DY. CIT, CENTRAL CIRCLE-2, , COIMBATORE vs. M/S POOJA MARKETING, MALAD

From the above it is clear that there is no difference between winning from lotteries sold and tickets remaining unsold with the assessee. Hence, the winning from Lotteries from unsold tickets would not partake the character of business receipts.

Assessment Proceedings 3.1 The assessee being a resident partnership firm is stated to act as reseller of government paper lottery tickets. It transpired that the assessee credited sum of Rs.46.83 Crores under the head ‘prize money from unsold lottery tickets’ in the Profit & Loss Account and the assessee reflected net profit of Rs.1.68 Crores which was offered as business income. The assessee claimed credit of TDS as deducted by the Director of Lotteries of Sikkim and Director of Lotteries of Mizoram u/s 194B of the Act. In other words, the assessee considered winning from unsold lottery tickets as business income and claimed set-off of various expenses inclusive of cost of tickets against the said winning. 3.2 The Ld. AO formed an opinion that the aforesaid winning would be separately chargeable to tax under the head ‘income from other sources’. The same was on the reasoning that the provisions of Sec.14 prescribe different head of income for which separate mode of computations has been provided in the tax statute. These heads are mutually exclusive as judicially settled. The Ld. AO observed that the income as defined in Sec.2(24)(ix) include winning from lotteries, cross word puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever. The above income was classified u/s 56(2)(ib) and thus for all purposes of taxation, winning from lotteries would be considered under this head only. The relevant provisions of Sec.56(2) read as under: - (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head "Income from other sources", if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. (2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head "Income from other sources", namely - (i) dividends; (ia) income referred to in sub-clause (viii) of clause (24) of section 2; (ib) income referred to in sub-clause (ix) of clause (24) of section 2 Thus for the purpose of taxation, the legislature included winning from lotteries u/s 56(2)(ib) of the Act and the same, therefore, would fall under residuary head of income as contemplated u/s 56. 3.3 The Ld. AO further noted that the provisions of Sec.57 provide that expenditure could be allowed in earning the income as referred to in Sec.56. However, the provisions of Sec. 58(4) prohibit claim of any such expenditure against the same. The provisions of Sec.58(4) provide that in case the assessee has any such income as chargeable under the head income from other sources, no deduction in respect of expenditure or allowance in connection with such income shall be allowed under any provisions of this act in computing the income from such winnings. The relevant provisions read as under: - "In the case of an assessee having income chargeable under the head "Income from other sources" no deduction in respect of any expenditure or allowance in connection with such income shall be allowed under any provisions of this Act in computing the income by way of any winnings form 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:

Thus, as per the provisions of Sec. 58(4), the assessee would not be entitled to claim any expenditure against such winnings. Further, as per Sec.115BB, the assessee is required to pay tax @30% on winning from lotteries. 3.4 Proceeding further, Ld. AO observed that the provisions of Sec.194B put an obligation on person responsible for payment of any income by way of winning from lotteries to deduct tax at specified rates at the time of payment thereof. The same was done in the present case.

3.5 The Ld. AO finally concluded that the legislature has stipulated that winnings from lottery cannot be computed except within the meaning of the provisions of Section 56(2) r.w.s 2(24)(ix) of the Act. Further no deduction of any kind within the meaning of the provisions of Sec. 58(4) could be allowed to the assessee. As per the provisions of Section 115BB of the Act, tax liability on such income is to be computed at the rate of 30%. Therefore, Ld. AO proceeded to disturb the computations made by the assessee. 3.6 The assessee vehemently opposed the proposed action of Ld. AO and inter-alia, submitted that the prize money was nothing but part of the income generated from the business of distributing lottery tickets. The assessee drew attention to the respective agreements to submit that the unsold tickets which could not be returned to the organizers, contained the prize money which is paid by the assessee-firm as cost of the lottery tickets i.e., unsold lottery tickets remained with the assessee and hence the said prize money in respect of the said unsold tickets lying with the assessee-firm would be the refund of the cost incurred by the assessee- firm or a part of the sale proceeds on sale of tickets. By no stretch of imagination, such prize money from unsold tickets lying with the assessee-firm could be said to be winning from lotteries because the assessee-firm had not purchased the said lotteries for winning prize and the assessee firm had not taken part in the lottery draws. The prize money from unsold tickets lying with the assessee firm has reduced the cost of the lottery tickets which were distributed by the assessee. Reliance was placed on various judicial decisions to support the submissions.

