THE PRINCIPAL COMMISSIONER OF INCOME TAX vs. USHA MURUGAN

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR. JUSTICE BECHU KURIAN THOMAS WEDNESDAY, THE 23RD DAY OF JUNE 2021 / 2ND ASHADHA, 1943 ITA NO. 18 OF 2017 AGAINST THE ORDER IN ITA 512/2013 OF I.T.A.TRIBUNAL,COCHIN BENCH, ERNAKULAM APPELLANT/S: THE PRINCIPAL COMMISSIONER OF INCOME TAX KOTTAYAM. BY ADVS. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, FOR INCOME TAX SRI.CHRISTOPHER ABRAHAM, INCOME TAX DEPARTMENT RESPONDENT/S: USHA MURUGAN WIFE & L/H OF T.MURUGAN,M/S. MEENAKSHY LUCKY CENTRE,YMCA ROAD, KOTTAYAM - 686 001. BY ADV SRI.ANIL SIVARAMAN THIS INCOME TAX APPEAL HAVING COME UP FOR HEARING, ALONG WITH ITA.13/2017, 29/2017, THE COURT ON 23.06.2021 DELIVERED THE FOLLOWING:

I.T.A. Nos. 18, 13 & 29/2017 -2- IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR. JUSTICE BECHU KURIAN THOMAS WEDNESDAY, THE 23RD DAY OF JUNE 2021 / 2ND ASHADHA, 1943 ITA NO. 13 OF 2017 AGAINST THE ORDER IN ITA 510/2013 OF I.T.A.TRIBUNAL,COCHIN BENCH, ERNAKULAM APPELLANT/S: PRINCIPAL COMMISSIONER OF INCOME TAX KOTTAYAM. BY ADVS. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, FOR INCOME TAX SRI.CHRISTOPHER ABRAHAM, INCOME TAX DEPARTMENT RESPONDENT/S: M/S. MEENAKSHY ENTERPRISES YMCA ROAD, KOTTAYAM-686001. BY ADVS. SRI.ANIL SIVARAMAN SMT.RAJI VINCENT THIS INCOME TAX APPEAL HAVING COME UP FOR HEARING, ALONG WITH ITA.18/2017 AND CONNECTED CASES, THE COURT ON 23.06.2021 DELIVERED THE FOLLOWING:

I.T.A. Nos. 18, 13 & 29/2017 -3- IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR. JUSTICE BECHU KURIAN THOMAS WEDNESDAY, THE 23RD DAY OF JUNE 2021 / 2ND ASHADHA, 1943 ITA NO. 29 OF 2017 AGAINST THE ORDER IN ITA 511/2013 OF I.T.A.TRIBUNAL,COCHIN BENCH, ERNAKULAM APPELLANT/S: THE PRINCIPAL COMMISSIONER OF INCOME TAX KOTTAYAM. BY ADVS. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, FOR INCOME TAX SRI.CHRISTOPHER ABRAHAM, INCOME TAX DEPARTMENT RESPONDENT/S: SMT.USHA MURUGAN WIFE AND L/H OF T. MURUGAN, M/S. MEENAKSHY LUCKY CENTRE, YMCA ROAD, KOTTAYAM-686001. BY ADV SRI.ANIL SIVARAMAN THIS INCOME TAX APPEAL HAVING COME UP FOR HEARING, ALONG WITH ITA.18/2017 AND CONNECTED CASES, THE COURT ON 23.06.2021 DELIVERED THE FOLLOWING:

I.T.A. Nos. 18, 13 & 29/2017 -4- J U D G M E N T [ITA Nos.18/2017, 13/2017, 29/2017] S.V. Bhatti, J. These appeals are under Section 260A of the Income Tax Act, 1961 (for short 'the Act'). The Principal Commissioner of Income Tax, Kottayam (for short 'the Revenue') is the appellant in these Tax Appeals. M/s.Meenakshy Enterprises, a proprietary concern, represented by T. Murugan, since deceased, represented by his wife Usha Murugan, is the respondent in these appeals (for short referred to as 'the assessee'). 2. The appeals deal with common questions of law and fact, hence are taken up together for hearing and disposal. The details of orders till the date of filing of the tax appeals are as follows:

I.T.A. Nos. 18, 13 & 29/2017 -5- Sl. No. Assessment Year Order date of Assessing Officer Order of Commissioner of Income Tax (Appeals) Order of Income Tax Appellate Tribunal I.T.A. No. 1 2008-09 31/12/10 ITA No.78/Ktm/CIT(A)- IV/10-11 dt.04.06.2013 ITA No.510/Coch/2013 dt.25.10.2016 13/2017 2 2008-09 31/12/10 ITA No.79/Ktm/CIT(A)- IV/10-11 dt.04.06.2013 ITA No.512/Coch/2013 dt.25.10.2016 18/2017 3 2006-07 28/12/09 ITA No.37/Ktm/CIT(A)- IV/09-10 dt.05.06.2013 ITA No.511/Coch/2013 dt.25.10.2016 29/2017 3. Heard learned Senior Standing Counsel Mr.Christopher Abraham for Revenue and learned Counsel Mr.Anil Sivaraman for assessee. Both the counsel refer to and rely on the details covered by I.T.A. No.18/2017 and stated that advertance to the details in I.T.A. No.18/2017 would be sufficient for disposing of the other two appeals as well. 4. One T Murugan was the Proprietor of M/s.Meenakshy Lucky Centre/a proprietory concern doing

I.T.A. Nos. 18, 13 & 29/2017 -6- business as a wholesale dealer of lottery tickets. The assessee was engaged in the said business as Stockist for the sale of lottery tickets of various government/quasi-government agencies and State governments. The assessee purchases lottery tickets from the agencies referred to above and claim to sell the lottery tickets to the retailers. In the subject financial year, the assessee purchased lottery tickets from the State of Kerala and claims to have sold to the retail vendors. The assessee in the Tax return for the Assessment Year 2008-09 returned total income of Rs.1,62,45,266/-. The return filed for the subject Assessment Year was taken up for scrutiny and resulted in issuance of notice under Section 143(2) of the Act. The notice refers to alleged impermissible deduction of Rs.7,72,66,051/- received and transferred by the assessee, to agents towards incentive for the prize money realised from the tickets sold by them. According to the assessee, there is no relationship of

I.T.A. Nos. 18, 13 & 29/2017 -7- Principal and Agent between the assessee and the end sellers of lottery tickets to the general public and the retailers have become eligible for receiving their entitlement as successful agents' prize money/commission, etc. The assessee is not the seller of lottery ticket to the end recipient and the assessee acted as post-office between the State government and the buyers of lottery tickets from Stockist/wholesale dealers, such as assessee. Therefore, the deduction claimed is expenditure and the notice issued for addition of the said amount is impermissible. The Assessing Officer, from the details and materials available on record, held that the relationship between the assessee and the end buyers of lottery tickets is one of Principal and Agent; the incentive/commission has been paid after deducting tax at source and the total payment is liable to be disallowed under Section 40(a)(ia) of the Act. The Assessing Officer further held that Section 194H is attracted to

I.T.A. Nos. 18, 13 & 29/2017 -8- the subject entry. For argument sake even if one assumes that Section 194H has no application, Section 194G will be attracted. The Assessing Officer determined the net income assessable to tax for the Assessment Year 2008-09 at Rs.9,01,24,618/- and demanded Rs.3,96,11,900/- towards difference of tax from the assessee. 5. The assessee filed I.T.A. No. 79/KTM/CIT(A)-IV/2010- 11 before the Commissioner of Income Tax (Appeals), Ernakulam. The CIT (Appeals), through Annexure-B Order dated 04.06.2013, allowed the appeal and the Revenue filed I.T.A. No. 512/COCH/2013 before the Income Tax Appellate Tribunal, Cochin. Through Annexure-C Order dated 25.10.2016 the Tribunal dismissed the appeal. Hence the appeal. The appellant raises the following substantial questions of law in the instant appeal:

I.T.A. Nos. 18, 13 & 29/2017 -9- “1. Whether, on the facts and in the circumstances of the case- i) The payment made by the assessee to the Sub-agents fall within the clutches of Section 194G/194H of the Income Tax Act? ii) The provisions of section 40(a)(ia) are attracted to the above payments? 2. Did not the Tribunal err in deleting the disallowance made u/s 40(a)(ia) for non-deduction of tax at source u/s.194H/194G of the Income Tax Act from the payment of commission to sub- agents? 3. Should not the Tribunal have considered the issues raised (declined to be considered in paragraph 12 of the order on merits?” 6. The learned Counsel appearing for the parties have, in great detail, invited our attention to all the three orders of the authorities filed as Annexures A to C. The arguments now made in support of the respective cases by the learned counsel are

I.T.A. Nos. 18, 13 & 29/2017 -10- similar to the arguments made before the CIT(Appeals) and the Tribunal. The Revenue contends that from the nature of admitted circumstances and the conduct of lottery business, the assessee, though a Stockist or wholesale dealer of lottery tickets organised by the State of Kerala, upon purchase of the lottery tickets, is dealing with conduit sellers as agents. Even assuming without admitting that the agents' prize money, commission, etc are received by the assessee, but is transferred to respective sellers of lucky lottery tickets. The assessee is paying or transferring the amount so received as commission etc to the agents. In the foremost consideration of entries, Section 194G of the Act is attracted and the assessee failed to comply with Section 40(a)(ia) of the Act and the Department, therefore, is justified in adding the commission etc paid by the assessee to its agents in the net income of the assessee. At the cost of repetition, stated differently, the Revenue proceeds on the

