Income Tax Appellate Tribunal - Pune
A.C.I.T. And D.C.I.T. vs Shri Raghunath B. Taware on 31 May, 2007
Equivalent citations: [2008]302ITR136(PUNE)
ORDER
C.L. Sethi, Judicial Member
1. All these three appeals have been filed by the revenue for A.Y 1991-92, 1992-93 and 1994-95.
2. the issues involved in all these appeals are common and identical, hence these appeals were consolidated and heard together.
3. The grounds of appeal raised by the revenue in these three assessment years are similarly worded, raising identical and common issue. The grounds raised by the revenue read as under:
1. On the facts and in the circumstances of the case, the learned CTI(A) erred in treating tote receipts as income from business to be charged to tax Under Section 28 when in fact the A.O. has rightly taxed under the had 'ncome from other sources' in view of specific provisions of Section 56 of the I.T. Act, 1961,
2. On the facts and in the circumstances of the ease, the Ld. CIT(A) failed to appreciate the fact that the income received by the assessee from tote receipts is in fact winnings from horse race and is liable to be taxed (a) 40% as provided under Section 115BB of the I.T. Act.
3. The order of the learned CIT(A) on the issue may be vacated and that of the A.O. be restored.
4. The appellant craves leave to add, amend or alter any of the above grounds of appeal.
4. We proceed to decide the issue raised in these three appeals by making reference to the assessment order as well as the order of the CIT(A) tar A.Y 1991-92, having common and identical facts for AY 1992-93 and !l994-95.
5. The facts as emerging from the assessment order as well as the contentions of both the parties may be set out in brief as under:
i) The assessee is an individual, he is a Book Master who ran a business of booking races in the name and style of M/s. Raghunath and Company. The assessee along with the business of booking races, also bets on horse races in order to minimize the probable losses. Such winnings are popularly called as "Tote Winnings".
(ii) In A.Y 1991-92, the assessee showed income from Tote Winning at Rs. 11,49,600.
(iii) In the opinion of the A.O, the Tote Winning were covered Under Section 56(2)(ib) and as such the assessee was to be taxed at flat rate of 40% as provided Under Section 115BB of the Income Tax Act 1961.
(iv) The assessee did not offer tax from winning of tote amounting to Rs. 11 ,49,600 at flat rate of 40% as required Under Section 115BB of the Act.
6. The return of income declaring total income of Rs. 97,230 filed by the assessee on 22.10.1991 was processed Under Section 143(1)(a) on 20.03.1991 on the return income. There was no regular assessment made Under Section 143(3) of the Act. The A.O therefore, had taken a view that the income by way of tote winning amounting to Rs. 11,49,600 has escaped assessment to be taxed at the rate of 40% as required Under Section 115BB of the Act, and the A.O therefore initiated proceedings Under Section 147 read with Clause 2(c)(ii) of Explanation 2 to Section 147 of the Act. The A.O also obtained approval from the AC IT before issuing the notice Under Section 148 of the Act. The A.O thereafter issued notice Under Section 148 to the assessee on 20.02.1996 which remained un-complied with by the assessee. The A.O, therefore, issued a letter is well as a notice Under Section 142(1) on 14.12.1990 requiring the assessee to furnish certain details for completing the assessment for the concerned year. In the said letter, the A.O specifically raised the issue as to the chargeability of the tax at flat rate of 40% by stating as under:
3. ...It appears that you run a business of booking races in the name and style of M/s. Raghunath & Co. You also bet on horse races in order to minimize the probable losses and winning from such belting is known as Tote Winnings. During the A.Y 1991-92, you have shown income from such Tote Winning at Rs. 11,49,600 which arc covered Under Section 56(2)(ib) of the I.T. Act, 1961 r.w.s 115BB of the said Act. Therefore, the flat rate of 40% as prescribed Under Section 1 15BB is applicable in your case. Although you have shown Rs. 84,46,610 as collections and Rs. l 1,49,600 as winning from Tote declaring the same as business income and tax was not offered at flat rate of 40% as prescribed Under Section 115BB of the Act. You are requested to explain why the Oat rate of 40% as provided Under Section 115BB shall not be applied in your case of winning from Tote on the amount of Rs. 11,49,600 thereby taking the same accordingly and not as business income as declared by you.
7. Thereafter, on 28.01.1999, the assessee filed a written submission stating the nature of business carried out by the assessee in the year under consideration. The assessee's submissions has been discussed by the A O as under:
...He filed a written submission on 28.01.1999 inter-alia staling the nature of the business carried out by the assessee during the year under consideration. In elaborate submission the A.R tried to identify the "Book Maker" land also the "Punter". It was stated by the A.R that the assessee was carrying on the business of Book Maker in Racecourse and the profit of the said business were regularly taxed by the Income Tax Department as Business Income. It was also emphatically stated that since last number of years the assessee has been disclosing "'Tote Winnings" in his P&L account as integrated components of his business receipts and such amounts have although been taxed as Business Income of the assessee under normal tax rate. The A.R referred to the A.Y 1993-94 inter-alia stating that an elaborate explanation was furnished there so as to define the "Tote Winning" and its nature thereof before the A.O in course of scrutiny I assessment for that year. The said assessment order was passed after application of mind and considering all the issues by the ITO. It was further contended that whenever there was excessive belling on a particular horse, the Book Maker transferred that bet cither to another Book Maker or a Tote of R.W.I.T.C and this is known as making a "Hedge Bel". Such "Hedge Betting" was permissible as per Rules of R.W.I.T.C. It was narrated further that as per rules of R.W.I.T.C the total amount of bets laid over by one Book Maker with another should not exceed the total amount of bets accepted by him on a particular horse at the time of such layover. If the total amount of bets laid over by one Book Maker with another exceeded the total amount of bet accepted by him on a particular horse at the time of such layover then the excess bets laid over are treated as independent bets and betting tax is levied on such excess amount. It was emphasized that the assessee never laid over the bets in excess of bets accepted by him. By saying so the A.R. staled that a Book Maker was duly bound to accept the betting from "Punters" to the extent of limits prescribed by the R.W.I.T.C. All the books of accounts of the assessee were always subject to audit by the R.W.I.T.C and the assessee had to immediately submit the account and prescribed particulars to the R.W.I.T.C before the finish of each race. Further to that the A.R submitted that in the business of a Book Maker Hedge Bel is a regular future and this hedging is done by a Book Maker to cover up his possible feature losses. In the absence of Hedge Belting a Book Maker would always be exposed to heavy financial losses, and the business of a Book Maker would become a losing proposition. Finally it was staled by the A.R that the department's proposed action of taxing these Tote Winnings Under Section 1 15BB of the I.T. Act, 1961, at a flat rate of 40% would not be correct and should not be adopted.
