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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: SHRI OM PRAKASH KANT & SHRI SANDEEP SINGH KARHAIL
PER SANDEEP SINGH KARHAIL, J.M.
The present appeal has been filed by the assessee challenging the impugned order dated 16/11/2021, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, [“learned CIT(A)”], for the assessment year 2017–18, which in turn, arose from the order dated 22/08/2019, passed by the Centralized Processing Centre, Bangaluru, under section 154 of the Act.
In its appeal, the assessee has raised following grounds:
Serenity Traders Pvt. Ltd. ITA no.2230/Mum./2021
“1. The CPC/Id. Assessing officer (AO)/NFAC erred in holding that the change of income head by computerized system is justified. 2. The CPC / Id. Assessing officer (AO)/NFAC erred in holding that the change of income head by computerized system is justified. 3. The NFAC did not give proper opportunity for hearing and submissions to the appellant and violated the principles of natural justice. The CPC ignored the judicial precedents. NFAC did not call for any details and expected the appellant to file further details without seeking them. 4. The impugned addition is made in “IFOS”, but corresponding deduction is not made in “Business income” resulting into double counting of income in rectification order.”
The only grievance of the assessee in the present appeal is against treating the income earned from unsold lottery tickets as „income from other sources‟ instead of „income from business‟.
The brief facts of the case pertaining to the issue, as emanating from the record, are: The assessee is a lottery dealer. For the year under consideration, the assessee filed its return of income on 12/10/2017, declaring total income of Rs.8,62,28,150. The return of income was processed under section 143(1) of the Act, determining the taxable income at Rs.11,42,28,150, after making adjustment of Rs.2,80,00,000, on account of income by way of winning from lottery tickets, etc., under section 115BB of the Act. Thereafter, the assessee filed rectification application under section 154 of the Act against the aforesaid intimation, however, the same was disposed off by the Centralized Processing Centre, Bangaluru, vide order dated 22/08/2019, without granting any relief to the assessee.
In appeal against the rectification order passed under section 154 of the Act, the learned CIT(A) dismissed the appeal filed by the assessee and held that there is no evidence to show that the assessee was authorised by any Page | 2
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agreement / memorandum of understanding to keep the unsold lottery tickets and receive the prize from the unsold stock of lottery. The relevant findings of the learned CIT(A) are as under:–
“4.1 Ground No. 1, 2 and 3 relates to changing the nature of income resulting into change in head of income, based on data base of form 26AS. It is an undisputed fact that the appellant had receipt of Rs. 2.80 crores u/s 1948 of the Act appearing in 26AS/ TDS Statement for FY 2016-17, which is in the nature of winnings from lottery or crossword puzzle and the appellant prima facie failed to declare it under the head of income "IFOS and therefore, the CPC while processing the return of income, made an adjustment u/s 143(1)(a)(vi) of the Income tax Act. Further, the appellant being a trader of lottery, income from trading activity only has to be assessed under business income. It is wrong to say that any winning from unsold lottery ticket shall also be its business income: In general practice, any unsold tickets are communicated to the lottery organizer before the timing of draw so that the unsold lottery tickets should not be taken into account in the draw and the appellant failed to furnish any agreement/MoU/agency agreement, which authorizes the appellant to keep the unsold lottery ticket without intimation to the lottery organizer and received the prize from the unsold stock of lottery. Also, the appellant failed to furnish any documentary evidence in support of the claim that this receipt has already been included in the business receipt. Therefore, I do not find any menit in the argument of the appellant that this receipt is a business receipt without furnishing any evidence to show that it was authorized by any agreement/MoU that the appellant shall be authorize to receive prize on unsold stock. Also, all these facts are not emanating from the ITR and 26AS so the mistake is not apparent from the record. Hence, all these grounds are dismissed.”
Being aggrieved, the assessee is in appeal before us.
During the course of hearing, the learned Authorised Representative (“learned A.R.”) by referring to the decision of the Co–ordinate Bench of the Tribunal in M/s. Pooja Marketing v/s PCIT, ITA no.2596/Mum./2019, A.Y. 2014–15, order dated 24/05/2021, submitted that in case of similar lottery trader, income from prize received from unsold lottery tickets has been held to be taxable under the head “Income From Business”. The learned A.R. further submitted that facts in assessee‟s case are similar to the facts in the aforesaid decision and filed a comparative chart in this regard.
Serenity Traders Pvt. Ltd. ITA no.2230/Mum./2021 7. On the other hand, the learned Departmental Representative (“learned D.R.”) vehemently relied upon the impugned order passed by the learned CIT(A).
