Delhi High Court
Anuj (Toffee) Garg vs Income-Tax Officer. on 12 March, 1990
Equivalent citations: (1990)37TTJ(DEL)208
ORDER
1. This is an appeal by the assessed and the point raised is whether an income by way of winning from lottery run by Sikkim Govt. would be taxable.
2. The facts are in a narrow compass. The assessed, a minor, had bought a ticket of a lottery run by Govt. of Sikkim. He was lucky enough to get the winning ticket. The prize amount was Rs. 63,500. The Govt. of Sikkim deducted income-tax of Rs. 5,438 and remitted the balance of Rs. 58,062 by means of a cheque drawn on State Bank of Sikkim at Gangtok. The assessed filed his income-tax return in which he showed the receipt of the prize money as income and claimed credit for the tax deducted at source. The ITO did not allow the tax deduction credit on the ground that the tax deducted was not credited to the Govt. of India account.
3. The assessed appealed. The AAC agreed with the ITO that the tax deduction by the Sikkim Govt. could not be considered as eligible for tax credit. The assessed, thereupon, for the first time, claimed before the AAC that the entire income is not taxable under the Income-tax Act, 1961. This claim was rejected by the AAC on the ground that under section 5, income accruing or arising, whether in India or outside, would be taxable. Therefore, this amount was correctly brought to tax. However, with regard to tax deduction at source, he was of the view that it was an expenditure incurred by the assessed on earning income and, therefore, it should be allowed as a deduction.
4. Against this finding, the assessed has come in further appeal. Before we go into the issues raised in this appeal, it would be necessary to have an idea of the position of Sikkim under the Indian Constitution. Prior to 26-4-1975, Sikkim was a foreign country. Any income accruing or arising there from would be treated as income country. Any income accruing or arising there from would be treated as income accruing or arising in any foreign country. However, by the 36th amendment to the India Constitution in 1975, Sikkim became part of the Indian Union. This, amendment was effected by introducing Article 371F. There were, however, certain safeguards provided in the Article itself regarding the continuation of the Rules and Regulations of the Sikkim Govt. which existed prior to the merger as well as for extending the provisions of India laws to that territory. Clause (k) stated that, all laws in force immediately before the appointed date, i. e., 26-4-1975 in the territories comprised in the State of Sikkim or any part thereof shall continue to be in force until amended or repealed by the competent legislative or other competent authority. The extension of the laws of India to Sikkim was provided by clause (n) which reads as follow :
"The President may, by public notification, extend with such restrictions or notifications as he thinks fit to the State of Sikkim, any enactment which is in force in a State in India at the date of the notification."
5. We are concerned with the accounting year ending 31-3-1982, and, during this time, the Income-tax Act had not been made applicable to the territories of Sikkim. Therefore, the law in force prior to the merger, continued to be applicable. As a matter of fact, the Income-tax Act was made applicable only a Notification made in 1989 and the first assessment year would be 1990-91.
6. The assesseds case for canvassing is that income accruing or arising in Sikkim would not be taxable in India, as per clause (k) of Article 371F. It is submitted that since the law in force prior to merger would continue to apply and since no notification under clause (n) has been issued by the President, the Income-tax Act would not apply. This submission, that Income-tax Act, as such, would not apply, will not cover a case of a citizen living in India and having income accruing or arising in Sikkim. It is necessary to see, whether the provisions of section 5 of the Income-tax Act would be sufficient to bring to net such income. According to the assessed, the provisions of section 5 would not be applicable and his reasoning is that the Income-tax Act does not apply to Sikkim and, therefore, section 5 which is part of this Act, would also not be applicable. It appears to me that such a submission is over-simplifying the issue. The Income-tax Act would not be applicable to, say income accruing in America, but nevertheless, it can be brought to tax in India in the case of a resident and ordinarily resident by virtue of section 5(1) (c). To this position, the assesseds submission is that section 5(1) (c) would not apply because that applies to income accruing and arising outside India and Sikkim is not outside India. Then the question would arise, whether section 5(1) (a) or section 5(1) (b) would be applicable. According to the assessed, both these clauses would not apply, because the Income-tax Act does not reach Sikkim income.