8. After considering the submissions of the assessee, as well as the arguments of authorized representative, the A.O had taken a view that the receipts from the tote winning is to be charged to tax at the flat rate of 40% by observing as under:
I have considered the submissions made by the A.R in the letter filed on 28.01.1999 and also A.R's argument in this score and I do not agree with the submissions made by the A.R due to following reasons:
(i) The definition of the word "Income" was widened by the Finance Act, 1972 w.e.f 1.4.97 and according to memorandum explaining the provisions of the "Finance Bill'1. 1972, winning from lottery, horse races, gambling etc were made chargeable to tax under the head 'income from other sources."
(ii) The facts of the case of the appellant are that the income is from horse race winning and in view of specific provision of Section 56 of the I.T. Act 1961 it has to perforce fall under the head "Income from other sources". It is immaterial whether the appellant's winnings were as "Hook Maker" or as a "Punter" so far as the bets were in the nature of gambling. This is also re-inforced in item (iv) of para 1.3 of the memo explaining provisions in the "Finance Bill", 1972.
(iii) Reference may be made to para 102 of the "Budget Speech of Minister of Finance. 1986-87" and note on douses of the "Finance Bill, 1986" which do no suggest an iota of the view expressed by the A.R and these do not at all imply that the winning from lottery, horse races, gambling etc are not to be taxed at fiat rate of 40%. The Honourable Finance Minister in the Budget Speech for 1986-87 has categorically stated that income from any winning from horse race, gambling or betting races etc would not be aggregated with other income and as such these wind fall profits would be taxed at a flat rate of 40% of the gross receipts, douse 26 "Note Of douses Of Finance Bill, 1986" reiterated that under the existing provisions any income by way of lottery, card games, horse races etc was chargeable to tax under the head "Income from other sources" and that the new Section 1 15BB then it was inserted, sought to provide that any income as referred to above should be charged to income tax at a fiat rate ol'40%.
(iv) As regards A.R's submission wherein he has tried to distinguish his bets by a "Book Maker" and bets by a "Punter", it can safely be said that the same does not make any difference as to whether.; horse race winnings are on the bets placed by a "Book Maker" or bets placed by a "Punter", as the character of winnings from such bets is from horse race or gambling and does not change the nature of receipts and as such, such receipts always falls within the preview of Section 56 of I.T. Act. 1961 as "Income from other sources" and have necessarily to be taxed at a special rate prescribed in Section 115BB of the said Act. In this regard, it is pertinent to mention that in the book "Law and practise of Income Tax" by Palkiwala in Volume 1 at page 320, the Learned Authors have observed that Section 56(2)(iv) provides that all winnings covered by Section 2(24)(ix) shall be assessed as "Income from other sources". Therefore, in no case can such winnings be assessed Under Section 28 of the I.T. Act, 1961 even where the gambling activity amounts to a business. The Learned Authors have also observed on the same page that Section 80TT is replaced by Section 115BB which does away with the favourable to lotteries and uniformaly taxed of winning covered by Section 2(24)(IX) (a) 40%. The Authors have also observed in the same volume that the income from maintenance of a racing establishment made in some cases be taxable under the Head "Business" while in other case it may be taxable under the head "'Income from other sources" but winning from races must in all cases be charged under the letter head referred to Section 56(2)(ib) r.w.s 2(24)(ix). On page 320 again the Learned Author have also observed that Section 58 has been introduced to deny any deduction or any expenditure or allowance under any provisions of this Act in computation of income from such winnings.
5. In view of the aforesaid discussion. I firmly disagree with Contention raised by the A.R as above and opine that receipts from "Tote Winnings" are taxable under the head "Income from other sources" and not as "Business Income" and the said receipts arc required to be taxed at the special rate as provided in Section 115BB of the I.T. Act, 1961. I, accordingly, charge tax @ 40% being rate applicable for these year for such winnings while charging the tax on the "Idle Winnings" for this year under consideration. Since the assessee did not file any return against notice Under Section 148 of the I.T. Act, 1961 and in no occasion the tax on Tote Winnings was correctly paid, penalty proceedings Under Section 271(1)(c) initiated.
6. In this connection it is pertinent to mention that while deciding the Assessment order passed Under Section 143(3) of the I.T. Act, 1961 for the A. Y 1993-94 as erroneous as well as prejudicial to the interest of revenue, the earned CIT, Pune vide order No. Pn/263.ADI(P)/13/95-96 dated 12.03.1996 observed as under:
In the circumstances, the order passed by the A.O is erroneous in the eyes of Law as well as prejudicial to the interest of revenue. Hence the A.O is directed to bring to tax the receipts shown by the assessee under the head "Tote Winnings" as income from other sources and the said receipts be taxed at the special rates as provided in Section 115BB. The A.O is further directed that no deduction in respect of any expenditure or allowance in connection with such income be allowed to the assessee in view of Section 58(4) of the I.T. Act. The A.O will modify his order dated 25.03.f994, accordingly.
The Learned CIT(A)-II, Pune vide his order No. Pn/11/Wd.2(2)/13/96-97, dt. 27.08.96 for the A.Y 95-96 confirmed the order of the A.O wherein "Tote Winnings" were taxed (a), 40% as per provisions of Section 115BB of the I.T. Act, 1961.
7. The above findings of the learned CIT, Pune and Learned CIT(A)-II, Pune also strengthen the findings of the undersigned.