I.T.A. Nos. 18, 13 & 29/2017 -11- assumption that in sale and purchase of lottery tickets between the assessee and its purchasers, relationship of Principal and Agent exists, amount so transferred represents commission etc., therefore, TDS should have been deducted and Section 194G is attracted in all fours. Alternatively, in the admitted fact situation of the subject assessment Section 194H is attracted. 7. Advocate Anil Sivaraman invites our attention to the explanation given by the assessee to the notice under Section 143(2) of the Act and contends that from the nature of lottery ticket business, the government is exclusively authorized to conduct lottery, and does not prefer to deal with several thousands of retail sellers of State lottery tickets. In the module followed by the State, the lottery tickets are sold to Stockists/wholesale dealers; the Stockist/wholesale dealers purchase tickets from the State government and sell the lottery tickets to the individual retailers. Thereafter, what had been

I.T.A. Nos. 18, 13 & 29/2017 -12- undertaken between the assessee/wholesale dealer and the retailers is a sale for a margin of discounted price. The assessee acts as a post-office. There is no relationship of Principal and Agent between the assessee and his retail buyers. The retail sellers did not provide service to the assessee thus entitling for receipt of commission/incentive from the assessee. He places strong reliance on Section 194G of the Act and argues that the basic ingredients warranting application of Section 194G are not available in the case on hand and levy of tax for the amount received and made over to agents is illegal. 8. We have heard the Counsel and perused the record. Questions 1 to 4 9. The short and long of substantial questions framed centers around the premise on which deduction is rejected and added to the income of assessee and tax is levied, and, on the

I.T.A. Nos. 18, 13 & 29/2017 -13- other hand, assessee contends: that the relationship between the assessee and the buyers of lottery tickets from the assessee is not an agent or purchaser. Stated simply, assessee claimed that lottery tickets were purchased at discount from the organising agency and, by retaining a margin of the discount so received, lottery tickets were sold to retail sellers. Hence, none of the incidences covered by Section 194 G or Section 194 H is attracted. At this juncture, to avoid reiteration of what has been held as a fact we deem it very useful to refer to the consideration of this aspect by the CIT (Appeals). In his order dated 04.06.2013, the learned CIT (Appeals) first had taken up for consideration the scope and applicability of Section 194H of the Act to the controversy in the subject assessment, and, thereafter, examined whether the sub-dealers purchasing lottery tickets from the assessee had rendered any service to the assessee in the course of buying or selling of goods in

I.T.A. Nos. 18, 13 & 29/2017 -14- relation to any transaction relating to any asset, valuable article or thing. And on this crucial aspect, the first appellate authority recorded a finding that the buyers of lottery tickets from the assessee do not render service in the sale and purchase of lottery tickets between two of them. Therefore, in the absence of any service being received to the assessee it cannot be held that Section 194H is attracted. Thereafter, applicability of Section 194G is examined and held that in the transactions of sale of lottery tickets to end buyers the assessee is a conduit or a postman. Therefore, Section 194G is not attracted and deduction of tax at source by the assessee would amount to double deduction of tax on the same amount. 9.1 The CIT (Appeals) accepted the case of assessee that the assessee was not liable to deduct tax either under Section 194H or under Section 194G in respect of the amount collected from the government and paid or made over to the sub-dealers.

I.T.A. Nos. 18, 13 & 29/2017 -15- Section 40(a)(ia) does not contemplate dis-allowance consequent upon default under Section 194G. The Tribunal approved the view of appellate authority. Stated very briefly, examined applicability of Section 194G and Section 40(a)(ia) of the Act and rejected the argument of the Revenue. The Tribunal categorically held that Section 194G of the Act is not applicable and dis-allowance under Section 40(a)(ia) excludes Section 194G of the Act. 10. A bare reading of Section 194H together with the definition of expression 'commission or brokerage' in clause (i) of the explanation to Section 194H would be clear that the definition would not include any payment receivable, directly or indirectly, for services in the course of buying or selling of goods. The converse of the applicability of the said explanation is that the payment received or receivable either directly or indirectly by a person acting on behalf of another person and

