside by the CIT(A) sometime by the end of 1989 and the impugned orders in the present proceedings were passed by the end of 1995, approximately six years later. In these cases, the assessee has not furnished the details of the scheme before the AO, before initiating the proceedings. The assessee has not deducted tax at source. He has not filed any statutory return regarding deduction and payment of tax, etc. before the AO. Therefore, the AO was constrained to collect all the necessary details before finalising the present proceedings. Considering the peculiar facts and circumstances of this case, the period taken by the AO to pass the consequential orders in pursuance of the orders of the first appellate authority in the original proceedings cannot be said to be undue and unreasonable, so as to warrant being treated as barred by limitation. In the case reported in (1975) 100 ITR 17 (supra), rendered by the jurisdictional High Court, the order imposing penalty was passed in 1963, whereas the assessment was made in 1954, in a matter relating to asst. yr. 1946-47. In that case, the delay was prima facie inordinate and unreasonable. The facts of the present case are entirely different. In these proceedings, we cannot say that there was inordinate or unexplainable delay, so as to warrant invoking the provisions of limitation on grounds of reasonableness of delay. Therefore, we find that this contention of the assessee is also not sustainable, and the present proceedings cannot be treated as time-barred. That contention is also decided against the assessee.
19. The third contention of the assessee, that the subscribers of the scheme were neither liable to income-tax nor any proceedings for assessment could be initiated against them at this stage, as the same would be time-barred, needs to be examined now. In support of this contention, as already noted, the learned counsel relied upon the decision of the Tribunal in (1999) 68 ITD 205 (supra) The facts of the present case and the facts in the case considered by the Tribunal in (1999) 64 TTJ (Mum) 26 : (1999) 68 ITD 205 (supra). are entirely different. In that case, the assessments of the payees have been completed. It is only therefore, the Tribunal has held that there was no subsequent liability on the part of the concerned persons to deduct tax at source. Here in this particular case, the assessee has not furnished any details about the taxability or otherwise of the subscribers. The subscribers have not filed any forms declaring that they are not assessable to tax. It was not pleaded before the AO that the subscribers were already assessed to tax and in their assessments, the prize monies distributed by the assessees have already been considered. Therefore, when these relevant material and details are not made available before the AO, there is no merit in the contention of the appellant that he is not liable to deduct tax at source on the ground that the subscribers are not liable to income-tax and even if liable, proceedings against them are barred by limitation. The contention of the assessee in this behalf is too vague and devoid of merit and details, and it only deserves to be dismissed as a mere afterthought. When the assessee has not brought any material details to plead that the subscribers to the scheme are not income-tax assessees and therefore, he was not liable to deduct tax at source, the AO is under no statutory obligation, to verify those aspects to bail out the assessee from the default on its part in non-deduction of tax at source. Neither s. 194B nor s. 201 cast any such obligation on the AO. On the other hand, the provisions of sub-s. (1) of s. 201 clearly state that if the person liable to deduct tax at source does not deduct tax, or after deducting such tax, fails to pay the tax as required by or under the Act, he shall be deemed to be an assessee in default in respect of the tax. Once the assessee is declared as an 'assessee in default' under the statute in respect of that tax, the AO is perfectly justified in demanding the payment of tax from the assessee. Therefore, the third contention is also decided against the assessee .
20. What is demanded by the AO by the impugned orders under s. 201 and s. 201(1A) is the amount of tax that the assessee was liable to deduct while paying out prize monies to the subscribers under the scheme operated by him which he failed to deduct, and interest thereon leviable under the statute, itself, Once it is held that the scheme operated by the assessee satisfies all the tests to be branded as a scheme of lottery, the provisions of s. 194B are attracted, and for failure on the part of the assessee under the said provisions, the consequences under s. 201 and s. 201(1A) are to follow. In the circumstances, the orders of the AO in these provisions are perfectly justified and they have to be upheld.
21. We have considered all the contentions raised by the appellant in the light of submissions, case laws and materials, and held that the scheme run by the assessee was a lottery and consequently assessee was liable to deduct tax at source; that the proceedings under s. 201 and s. 201(1A) challenged before us are not barred by limitation; and that the AO was very much justified in demanding tax that assessee failed to deduct while paying out the prize money to the winning subscribers and interest thereon. In the circumstances, all the contentions of the assessee in these appeals are rejected.
22. In the result, both these appeals are dismissed.