9. Being aggrieved, the assessee preferred an appeal before the CIT(A) who decided the issue in favour of the assessee after discussing the assessee's submission and reasons as under:
3. The representative of the appellant argues that the appellant is a book maker controlled by the R.W.I.T.C regulations. The regulations of R.W.I.T.C permit a book maker to indulge in hedging transaction only to cover his booking losses. As per these regulations, the betting made by a book maker should not exceed the amount of receipts on any particular date. The entire transactions of receipts and payment of a particular date are necessarily regulated and audited by the concerned authorities of R.W.I.T.C. In case the book maker indulges in belting of an amount exceeding his receipts in a particular race such book maker would be disqualified. In the appellant's ease there was not a single date on which there occurred a default of this nature. The appellant was required to made hedge betting only as part of his business transaction because if he does not do this there would be many occasions when the price fixed on Certain horse in a given race would render him to suffer great losses. This was so because certain horses are favourable and certain other horses are hot so favourable. In ease he fixes the prices as per business ethics on horses as per their demand, he would be made to suffer losses and he would not be in business. The appellant demonstrate that once the Assessing Officer has charged to tax the "Tote Winnings" in A,Y 1991-92. the appellant has suspended these activities from the subsequent Financial Year and in such Financial Years, the appellant has actually suffered losses. This proves the point that hedge betting is an integral part of the business of a book making and it is pointed out that each book maker will necessarily have to indulge in this activity without which there would be no profitable business. In view of this, the betting made by the appellant was no like any other normal betting to be taxed under the head 'income from other sources". On the contrary it was belting connected with the activities of his business as a book maker and therefore, the same should be treated as his business income.
4. I have considered rival submissions. 1 find that the contention of the representative of the appellant and the appellant are factually correct. 1 find that hedge betting is a part of the business transactions in respect of business of book making inasmuch as hedging is permitted and not treated as speculative transaction within the meaning of Section 43(5) of the Income-tax Act, in respect forward transactions where actual delivery takes place. This being so, the winnings disclosed as "Tote Winnings" by the appellant cannot be charged to tax as 'income from other sources' because it will have to be include as part of the profits and gains of the business to be charge to tax Under Section 28 of the Act. The Assessing Officer is therefore directed to charge to tax the income as profits of the business and not as per the provisions of Section 1 1 5BB of the Act.
10. Hence, the department is in appeal.
11. The learned departmental representative has submitted brief notes arguments which is reproduced here as under:
Brief Notes on Arguments By The Department About the erroneous findings by the learned CIT(A)
1. The observation of the learned CIT(A) on Page 2 Para 3 of his appellate order for the A.Y 1991-92 that In case the book maker indulges in betting of an amount exceeding his receipts in a particular race such book maker would he disqualified is a perverse finding of fact and contrary to the Rule No. 9 of the Rules and Regulations for Bookmakers as framed by the R.W.I.T.C. In view of the said Rule, only die betting tax becomes payable on such excess amount and the Bookmaker is nor disqualified.
2. The observation of the learned CIT(A) on Page 2 Para 3 of his appellate order for the A.Y 91-92 that The appellant demonstrated that once the Assessing Officer has charged to tax the "Tote winnings" in A.Y 91-92, the appellant has suspended these activities from the subsequent Financial Year and in such Financial Years, the appellant has actually suffered losses is clearly unsustainable in view of the decision of the Hon. Supreme Court in the case of Sumati Dayal reported in 214 ITR Page 801, wherein it has been held that one would not give up an activity yielding or likely to yield a large income merely because the income would suffer tax. 'The inference drawn by the Hon. CIT(A) is against the preponderance of human probabilities and hence deserves to be vacated.
It appears that while deciding the issue, the learned CII(A) was guided by the aforesaid two reasons due to which his impugned order has become contrary to the law for the reasons mentioned hereinafter, and hence needs to be vacated.
Legal submissions in the matter
1. A bookmaker is given a liberty to lay over a bet but is under no compulsion to lay over the bet if he otherwise decides. While taking a decision of laying over the bet, a bookmaker also considers the chances of a particular horse winning the race for which a bookmaker has to apply his knowledge about the factors involved in the game of race such as the age of a horse, past performance of a horse, & pedigree of a horse and the competence of the other horses competing in the race. Excess betting is not the only factor which compels a bookmaker to lay over the bet. If a bookmaker has good knowledge about the horses he can opt for not laying over the bet and earn more profits. When a bookmaker lakes a decision of laying over a bet in fact he steps into the shoes of a Punter. The act of laying over a bet may incidentally amount to hedging but that is of no consequence because basically and predominantly an act of laying over a bet is nothing but an act of indulging in racing by a bookmaker.
2. There is no floor limit prescribed for laying over a bet. i.e a limit over and above which a bookmaker must lay over a bet is not prescribed and a bookmaker is free to lay over a bet irrespective of the amount of betting accepted by him if he so desires. Laying over is not a compulsion and therefore the same becomes an act of racing by the bookmaker even though the purpose may be of saving the unanticipated losses.
3. It is pertinent to note that lay over of a bet is not of an equivalent win amount. It may be of a lesser or more win amount, because even a bookmaker accepts the bets on different win amounts on a particular horse depending upon the mood of the Punters which is always changing faster than the speed of a wind. The chances and predictions about a horse winning a particular race are always rapidly changing and in turn the Win amount on a horse also rapidly changes.
4. The lad that a bookmaker can lay over a bet in excess of his bet amount proves that lay over is a special mode of racing permitted for the bookmakers and it is a special privilege granted to a bookmaker.
5. All the above factors demonstrate that laying over of a bet has all incidents of racing of a Punier and the incidental advantage [lowing there from is that the same reduces the risk of a bookmaker which is of no Consequence because the act of laying over a bet is basically an act of playing the race.
6. It is pertinent to note that in case of bookmaker the legislature in its wisdom has not inserted an identical provision like Section 43(5) of the I.T. Act 1961. When the legislature has inserted Section 115BB of the I.T. Act 1961, nothing had prevented the law makers in providing for a similar provision like Section 43(5) of the Act. This clearly shows the intention of the law makers that winnings from races irrespective of the purpose are to be taxed at special rates. In the circumstances, the example of Section 43(5) cannot come for the rescue of an assessee.
