DCIT CENTRAL CIRCLE-2, , COIMBATORE vs. M/S MARUTI ENTERPRISES, MUMBAI

The assessee being a partnership firm is stated to be carrying on the business of distribution of lottery tickets. The assessee earned prize money on unsold lottery tickets which was credited to Profit & Loss Account and the same was offered as business income. After claiming various expenditures, the assessee reflected business income of Rs.9.42 Lacs.

The Ld. AO, considering the provisions of Sec.2(24)(ix) r.w.s. 56(2)(ib) & Sec.58(4) concluded that such winning from lotteries from unsold lottery tickets would be separately chargeable to tax at the rate of 30% in terms of Sec.115BB r.w.s. 58(4). The assessee is not permitted to claim any expenditure against the same. The cost of unsold lottery tickets was disallowed and the resultant business loss was allowed to be carried forward.

The Ld. CIT(A), relying on the decision of Mumbai Tribunal in the case of assessee’s sister concern i.e., M/s Pooja Marketing for AY 2014- 15, ITA No.2596/Mum/2019, directed Ld. AO to consider the prize money as business income and allow expenditure of unsold lottery tickets. Aggrieved, the revenue is in further appeal before us. 6. Similar issue has been adjudicated by us in the case M/s Pooja Marketing in & 960/Chny/2022 as under: - Our findings and Adjudication 6. The Ld. CIT-DR, in its written submissions has stated that the assessee has not treated the tickets as stock-in-trade since the assessee has not reflected any opening or closing stock in its financial statements. The same would mean that the assessee’s intention was not to treat the winning as business receipts but as prize money from tickets which have remained unsold in the relevant lottery scheme. Therefore, such winning would be classified u/s 2(24)(ix) r.w.s. 56(2)(ib). It has also been submitted that Ld. CIT(A) as well as Mumbai Tribunal has not looked into all these aspects / facts. Accordingly, Ld. CIT(A) has prayed for restoring this issue back to the file of Ld. CIT(A).

The Ld. Sr. DR, in its written submissions, has stated that the assessee has returned back certain percent of unsold tickets and held back some unsold tickets. The same would show that the assessee intentionally held the tickets with it to participate in the lottery scheme on its own. It is also evident that TDS has been deducted u/s 194B at higher rates of 30%. If the prize money was out of trading stock that remained unsold, then TDS should have been deducted u/s 194G at lower rate of 5%. Having reported the winnings separately by the assessee in its financial statements, AO was right is taxing the same u/s 2(24)(ix) and apply consequential provisions. It has also been urged by the revenue that the aforesaid decision of Mumbai Tribunal was in the context of challenge to revisionary jurisdiction u/s 263 and therefore, Ld. CIT(A) should have adjudicated the issue with independent application of mind. The Ld. Sr. DR also submitted that the decision of Hon’ble Supreme Court in the case of State of Andhra Pradesh vs. H Abdul Bakshi as relied upon by Mumbai tribunal was a sales tax issue whereas in the Income Tax Act, there are separate provisions governing taxation of lottery winnings. The Ld. Sr. DR also submitted that if the winnings are computed under the head income from other sources, the same would not be tax neutral.

The Ld. Sr. Counsel, on the other hand, referred to various findings of Mumbai Tribunal in assessee’s own case and submitted that facts in AY 2014-15 are quite identical to the facts in AY 2015-16 and therefore the aforesaid decision would have an equal application in this year. 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.

After going through the order of Mumbai Tribunal in assessee’s own case for AY 2014-15, order dated 24-05-2021, we concur that all the aspects / facts of the matter as well as applicable case laws have elaborately been dealt with by the co-ordinate bench in its order. The bench has not only considered the validity of revisionary jurisdiction u/s 263 but also decided the issue on merits. After much deliberation, the impugned issue has ultimately been decided in assessee’s favor. The case law of Hon’ble High Court of Madras in the case of CIT vs. Dr. M.A.M. Ramaswamy (53 Taxmann.com 231) has elaborately been distinguished by Ld. Sr. Counsel in its written submissions. The same has already been deliberated upon by us in preceding paragraphs. The same found our concurrence. Further, nothing has been shown to us that the aforesaid decision of Mumbai Tribunal has been reversed by higher judicial authorities in any manner or the same is not applicable to the facts of this year. No distinguishing feature has been shown to us. The issue, on merits, has elaborately been dealt with by the Tribunal in its order. Under these circumstances, respectfully following the aforesaid decision of Mumbai Tribunal in assessee’s own case, we dismiss the appeal of the revenue.

Facts in AY 2016-17 are quite identical. The order of Ld. AO is on similar line. The impugned order is a common order for both the years. Therefore, our adjudication as above, shall mutatis-mutandis apply to this year also.

In the result, both the appeals stand dismissed.

The appeal stand dismissed.