In this case, two main issues arise. First, what is the situs of the income in this case. Is it Sikkim or it is India ? In other words, does this income accrue or arise in India. This issue can be easily answered. There is no difficulty in holding that the income accrues or arises in Sikkim only. The Govt. of Sikkim has entered into a contract with the buyers of the lottery tickets, according to which, the Govt. is bound to pay to the winning ticket holder a certain sum of money. The situs of this contract is obviously Sikkim.
The tickets are made out at Sikkim. The fact that they are sold outside Sikkim, would not make any difference to this position. By agreeing to the terms of the contract for running the lottery, each buyer of the tickets commits himself to a contract made in Sikkim. The payment is made in Sikkim as per this contract. The presentation of cheque by the assesseds bank in Delhi is to the Sikkim Bank and the payment is made in Sikkim. So the income accrues and arises in Sikkim.
7. The next question is, whether section 5 would apply to such income. Section 5(1) (c) definitely will not apply because that deals with the income accruing or arising outside India and Sikkim is part of India. Under these circumstances, the question is, whether section 5(1) (a) or section 5(1) (b) would apply. I do not see why section 5(1) (a) and section 5(1) (b) would not apply. The assesseds contention that these two sections would not apply because the Income-tax Act has not been made applicable to Sikkim does not appear to be acceptable. As stated earlier, Income-tax Act is not applicable to various other countries and still the income accruing and arising in foreign countries can be brought to tax provided the assessed is resident and ordinarily resident. I see no reason why, in the case of a resident and ordinarily resident, any income accruing or arising anywhere in the world should be exempted. Section 5 casts a very wide net and all incomes accruing any where in the world would be brought within its ambit.
8. The mere fact that section 5 would be applicable does not automatically mean that all the provisions of the Income-tax Act and the Finance Acts would be applicable. We must remember that, under Art. 371F (k), the existing rules and regulations prior to the merger of Sikkim to India have been preserved. The Govt. of Sikkim had their own notification in respect of the income accruing and arising therein. Their notification dated 21-4-1970 had extended its field to lotteries also be virtue of another notification in respect of the income accruing and arising therein. Their notification dated 21-4-1970 had extended its field to lotteries also by virtue of another notification dated 5-2-1974. As per this notification, winning from lottery of Rs. 10,000 and above would be assessed to Income-tax. These notifications are preserved under clause (k) of Art. 371F of the Constitution of India.
9. The result, therefore, is that, while undoubtedly section 5 would be applicable, the existing notifications of Sikkim also would be applicable. Thus, on the same income, it would appear that Income-tax would be payable, under the notification of the Govt. of Sikkim as well as under Income-tax Act, 1961. But such a position would not be acceptable in law. Since Sikkim is part of India for the accounting year, there would appear to be, on the same income, two types of Income-taxes. The Supreme Court has observed in Laxmipat Singhania v. CIT [1969] 72 ITR 291 (at 294 : "It is a fundamental rule of law of taxation that, unless otherwise expressly provided, income cannot be taxed twice". The Patna High Court in the case of Tara Iron & Steel Co. Ltd. v. Union of India [1970] 75 ITR 676 had stated "a taxing statute should not be interpreted in such a manner that its effect will be to cast a burden twice over for the payment of tax on the taxpayer unless the language of the statute is so compelling that the court has no alternative than to accept it. In a case of reasonable doubt, the construction most beneficial to the taxpayer is to be adopted".
10. So it is clear enough that only one tax law would be applicable and not both. By virtue of clause (k) to Art. 371F, it would be clear that only the Sikkim Regulations on Income-tax would be applicable. Therefore, it cannot be brought to tax by applying the rates of Income-tax Act, 1961.
11. The next issue which will arise is, whether the income from Sikkim could be included for rate purposes. In order to do so, section 86 had to be attracted to the facts and it is clear that section 86 would not be applicable on the facts of the case. Therefore, the income cannot also be taken into account for rate purposes.
12. The assesseds contentions are, therefore, accepted and the inclusion of the income from Sikkim Lotteries would be deleted.
13. The appeal is allowed.