7. It is to be noted that winnings from Horse Races are to be taxed under the head Income from Other Sources even though a person may be a Punter. The rationale behind enacting this provision is that the gambling Is never a Business or Vocation of a person as observed by the Hon. Madras High Court in the case of Janab A. Syed reported in 39 ITR page 660 wherein it has been held as under:
What is a bet? A bet is merely an irrational agreement that one person should pay another person something on the happening of an event. A, agrees to pay B, something if C's horse runs quicker than D's or if a coin comes one side up rather than the other side up. There is no relevance at all between the event and the acquisition of property. The event does not really produce it at all. It rests, as 1 say, on a mere irrational agreement.
We are in respectful agreement with these observations. To these observations we can add: when a person places a bet and loses it, that money is gone; if he wins the bet he gets his own money plus what the other party has lost as his bet; in neither ease can the placing of a bet be equated to an investment or even an expenditure to produce an income or receipt.
What that learned judge said about the realization of successful bets would also apply, at any rate, as far as the assessee was concerned, to his receipts of prize money or stakes from racing horses. The success of a given horse, so much dependent on chance, to which both betting and racing have to be correlated, was not the event which itself produced the income. That of course is not conclusive in deciding the question, whether betting and racing could ever be viewed as constitution a business.
8. Section 155BB is widely worded and does not make distinction between the casual winning and habitual winning from races. The section is applicable to all sorts of winnings irrespective of the fact whether the same are causal or incidental or integral parts of a business or even the same may be flowing from the main business activity. The lion. Supreme Court in the case of Dr. K.R. Lakshmanan reported in 223 ITR Page 601 has held that Horse racing is a game where the winning depends substantially and preponderantly on skill. Since the language of the section is very clear and unambiguous, one need not refer or look at the purpose of inserting the said section as has been held by the lion. Supreme Court in the case of Orissa State Ware Housing Corporation reported in 237 ITR Page 589.
9. The matter can be viewed from another angle also. Section 74A of the I.T. Act defines horse race means a horse race upon which wagering or belting may be lawfully made. Therefore any act of laying over a bet would certainly come-within the purview of racing.
10. For the A.Y 1993-94 and A.Y 1995-96 the assessee has accepted that the Tote Winnings arc to be taxed Under Section 115BB of the I.T. Act 1961. In the circumstances the assessee cannot now agitate the same in the present appeals in view 6f the decision of the lion. Supreme in the case of Kaumudini Narayan Dalai reported in 249 ITR page 219. The principle propounded in the said decision applies will full force to the assessee also. The assessee has not made out a case as to why he has not challenged the orders for above both the years [wherein substantial tax was involved] and therefore now it does not lie in the mouth of the assessee to agitate the well settled/resolved issue in his own case.
12. The learned Counsel of the assessee has also given notes on "Tote Winning" as under:
1. The persons who bet on horse races arc known as punters. They have two choices for putting their bets. They can put the betting on the official counters of the concerned Race Club. The race club at the end of the race, distributes the dividend from out of the collection of bets, after deducting the state tax. The punters however, find that they are likely to get more money if they place bets with licensed bookmakers. The bookmakers are licensed by the race club and they are required to strictly follow the rules and regulations of the club. There books are required for inspection at any time by the club authorities. The rules of the race club are primarily designed to protect the interests of the punters.
The bookmakers accept bets from the punters on various races. Bets are accepted for (i) Winners i.e. winning horse in the particular race, (ii) for place i.c first three place in a race of 8 or more horse or first two places in a race of 7 or less horses. There are other bettings also but winners and places are the main bets. When a punter bets he places his amount and he is given a card showing the rate of odds he has played. The odds are the chance of the concerned bet. for example when the odds for Winner arc 100 to 175 it means that it the concerned horse wins, the punter will get his Rs. 100 back and Rs. 1 75 more. Along with the bet the punter is required to pay the stale lax and club tax, which is 23% at present. This amount he does not gel back. The current rate of odds by the concerned bookmaker is displayed on the board in his office. If the punter loses his bet. he gets nothing. The betting money he has put is lost by him while the bookmaker will stand to gain. The odds won by the punters arc paid by the bookmaker out of his own fund which comprises Of the bets collected by him from the punters. If the amount payable to punters is more than the total collection made by the bookmaker, he puffers a loss in other words, he has to pay out of his pocket. He will be in profit, if all the punters or substantial number of punters lose.
3. The acceptance of the bets usually starts half an hour before the race. In that time, the bets are accepted. The odds for each horse depend on his ability to win that particular race. This will depend on number of factors such as genealogical history of the horse, reputation of the trainer, jockey, the past history etc. The odds go on changing as lime passes and the time of the start of the race arrives. On start of the race, the betting is stopped.
4. As stated earlier, the profit or loss of the book maker will depend on the bets he has collected on different horses. A favourite horse will have small odds while less likely horse will have very high odds. But even then heavy betting on a favorite horse means a prospective loss to the bookmaker. Let us assume that all bets are on a favourite horse. There are no bettings on any other horse. In such a case, when the favourite horse wins, the punters will get not only their bets but also additional amount as per the odds on which they have played. In this situation, the bookmaker stands to make a substantial loss. To save this situation or to minimize his loss, the bookmaker is permitted by the club rules to put his own bets with another bookmaker who may have better resources. Normally such betting is done on the same horse on which substantial booking is made. No doubt when the bookmaker places his bets with other bookmaker he will get the odds offered by that bookmaker. If suppose bookmaker A has accepted odds at 100 to 175 and when he bets with another bookmaker B, odds of that bookmaker are 100 to 125. In this situation when the concerned horse wins A will no doubt have to shell out 175 to the punter but to the extent of 125 he gets recoupment from B. This belting of one bookmaker with another bookmaker is known as hedging the bet. The purpose of the hedging is to reduce the loss. Of course, it may happen that hedge betting itself may result in loss, if the horse on which bet was placed docs not win.