We have considered the rival submissions and perused the material available on record. As per the assessee, all the transactions relating to its business has resulted in income from business. The purchases, losses, unsold stock of lottery tickets, expenditure and all the activities are pertaining to business only. Further, the assessee being a seller / trader, all/any income generated from lottery tickets is exclusively in the nature of business income, unlike in case where the person earned income from lottery tickets by winning the prize. As per the assessee, it has not purchased the lottery tickets with a chance to win the prize and the same were purchased in the course of business for the purpose of trading and, therefore, income arising therefrom can be taxed only under the head “Income from Business”. It has been also submitted that in the course of lottery dealing, every dealer ends up with some quantity of lottery tickets unsold at the end of draw, which are not taken back by the main distributor. In such circumstances, purchase price paid by the lottery dealer to the extent of unsold lottery tickets is loss. However, this loss is mitigated by prize money attributed to prize winning lottery tickets out of unsold lottery tickets lying with the trader.
We find that the Co–ordinate Bench of the Tribunal in Pooja Marketing (supra), dealt with a case, wherein the taxpayer was carrying out business as a “Sole State Level Distribution” for distributing lottery tickets in the State of Maharashtra and in this process has won prize from unsold lottery tickets, Page | 4
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which were not taken back by the main distributor. The Co–ordinate Bench, vide aforesaid decision dated 24/05/2021, held such prize money from unsold lottery tickets as „income from business‟ of the taxpayer firm. The relevant findings of the Co-ordinate Bench are as under:–
“8.3. At the outset, we find that the Id PCIT had categorically agreed to the fact that the assessee is engaged in the business of purchase and sale of lottery tickets thereby categorizing it as a dealer in lottery tickets. This fact is absolutely not in dispute. We find that the id PCIT had also stated that the purchase of lottery tickets and sale of lottery tickets are part of business activities of the assessee firm and any profit derived thereon would have to be taxed as business income of the assessee firm. Since purchases and sales are treated as part of business activities, the purchase returns and sales returns also would only be business activity of the assessee. We are now concerned with sales returns of lottery tickets to the assessee. The stockists return the unsold lottery tickets to the assessee firm and which are taken cognizance by the assessee firm as 'sales returns'. We find that the assessee is engaged only in one activity of distribution of lottery tickets. It is not engaged in participation in the draw of lottery tickets. The participation in the draw of lottery tickets in respect of unsold stock lying with it (pursuant to sales returns from stockists) is an automatic fall out of business and becomes indivisible business activity with that of distribution of lottery tickets. Hence prize winnings from unsold lottery tickets would also constitute part of income arising from distribution of lottery tickets and to be construed as part realization of cost of unsold lottery tickets. Therefore, it would be incorrect to construe the unsold lottery tickets as a separate activity. Obviously, the assessee firm had indeed paid monies for purchasing the tickets and it had indeed made sales to its stockists. If the stockists are not able to ultimately sell the tickets to retailers consumers, as the case may be, and return those unsold tickets to assessee firm and in the event of Government or National Distributor refusing to get back the unsold tickets from the assessee firm, then any prudent assessee would try to mitigate its loss by atleast winning the prize monies on such unsold tickets to the extent of such tickets qualify as winning tickets in the draw held by the Organising State. Admittedly, the value of unsold lottery tickets in the hands of the assessee, but for the prize monies, would be NIL. If an item of closing stock does not have any market or does not remain a marketable commodity, then such item of closing stock would be valued at NIL. Reliance in this regard is placed on the landmark decision of Hon'ble Madras High Court in the case of K Mohammad Khan Sahib vs CIT reported in 56 ITR 360 (Mad) wherein it was held that : "It seems exceedingly difficult to accept the reasoning adopted by the Tribunal in justifying the addition. The Tribunal purports to hold that if the assessee had written off this stock, he would have been justified in doing so. It accepts also the position that the fancy market for snake skins had disappeared, as is strongly supported by the circumstance that the turnover had fallen from Rs. 25 lakhs 10 Rs. 6 lakhs. Its reference to well accepted; principles of accountancy that the assessee could reduce the value and place: "nil" value only after some lapse of time when it became clear that the skins were only dead stock, in fact, supports the very action taken by the assessee. It has been found as a matter of fact that in so far as variant and baby skins are concerned, during the whole of the previous year, only Rs. 12 worth of the first variety and Rs. 112 worth of the second variety could be sold. In the case of cobra skins, against the total purchases of nearly 2 lakhs of skins, the assessee had been able to sell till February about 1,70,000 skins, and, according to the correspondence which he produced, there had been no demand for these skins subsequently. It also seems to be accepted by the Tribunals below that there was no local market for snake skins of any variety. The question is, Page | 5