3.7 However, not convinced, Ld. AO rejected the submissions of the assessee on the ground that the assessee had entered into Agreement with M/s Future Gaming Solutions India Pvt. Ltd. (‘future’ in short) in respect of lottery tickets of State of Sikkim lottery. Similar agreement was entered with M/s Teesta Distributors for sale of lottery tickets of State of Mizoram. Both the agreements were almost similar / identical. As per the agreement with ‘future’, the assessee was the sole purchaser of the tickets of State of Sikkim from ‘future’ at rates decided by them. The assessee had purchased the tickets at much lower rate than the Maximum Retail Price (MRP) of the tickets. As per the agreement, the Government had sold out entire lottery tickets to both these entities, who, in turn, sold the same to the assessee for subsequent sale. In executing the same, the assessee had appointed stockist for sale and distribution thereof. At each level, the selling price was determined by seller with a profit motive. In other words, each seller became a separate entity for determining the sale price with a condition that the price should not exceed the MRP as fixed by the state governments. Therefore, the argument that the purchaser stepped into the shoes of the seller could not be accepted. The respective agreements were for sale and purchase of tickets. The agreement did not distinguish winning from tickets sold by the assessee and the tickets remaining unsold with it. 3.8 The Ld. AO, upon analysis of financial statements, noted that tickets remaining unsold with the assessee during the year were 40.22% of purchased tickets. The tickets remaining unsold were 4,61,11,046 out of which the assessee reflected winning of Rs.46.83 Crores from 33,51,897 tickets. The entire purchases were debited to Profit & Loss Account. The same clearly established that the assessee had purchased the tickets from the sellers thereof. 3.9 The assessee made another argument that the prize winning from unsold tickets was nothing but refund of the price which the assessee had paid for distributing the tickets. However, Ld. AO held that by purchasing the tickets, the assessee became the absolute owner / holder of the tickets. As per the terms and conditions of relevant agreements, the assessee was to sell the aforesaid tickets. Accordingly, the sale consideration thereof compensated for the cost of the tickets. As a matter of fact, the assessee's activities were two-fold. Firstly, earning of profit on account of sale of tickets at a higher price than the cost borne out by it which would adjust the cost price of the tickets as explained by it and the same would certainly constitute business income. The second activity of the assessee was the winning from the unsold lottery tickets. This activity, by no stretch of imagination, could be termed as business activity. The word ‘lottery’ itself points chance for prize. There must be some consideration to be paid for taking the chance. Thus, as the assessee had purchased the tickets by paying certain amount as discussed at length in the preceding paras, the prize from such lottery by chance would not take colour of retrieval of the cost of tickets as explained by the assessee. Accordingly, by holding the tickets, the assessee had participated in the draw. The Ld. AO distinguished the case laws being relied upon by the assessee. 3.10 It was finally held by Ld. AO that winning from lotteries from unsold lottery tickets would be chargeable to tax as ‘income from other sources’ as per Sec.56(2)(ib) r.w.s. 2(24)(ix) which would be subject to tax at rates specified u/s 115BB. The assessee is not permissible to claim any expenditure against the same. The value of unsold tickets constitutes expenditure incurred by the assessee for such winnings. Accordingly, the purchases were reduced to that extent and the assessment was framed. Appellate Proceedings 4. The Ld. CIT(A), upon perusal of case records and assessee’s submissions, concurred that the impugned issue stood covered in assessee’s favor by the decision of Mumbai Tribunal in assessee’s own case for AY 2014-15, ITA No.2596/Mum/2019. The Ld. CIT(A) discussed the ratio of aforesaid decision of Tribunal in impugned order from para 5.2 onwards. The Tribunal held that such prize winnings would be Business Income for the assessee. Alternatively, if the winnings from unsold lottery tickets are treated as 'Income from other sources', even then the set-off of Business Loss against such income would be allowed in terms of Sec.71 and therefore, the ultimate effect would be tax neutral. The Tribunal also held that the since the assessee was carrying on the business of distribution of lottery tickets, it does not take part in draw like an individual purchasing lottery tickets for taking a chance of winning prizes and therefore, the winning from unsold lottery ticket is not winning from lottery tickets which would be taxable u/s. 2(24)(ix) r.w.s. 56(2) of the Act. It was further held that pre-amendments by the Finance Act, 1972 and the post amendments, the position of the person carrying on business of distributing lottery tickets, had not changed and it is business income for the assessee and not winning from lottery tickets which is chargeable to tax u/s. 2(24)(ix) r.w.s. 56(2) of the Act and consequently the provisions of section 58(4) of the Act would have no application. The decision of Hon’ble Karnataka High Court in the case of Mysore Sales International Ltd. vs. CIT (117 ITR 64) still hold the field and this decision had become final as no further appeal was preferred to the Hon'ble Supreme Court by the appellant. The facts in that case were held to be identical. The decision of Kerala High Court in the case of CIT vs. Manjoo & Co. (335 ITR 527) was held to be factually distinguishable and would not apply. The decision of Hon’ble Allahabad High Court in the case of J. N. Sharma vs. ACIT (270 CTR 594) has not categorically decided that the heads of income but it has been held that irrespective of the head of income, the winnings shall be taxed at a special rate u/s 115BB of the Act. There was absolutely no quarrel regarding the applicability of tax rate u/s 115BB of the Act.