5. The hedge betting is common practice among the bookmakers. It is entirely different from ordinary betting. Firstly, it is permitted and subject to rules of the concerned race club. Secondly, as per the rules, no bookmaker is permitted to bet more than the betting he himself has received. Thus it is controlled by the rules. Thirdly, the purpose of the hedge betting is entirely to protect against the possible business losses. In that sense, it is incidental to the business of the bookmaker. It is integral part of his business and has to be considered as part of his business income and not as ordinary winning from horse racing which was considered to be casual and non-recurring receipt before 1972. The hedge betting can be compared to re-insurance. Just as the insurer in case of substantial risk undertaken may reinsure with other insurer so also the bookmaker is taking reinsurance on his belling by betting with other book makers. The total result of the hedge belting in a year may be a profit or loss. It so happens that in the years under consideration, the result of the hedge betting was a profit which is shown as Tote Winning
6. Since the Tote winning is different in character and purpose, it cannot be considered as ordinary winning from horse racing and subjected to tax at 40% as prescribed under section.
13. Thereafter the learned Counsel for the assessee has also submitted a written rejoinder to the departmental representatives contentions and legal submissions, as under:
On behalf the assessee a note had been submitted explaining the nature of tote winnings. It was submitted that a bookmaker is permitted by the Rule 9 of Race Club to make a hedge bet with another bookmaker. But this rule puts certain restrictions and in no ease, total amount of bets laid over by one bookmaker with another should exceed the total amount of bets accepted by him on a particular horse at the time of such lay over, If this limit is crossed then on the excess bet, belling tax is required to be paid. The decision which the bookmaker makes for laying over the bet depends mainly on the prospect of heavy loss likely to be suffered by him in ease there is heavy belling on a horse, which is favorite. Depending on his financial capacity, the bookmaker takes this decision and it is entirely a (business decision. The assessee has never laid over excess bets and was never required to pay belling tax on such excess belting. It has already been pointed out how the hedge bet is different from the normal betting by a punter. It is going to be the submission of he assessee that winning from race horse referred to in Section 115BB is such normal betting by a punter and not the hedge bet which is part of the business receipts of the bookmaker.
2. The principal points on which the learned D.R. is assailing the order of the learned C.I.T.(A) is on two counts. Firstly he equates hedge bet with normal bet and to put it in the words of the learned D.R...the bookmaker steps in the shoes of the punier. Secondly it is submitted that for purpose of Section 115BB one has to consider winning from horse racing and it is irrelevant whether such winning is from business or not.
3. As regard to the first point, in the note given by the assessee, it has been pointed out that there arc three most important characteristics of hedge bet, which distinguishes it from normal bet. To say therefore that the bookmaker steps in the shoes of the punter is totally misconceived. If he however crosses the limit laid down in Rule 9 he may possibly brought on par with the punter but this is not the case here. In Para I of the departmental note it is staled that there is no compulsion lo lay over the bet and in making such hedge bet the bookmaker docs consider on the basis of his knowledge, the chances of the horse winning the race. This shows total non consideration of the submission of the assessee where it | was pointed that the lay over of hedge bet is made when there is excessive betting on a particular horse and the bookmaker considers that lie is likely to suffer substantial loss beyond his means possibly if the horse eventually wins the race. This is financial and business decision which is totally different from the mindset of the punter who makes his bet only to make money by taking a chance and not because of any considerations which ^bookmaker has in his mind. Para 2 and 3 again shows the misconception |in the mind of the learned DR. It is wrong to say that laying over is not a compulsion and therefore the same becomes an act of racing by the bookmaker though the purpose may be of saving "unanticipated" (?) losses. The learned D.R. has misunderstood when he says that the lay over bet is not equivalent to win amount. The odds proposed by the bookmaker do not depend on the mood of the punier but on the number of bets made on a particular horse. These odds will no doubt go on changing but entire exercise takes place within the specified lime. The assessce does not agree with the statement of the learned D.R. that laying over of a bet has all the incidents of racing of a punter and the reduction of loss is incidental. In fact, it is other way round. It is for reducing anticipated loss that the hedge bet is made.
:4. The second point made by the learned D.R. in Para 8 of his note is that Section 115BB is widely worded and does not make distinction between casual winning and habitual winning and that it makes no distinction whether the winnings are casual or arise from the main business activity According to the learned D.R. since the language is clear and unambiguous one need not refer to the purpose of inserting the said section. For this purpose, the reliance is placed on the decision of Hon. S.C. in 237 (TR 589. In this context the assessee wishes to rely on the decision of the Hon. S.C. in the case of B.C. Srinivas Shelly 128 ITR 294. This decision was concerning the capital gain on transfer of goodwill. The definition of "capital asset" was very clear in the Act. yet the Hon. S.C. considered the entire scheme of taxation of capital gain. It was held that the provisions of Section 45 are meant to apply only to those "capital assets" which have date of acquisition and cost of acquisition. Thus the situations have arisen where the courts have gone beyond the clear language and have considered the entire scheme of taxation to give proper meaning. Taking cue from this decision of Hon. S.C., the assessee submits that Section 115BB no doubt seeks to tax winning from horse race and the word horse race is to have the same meaning as given in Section 74A. But Section 74A defines horse race and not what exactly is meant by "winning from horse race". For this purpose, one must see the provisions' of Section 2(24)(ix), Section 56(2)(ib) and Section 115BB together. First two provisions have been introduced by the same Finance Act 1972 Section 115BB was introduced by Finance Act 1986 seeking to replace Section 80 TT which was introduced by Finance Act 1972. In all these sections reference is to same type of income which is referred to Section 2(24)(ix) namely winning from any lottery or crossword puzzle or race including horse race etc. In other words, Section 115BB seeks lo tax those incomes which were brought within the ambit of "income" and which prior to 01.04.72 were part of casual and non-recurring receipts, liven before 01.04.72 the receipts arising from business or exercise of a profession or occupation were outside the scope I of Section 10(3) as per proviso to that section. In those times, the winning by punter was not considered to be casual and non-recurring. But hedge bets of bookmaker even in those times being arising from business of bookmaker were not exempted Under Section 10(3). The purpose of Section 2(24)(ix) was to rope in those receipts which prior to 01.04.72 were casual and non recurring incomes which included winnings by a punter in a horse race.