I.T.A. Nos. 18, 13 & 29/2017 -16- the said amount is received: (i) for services rendered not being professional, or (ii) for any services in the course of buying or selling goods, or (iii) In relation to any transaction relating to any asset, valuable article or thing by discharging any of these functions referred to above, the element of agency is there between the recipient and the provider. The record does not disclose that any of the ingredients referred to above are attracted to the transactions covered for the addition made by the Revenue.. 10.1 The alternative argument of the Revenue is that Section 194G of the Act is attracted and addition of amount covered by payments made to buyers of lottery from assessee is correct. Section 194G reads thus:

I.T.A. Nos. 18, 13 & 29/2017 -17- Section 194G is attracted, which reads as under: “Any person who is responsible for paying, on or after the 1st day of October, 1991 to any person, who is or has been stocking, distributing, purchasing or selling lottery tickets, only income by way of commission, remuneration or prize (by whatever name called) on such tickets in an amount exceeding one thousand rupees shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft by any other mode, whichever is earlier, deduct income tax thereon at the rate of ten per cent” 10.2 The assessee acts as a post-office by receiving counterfoils of prize winning tickets sold by different retailers in the organisation of lottery business presented to the State government and the prize/incentive/bonus received from the government is transferred to retailers. In the circumstances of the case our attention has been drawn to the flow of counterfoils into the hands of assessee and presentation of

I.T.A. Nos. 18, 13 & 29/2017 -18- counterfoils to government and receipt of incentive by assessee and subsequent transfer of incentive to retailers. The person responsible for making the payment is the government. Admittedly, the government after affecting TDS has paid the amount to the assessee towards prize incentive etc. The assessee has collected the amount and claims to have made over the incentive to the end retailers. Section 194G, as rightly held by the Commissioner of Income Tax and the Tribunal, is not attracted to the instant payment inasmuch as assessee is not under obligation to pay towards commission etc to any of these persons. 10.3 The substantial questions of law framed by the Revenue are examined by keeping in perspective the confirming order of the Tribunal. And the findings of facts recorded by the Tribunal on which no exception is pointed out to the effect that Sections 194H and 194G are not attracted. It is

I.T.A. Nos. 18, 13 & 29/2017 -19- definitely a case for consideration of substantial questions of law, had the Revenue established the basic ingredients required for attracting any one of the sections to the controversy covered by the appeal. We are of the view that the assessee being a wholesale dealer/Stockist of lottery has purchased from the government and sold to the retailers. It is accepted as a purchase from the organizing agency of lottery and sale to retailers. The amount covered is incentive payable by the organizing department to the agent and none of the ingredients required for adding the disputed amount is established. The questions, in our view, do not arise for consideration particularly having regard to the findings appreciated by the CIT (Appeals) and the Tribunal and accordingly the questions are answered in favour of the assessee and against the Revenue. The consideration of the issues should be understood as made in the circumstances of the case and not relied on as precedent

I.T.A. Nos. 18, 13 & 29/2017 -20- on the applicability of any of the sections referred to above vis- a-vis lottery business and implications on tax liability. In other words, the decision is fact specific to the cases on hand. For the very same reasons ITA Nos.13 and 29 of 2017 are dismissed. Sd/- S.V.BHATTI JUDGE Sd/- BECHU KURIAN THOMAS JUDGE jjj

I.T.A. Nos. 18, 13 & 29/2017 -21- APPENDIX OF ITA 13/2017 PETITIONER ANNEXURE ANNEXURE A ASSESSMENT ORDER U/S 143(3) DT. 31-12-2010 ANNEXURE B CIT (APPEALS) ORDER NO. 78/KTM/CIT (A)-IV/2010-11 DT. 04/06/2013 ANNEXURE C ITAT'S ORDER NO.510/COCH/2013 DT.25.10.2016

I.T.A. Nos. 18, 13 & 29/2017 -22- APPENDIX OF ITA 29/2017 PETITIONER ANNEXURE ANNEXURE A ASSESSMENT ORDER U/S 143(3)/147 DT. 28/12/2009 ANNEXURE B CIT (APPEALS) ORDER NO. 37/KTM/CIT (A)-IV/2009-10 DT. 05/06/2013 ANNEXURE C ITAT'S ORDER NO.511/COCH/2013 DT.25.10.2016

I.T.A. Nos. 18, 13 & 29/2017 -23- APPENDIX OF ITA 18/2017 PETITIONER ANNEXURE ANNEXURE-A ASSESSMENT ORDER U/S 143(3) DT. 31-12-2010 ANNEXURE B CIT (APPEALS) ORDER NO. 79/KTM/CIT (A)-IV/2010-11 DT. 04/06/2013 ANNEXURE-C ITAT'S ORDER NO.512/COCH/2013 DT.25.10.2016