At the same time, Ld. Sr. Counsel stated that the decision of Hon’ble High Court of Madras in the case of CIT vs. Dr. M.A.M. Ramaswamy (53 Taxmann.com 231) is distinguishable since the issue therein was whether the loss sustained in the business of owning and maintaining of race horses could be set-off against the income from betting of horse races. Thus, the issue was related to allowability of set-off of business loss against the income from betting and gambling. The assessee, in that case, had suffered loss on account of owning and maintaining horse races but had earned income from betting and gambling. The loss incurred on account of owning and maintaining of race horse is specifically prohibited to be set-off from any other source / head u/s 74A(3) of the Act. However, in the present case there is no such restriction of set-off of business loss against income from lottery either u/s 70 / 71 / 74A or u/s 115BB of the Act. Prior to Finance Act, 1986, sub-section (1) and (2) to Sec.74A provided that the loss from lotteries etc. shall be set-off against income from lotteries only. By the Finance Act, 1986, these two sub-sections were omitted and thus, the bar on set- off of losses was removed. Second distinction is the fact that, in that case, the assessee did not contend that betting income would be income from owning and maintaining of the horse races. However, in the present case, the winnings realized on unsold tickets are realization of closing stock of unsold lottery tickets. This prize money so earned by the assessee was business income which was realized during the course of business of distribution of lottery tickets. Regarding revenue’s written submissions on stock-in-hand, it has been submitted that this contention has already been dealt with by Mumbai Tribunal in its order. The factual position, in this regard, has already been noted in para 4.1.1 and para 4.1.2 in the order of Mumbai Tribunal. It has been noted that in respect of draws to be held in the next year, there would be no opening and closing stock since the purchase and sale invoices would be raised in the next year only. For the draws that were to be held in the same financial year, the value of unsold tickets would become zero. The assessee, would, therefore, have no stock in its financial statements. Referring to various finding of Mumbai Tribunal, it has finally been submitted that the purchase price paid for lottery tickers was for onwards distribution of tickets to the stockiest. The purchase price could not be bifurcated between those tickets which have been sold to the stockiest and the unsold lottery tickets which have fetched prized money. The prize winnings are nothing but realization of unsold lottery tickets during the course of business. The Ld. Sr. Counsel thus opposed any interference in the impugned order.