5. A. reference may be made to the decision in the case of Sumati Dayal 214 ITR 801. It was observed by on. Court on P 808 as follows:
The observation by the Chairman of the Settlement Commission that "fraudulent sale of winning ticket is not a usual practice but is very much an unusual practice" ignores the prevalent malpractice that was noticed by the Direct faxes Enquiry Committee and the recommendations made by the said Committee which led to the amendment of the Act by the Finance Act of 1972 whereby the exemption from tax that was available in respect of winnings from lotteries, crossword puzzles races was withdrawn.
The above observations make it very clear that Section 2(24)(ix) sought to bring the casual and non-recurring receipts like wining from horse racing within the tax net. The hedge bets, which were part of business income and never exempt could not have been intended to be covered by Section 2(24)(ix). Since Section 2(24)(ix), 56(2)(ib) and Section 115BB are part of the same scheme of taxation, the hedge bets are outside that scheme and arc to be considered as part of normal business income and to be taxed at normal rules. In other words, the term "winning from horse race" is contextually inapplicable to income from hedge bets made by the assessee bookmaker as part of his business activity and within the rules of the Race Club. The tote winnings are thus rightly held by the learned C.I.T.(A) not to be subjected to tax separately as made by the A.O. seeking to apply Section 115BB. A reliance can be placed on the decision of Hon. Bombay Bench in the case of 13th I.T.O. v. J. Dubash 14 TTJ 462. This was not a case of bookmaker but reliance is placed on the ratio of this decision that once the receipt is from business same cannot be considered Under Section 56(2)(ib). Since at that time Section 115BB was not on statute book, the question did not arise as to whether that Section would have applied. For their reasoning, the Hon. Bench relied on the decision of lion. Karnataka High Court in the case of Mysore Sales International Ltd. v. C.I.T. 117 ITR 64 which was a case where prize won by the lottery agent was not considered as winning from lottery.
6. There are no doubt decided eases which deal with the winning from horse racing but they deal with the normal betting or winning by way of stake money by the owner of horse owner. These are not useful for deciding the question arising in the present appeal. For record, reference may be made to following cases:
1. Lala Inder Sen In re. 8ITR 187 (All)
2. Janab A. Syed Jalal Saheb v. C.I.T. 39 ITR 660 (Mad)
3. C.I.T. v. S.S. Thiagarajan 129 ITR 115 (Mad)
4. N.K. Agarwal v. C.I.T. 124 ITR 371 (Cal)
5. C.I.T. v. Mrs. Sunila Kumar 208 ITR 807 (Cal)
6. Amar Kndiah V. I.T.O. 106 ITR 73 (AP)
7. M.A.A. Raoof v. I.T.O. 152 ITR 228 (Mad).
In one of the above decisions, the case of bookmaker is considered except in the case of Janab A. Syed Jalal Saheb (referred by the learned D.R.) in Para 26 of the judgment it is observed that "bookmakers is an Obvious ease of belting being his business". In this ease lion. Madras High Court held that income from betting and horse racing cannot be considered as income from business as gambling did not constitute business. But they did make an exception in the case of bookmaker and held that betting is his business. This decision of Madras High Court holding that gambling was casual and non recurring income and cannot be considered to be business was held to be no longer good law after introduction of Section 2(24)(ix) in the case of M.A.A. Roof. The decision of 'Calcutta High Court in Mrs. Sunita Kumar was concerning the loss from sale of race horse. This has no relevance to the present case under consideration.
7. for the above reasons, the assess submits that hedge belting resorted to reduce loss by the bookmaker is part of his business income land contextually such receipts is outside the scheme of taxation of Section 4151MB. The contentions of the learned D.R. to the contrary are untenable [in law. Reference made by the learned D.R. to Section 43(5) is irrelevant in the present case and reference of the learned C.I.T.(A) to that section seems only to highlight the fact that hedging having attributes of [speculation is still considered to be exception to speculation. Not much lean be made from these observations. The learned D.R. in para 10 refers to the feet that for A.Y. 1993-94 and 1995-96, the assessee accepted the decision. These years were covered under KVSS. In any case there is no estoppel in tax laws and on matters of legal interpretation each year is separate and the assessee is not precluded from agitating the issue in the years under consideration.
Alternate Submission:
Assuming without admitting that tote winnings are to be considered as winning from horse race and to be taxed Under Section 115BB, it is [found that in the years under consideration there is no proper [determination of total income by the learned A.O. Section 115BB enjoins the [A.O. first to compute the total income. In the present ease for all years under appeal, there is loss computed from business which however is not [set off as mandatorily required by Section 71. If the loss is so set off and then [total income is computed, the income by way of tote winning will be only part which is 'included' in the total income. If such proper calculation is [made, the income from the tote winning will be substantially less than [considered by the learned A.O. and it is this income which is required to be taxed Under Section 115BB. This contention is of course without prejudice to the main argument of the assessee that Section 1 I5BB has no application to tote [winning. The same is made to show that if larger relief is not held to be allowable, it may be held that the smaller relief was due as per law.
Sd/-
(K.A. Sathe) Advocate
14. Both the parties were heard and rival contentions have been considered. We have gone through the terms and conditions for a Bookmaker operating at the race course being formulated by Royal Western India Turf Club, (RWITC) Ltd. We have carefully perused the material on record.