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whether, in these circumstances, the assessee, in the normal course of its accounting, is not entitled to value the price of the skins at the market price which, in the present case, happens to be "nil". We are also unable to see how revenue is affected by this method of valuation. If these skins which are valued at "nil" happen to find purchasers in the next accounting year, it is obvious that the entire sale value will figure as a profit in the books and the assessee would have to pay tax on the entire sale value and not only on the difference between the sale value and the purchase value. Indeed, in the contingency of these skins finding a sale, it is revenue that would stand to gain. The observation of the Tribunal that this method of permitting him to value the goods "would open the door for showing these very goods as obsolescent and then sell them off later without bringing the profits into the books" is wholly uncalled for. It seems to suggest that the Tribunal found the assessee's intention to be to make a concealed profit by the sale of the goods in subsequent years. It is unfortunate that the Tribunal should have indulged in such uncalled for aspersions on the assessee's integrity. ……….………. There seems to the be no quarrelling with the question of fact that there was no market for these skins either locally or abroad. Locally it is certain there was at no time any market, and the observation of the Tribunal that the assessee should have tried to sell them locally is certainly un-under-standable in the context of the evidence. It is for the trader to ascertain what avenues for the sale of the goods are open to him and if he shows that, as far as his contentions establish, there was no prospect of the sale of the goods, for there was no demand, it is not for the income-tax department to order the mode of carrying on the business of the trader. For instance, when the only market for these snake skins was in the United Kingdom and United States all these years, and if that market fell off, the Income-tax Officer cannot ask the assessee why he could not have sold the skins in other foreign countries. That is virtually the stand taken by the Tribunal. As we have also pointed out, it the assessee should gain an initial advantage by valuing his closing stock at "nil", he is bound to value these goods at the same value in his opening accounts of the succeeding year of account, so that any sale of the goods in that year would result in the entire sale price being treated as profit liable to tax, clearly an advantage to the revenue. Even apart from that, it is settled law that the assessee has a right to value his closing stock at cost price or market price whichever is lower, and, in the present case, there is no doubt that the market price was "nil". 8.3.1. Effectively, the prize winnings from unsold lottery tickets is thing but realization of closing stock of lottery tickets lying with the assessee, which would obviously partake the character of business receipts. When purchases and sales are business activities, any realization of closing stock of such purchases would also be only business receipt. We hold that the expenditure incurred by the assessee on purchase of lottery tickets were towards the distribution of lottery tickets only and not incurred in order to produce winnings from lotteries. 8.4. We find that the word "business" has been defined in Section 2(13) of the Act in an inclusive manner. As per the said section, "business" includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture". Thus, the word "business" is a word of large and indefinite import. It is something which occupies attention and labour of a person for the purpose of profit. Some of the essential characteristics of a business are continuous and systematic exercise of activity and profit motive. To regard an activity as business, there must be a course of dealings either actually continued or contemplated to be continued with a profit motive and not for sport or pleasure. It predicates a profit making motive pervading a whole series of transactions. In common parlance, it connotes activities in which a person is engaged with a set purpose and frequency or the repetition of the activity. From the financials of the assessee firm for the Asst Years 2014-15 to 2016- 17, it could be seen that the assessee had time and again carried out the same set of activity by trying to realize the prize winnings from unsold lottery tickets to mitigate its loss incurred on purchase cost of lottery tickets. This is a purely a prudent business decision taken by the assessee firm with a set purpose to make profit as an ultimate motive under any eventuality. We find that the term 'business' u/s 2(13) of the Act is having widest amplitude and import to cover all incidental activities is also endorsed by Page | 6
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the decision of Hon'ble Supreme Court in the case of Mazagaon Dock Ltd vs CIT reported in 34 ITR 358 (SC). Hence even as per the inclusive definition of the word 'business' u/s 2(13) of the Act, the prize winnings from unsold lottery tickets could only have to be treated as income from business of the assessee firm.”
The learned A.R. during the course of hearing placed reliance upon the agreement entered with the Government of Maharashtra, which was filed by way of an application seeking admission of additional evidence. The assessee also placed on record its appointment letter as “Stockists”, inter–alia, for the State of Maharashtra, as part of the compilation of additional evidences. As per the assessee, these documents could not be filed before the lower authorities as the hearing before the learned CIT(A) was concluded only on the basis of partial submissions filed by the assessee. In view of the above, we admit the aforesaid additional evidences filed by the assessee. The learned A.R., by referring to the aforesaid agreement dated 03/09/2013, entered with the State of Maharashtra, submitted that the lottery tickets sold to it, as a bulk agent, were not required to be taken back by the Government of Maharashtra under any circumstances. We find that since these documents were not available with the lower authorities, therefore, no findings have been rendered on them. Accordingly, we deem it fit and appropriate to restore this issue to the file of the Assessing Officer for de novo adjudication after considering the additional evidences filed by the assessee before us and in the light of the aforesaid decision of the Co–ordinate Bench of the Tribunal rendered in Pooja Marketing (supra). Since this appeal is restore to the file of the Assessing Officer for consideration afresh, the assessee shall be at liberty to file any other document in support of its claim. Needless to mention that no order shall be passed without affording opportunity of being heard to the assessee. With the Page | 7
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above directions, the grounds raised by the assessee are allowed for statistical purposes.
In the result, appeal by the assessee is allowed for statistical purposes. Order pronounced in the open Court on 28/09/2022
Sd/- Sd/- OM PRAKASH KANT SANDEEP SINGH KARHAIL JUDICIAL MEMBER ACCOUNTANT MEMBER
MUMBAI, DATED: 28/09/2022 Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The CIT(A); (4) The CIT, Mumbai City concerned; (5) The DR, ITAT, Mumbai; (6) Guard file. True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary Assistant Registrar ITAT, Mumbai