15. The present assessee is a licensed Bookmaker operating at the Pune race course under the terms and conditions for a Bookmaker's license formulated by RWITC Ltd. It is not in dispute that the Bookmaker operates at the race course under the rules and regulations of the license granted to them by the RWITC. The assessee is a Bookmake used to accept; bets for WIN or PLACE from the punters on the horse races as per the guidelines formulated by RWITC. The profit and loss of the Bookmaker on a particular horse will depend on the bets he has collected on different horses from punters. In a situation where favourite horse having high odds on which the punters have placed bet wins, the punters will get additional amount as per the odds on which they have placed the bet either for WIN and PLACE. In this situation, the Bookmaker stands to make a substantial loss. To save this situation or to minimize the loss, the Bookmaker is permitted by the Club Rules to lay over bets with another Bookmaker as provided under rule 9 of the terms and conditions for a Bookmaker's license formulated by RWITC. Rule 9 of the rules and regulations for Bookmaker is as under:
9. In the event of a Bookmaker making a I ledge Bet with another Bookmaker, he should note in his Betting Book the name of the Bookmaker with whom the he( is laid and also the ticket issued lo him.
The total amount of bet's laid-over by one Bookmaker with another should not exceed the total amount of bets accepted by him on a particular horse at the time of such lay over.
In case the amount of laid over bets exceeds the total amount of bets accepted by that Bookmaker at that time, then the last laid over bet will be treated as an independent bet and betting tax will have to be paid accordingly.
16. On perusal of the aforesaid Rule 9 of Rules and Regulations for Bookmaker, it is clear that a Bookmaker is allowed to make a hedge bet with another Bookmaker subject to the condition that total amount of such hedge bet laid over by one Bookmaker with another should not exceed the total amount of the bets accepted by him on a particular horse at the time of such lay over, and in case the amount of laid over bets exceeds the total amount of bets accepted by that Bookmaker on a particular horse at that time, then last laid over bet will be treated as an independent bet and betting; tax will have to be paid by that Bookmaker accordingly. It is, thus, clear that one Bookmaker is allowed to make a Hedge Bet with another Bookmaker only to the extent of the total amount of bets accepted by him on a particular horse at the time of such lay over, meaning thereby, that one Bookmaker cannot make a hedge bet with another bookmaker in excess of the amount of the bet accepted by him on a particular horse at the time of hedging. Therefore, there is a restriction not to make a hedge bet in excess of the total amount of the bet accepted by him on a particular horse at the time of such lay-over. The hedge betting is only allowed to be made by one Bookmaker with another Bookmaker only to the extent of total amount of the bet accepted by one Bookmaker on a particular horse at the time of hedge betting and not otherwise. The restriction imposed as to the amount of Hedge Betting by one Bookmaker with another is with regard to the total amount of bets accepted by one Bookmaker on a particular horse at the time of such Hedge Betting and not with regard to the total amount of bets accepted by that Bookmaker on all horses. In other words, the limit of the amount of Hedge Betting is to be considered with reference to the total amount of betting accepted by that Bookmaker on a particular horse at the time of such lay over. Therefore, the limit of the amount of Hedge Betting is to be seen not with reference to the aggregate of total amount of bets accepted by that Bookmaker on all horses at the time of such lay-over. Thus, the Bookmaker is allowed to make Hedge bet with another Bookmaker to the extent of total amounts of bets collected by him on horse wise basis and not with reference to aggregate total amount of bets collected by him on all the horses. This thus makes it clear that hedge betting by one Bookmaker with another in respect of the bets already accepted by him on a particular horse is an integral part of the activity of a Bookmaker accepting bets on horse-races from others. In case the amount of hedge betting exceeds the total amount of bet accepted by one Bookmaker on a particular horse at the time of such hedging, then the excess hedge betting will be treated as an independent bet and betting tax will have to be paid by the Bookmaker accordingly. It is, thus, clear that the laying over the bet by one Bookmaker with another Bookmaker in excess of the amount of bet accepted by one Bookmaker on a particular horse at the time pf laying over shall be treated as an independent bet, and not a hedge bet to cover the loss that may arise from the bet already accepted by the Bookmaker on a particular horse at the time of such lay over. Rule therefore, makes it clear that Bookmaker is only allowed to lay over the bet with another Bookmaker with a view to hedge loss arising from the bets accepted by him on a particular horse at the time of such laying over only to the extent of the total amounts of the bets accepted by him on a particular horse at the time of such laying over of the bet with another Bookmaker. Laying over the bet by one Bookmaker with another Bookmaker in excess of the total amount of the bets accepted by that Bookmaker on a particular horse at the time of laying over of the bet with another Bookmaker shall always be treated as independent bet and bet tax will have to be paid accordingly. In other words, in case the amount of the laid over bets by one Bookmaker with another Bookmaker exceeds the total amount of bet accepted by that Bookmaker on a particular horse at the time of such laying over, the Bookmaker shall step in the shoes of the punter in so far as such excess of the bet laid over by that Bookmaker is concerned. However, with regard to the bet laid over by one Bookmaker with another Bookmaker for an amount not exceeding the total amount of the bets accepted by him on a particular horse at the time of such laying over, the Bookmaker cannot be considered to have been stepped in the shoes; of the punter. The status of the Bookmaker making a hedge betting with another Bookmaker for an amount not exceeding the total amount of bets accepted by him on a particular horse at the time of such hedging shall be that of a Bookmaker and not of a punter. In this situation, the Bookmaker takes the decision only to hedge the loss that may arise to him from the bets accepted by him from a punter on a particular horse and not to win any amount on betting as done by the punter while placing the bet with the Bookmaker. Here the decision of the Bookmaker is to hedge the loss that may arise from the bet accepted by him on a particular horse from the punter and not otherwise, provided the total amount of the bet laid over by that Bookmaker with another Bookmaker does not exceed the total $mount of the bets accepted by him on a particular horse at the time of such lay over. There is no doubt that it is the business decision of the Bookmaker whether to make hedge bet with another Bookmaker with a view to cover the losses that may arise to him on the bets accepted by him on a particular horse. The laying-over of bets by one Bookmaker with another Bookmaker in respect of the bets accepted by him on a particular horse is made with a view to hedge the loss that may possibly arise to him from the bets accepted by him on a particular horse. The such laying over of bets by a Bookmaker is a step or action to protect himself against anticipated loss that may arise from the bets already accepted by him on a particular horse. Therefore, such hedge treatment to the bets given by one Bookmaker is integrated with the bets already accepted by a Bookmaker on a particular horse, and the receipts/payments from both the activities are thus an integral part of the business of a Bookmaker.
17. In the present case, the lay over bet by the assessee Bookmaker with another Bookmaker falls under the category of laying over the bet with another Bookmaker for an amount not exceeding the total amount of bets accepted by the assessee on a particular horse at the time of such laying over It is not the A.O's case that the assessee had laid over bets in excess I of the total amount of the bet accepted by him on a particular horse at the time of such laying over. Therefore, the total amount received by the assessee from the bets laid over by the assessee Bookmaker with another Bookmaker shall not be treated to be the winning from horse race as is commonly perceived in the case of a punter. It is well known that punters do indulge in betting on horse race with a view to winning some amount by chance, in case the horse on which the bet is placed !wins the race as per the odds placed by the punters. However, in the case of the Bookmaker, the Bookmaker is permitted to lay over the bets with another Bookmaker with a view to hodgo the loss that may arise to him from bets accepted by him on a particular horse provided the total amount of bets laid over to another Bookmaker does not exceed the total amount of bets accepted by him on a particular horse at the time of such laying over. The position of the Bookmaker laying over the bet with another Bookmaker for an amount not exceeding the total amount of bets accepted by him on a particular horse at the time of such lay over is distinct and different from that of a punter, and, therefore, he cannot be deemed to be stepped in the shoes of the punter, while making a hedge bet with another Bookmaker within the limit of the total amount of bet accepted by him on a particular horse at the time of such laying over.
18. In support of the view that the hedge betting by one Bookmaker within the limit of the total amount of the bets accepted by him on a particular horse is an integral part and parcel of his activity of accepting the bets on a particular horse as a licensed Bookmaker under the Rules and Regulations contained in that behalf, we may derive some strength from the Board's Circular No. 461 dated 09th July, 1986 explaining the scope and effect of Section 58(4) and Section 115BB inserted by the Finance Act6, 1986 w.e.f. 01/04/1987.
19. A new Sub-section (4) to Section 58 was inserted in the Act with a view to provide that no diction shall be allowed, for and from assessment year 1987-88, in respect of any expenditure or allowance in computing the income by way of winnings from lotteries, cross-word, puzzles, races including horse races (not being income from the activity of owning and maintaining race horses), card games and other games of any sort or gambling or betting of any form or nature whatsoever, which were provided to be charged at a specified flat rate under the provisions of Section 115BB(i), which section was also inserted by the Finance Act, 1986, w.e.f. 01/04/87. The said Circular reads as under:
(xiii) Provisions of a flat rate of tax on winnings from lotteries, crossword puzzles, races, including horse races etc. 31.1 Under the existing provisions, any income by way of winnings from lotteries, crossword puzzles, races, including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever is chargeable to tax under the head "Income from other sources" along with the other income of an assessee. By inserting a new Section 115BB in the Income-tax Act, it has been provided that any income of a casual and non-recurring nature of the type referred to above, shall be charged to income-tax at a flat rate of 40 per cent. This provision will, however, not apply to income from the activity of owning and maintaining race horses. For this purpose, a new sub-section has been added to Section 58 to provide that no deduction shall be allowed in respect of any expenditure or allowance in computing the income from the aforesaid sources. What has to be borne in mind is that apart from the general exemption of Rs. 5,000 under Section 10(3), no further allowance or deductions are admissible against the gross winnings except in cases where there is a diversion by overriding title as in the case of certain lotteries where a certain percentage has to be foregone to the Government/agency conducting the lotteries. Consequent amendment has also been made in Section 197(1)(a) of the Income-tax Act.
31.2 These amendments will apply in relation to the assessment-year 1987-88 and subsequent years.
On reading the said Circular, it is clear that the Board is of a view that though; no deductions are allowed in respect of any expenditure or allowance in computing the income from the aforesaid sources as provided in Section 58(4) of the Act, where there is a diversion of an amount by overriding title as in the case of certain lotteries where a certain percentage has to be foregone to the Government/Agency conducting the lotteries, the deduction will be allowed. In other words, it implies that where there is an integral relation of any payment as to very source of activity, the same shall be treated as a part of the same primary transaction or activity, and cannot be viewed independently so as to divorce the same from its source. The hedge betting by one Bookmaker with another Bookmaker within the limits of the total amount of bets accepted by him on a particular horse and the bets accepted by that Bookmaker on a particular horse against which such hedge betting is made are integral part of the same activity, and are thus to be considered on same footing as in the case between the gross winnings from the lotteries and certain percentage deducted therefrom by the Government or lottery Agency conducting the lotteries
20. In the light of the discussion made above, it is thus, clear that Bookmaker makes a hedge bet to cover up the possible loss that may arise from the bets accepted by him in respect of a particular horse, and the amount so received by the Bookmaker from the hedge bets placed with another Bookmaker not in excess of the total amount of the bet accepted by him on a particular horse, at the time of such hedging has close nexus or link with the total amount received or paid for the bets accepted by him oh a particular horse. In other words, the amount received by such hedge betting laid over by one Bookmaker with another Bookmaker is an integral part of the assessee's business activity as a Bookmaker provided the total amount of such hedge betting should not exceed the total amount of the bets accepted by him on a particular horse at the time of such hedging, and, thus, are to be treated as part and parcel of the, assessee's business receipts or payments as a Bookmaker and not otherwise. These receipts from such hedge betting cannot thus be considered in isolation from that of the receipts and payments made by the assessee as a Bookmaker on bets accepted by him so as to permit the revenue authority to tax the same independently at the maximum marginal rate of tax specified under Section 115BB of the Act. It is not in dispute that normal receipts of a Bookmaker from accepting the bets from others is not assessable as winning from horse-races and is not so assessed by the A.O. also. Thus, the receipts from such hedge-betting is to be assessed in the same manner as in the case of other receipts from bets accepted by a Bookmaker.
21. For the foregoing reasons, the order of the CIT(A) is thus, upheld. In the result, all these three appeals filed by the department are dismissed. The judgment was announced in the court on 31.05.2007.