CIT vs. SAI DISTRIBUTORS

ITA 1098/2011 Page 1

IN THE HIGH COURT OF DELHI AT NEW DELHI

Decided on : 23.07.2012

ITA 1098/2011

CIT

….. Appellant

Through: Mr. Abhishek Maratha, Sr. Standing Counsel with Ms. Anshul Sharma, Advocate

Versus

SAI DISTRIBUTORS

…… Respondent

Through: Mr.Rohan Ahuja, Advocate

CORAM:

HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MR. JUSTICE R.V. EASWAR

MR. JUSTICE S. RAVINDRA BHAT (OPEN COURT)

% 1. The revenue appeals against the decision of the Income Tax Appellate Tribunal (ITAT) in ITA No.4594/Del./2009 dated 21.01.2011. The question of law sought to be urged is whether the impugned order is in error in affirming the CIT (Appeals)‟ determination that the sum of ` 1,42,09,820/- was wrongly disallowed by the Assessing Officer. 2. The assessment year in question is 2006-07; the respondent assessee firm is a sole selling agent of lotteries for certain stockists of State lotteries, and has arrangements with sub-agents, under which the latter (i.e. the sub-agents) operate

ITA 1098/2011 Page 2

terminals at kiosks and sell lottery tickets. The AO noticed that the balance sheet filed by the assessee with the return of income for the assessment year in question reflected a credit entry of ` 1,42,09,820/-, with a remark “Prize Winning Tickets (“PWT”) payable”. The assessee, upon being queried, responded stating that it had already received PWT worth ` 1,36,77,950 from selling agents during the year and this amount had been reflected in the balance sheet, as PWT in hand; that consequently, both figures, i.e. the Contribution towards Prize Fund („CPF‟) payable and the CPF receivable/received were duly reflected in its balance sheet. It was urged that the account up to 1.1.06 had already been settled during the year. The assessee, however, stated that the balance CPF account of ` 1,42,09,820/- was settled in the next year. It contended that the details of purchase of tickets from M/s Valuable Reserves (I) Pvt. Ltd. were being filed. These tickets were for the period from 02.01.2006 to 31.03.2006 during which CPF amounted to ` 1,42,09,820/- and Contribution towards Participation in Draw („CPD‟) was of ` 5,80,785.83. Copies of four purchase bills from M/s Valuable Reserves (I) Pvt. Ltd. confirming these facts were also filed. Besides these, a copy of balance confirmation of CPF amount of ` 1,42,12,620/- of M/s Valuable Reserves (I) Pvt. Ltd. and a copy of accounts of M/s Valuable Reserves (I) Pvt. Ltd. for the period from 01.04.2006 to 31.3.2007, (confirming the receipt of Prize Winning Tickets amounting to ` 1,42,09,820 on 01.04.2006), were also furnished. 3. The AO observed that the credit entry of ` 1,42,12,620/- had been squared off by M/s Valuable Reserves (I) Pvt. Ltd., by passing a debit note, whereas no transaction of money had actually taken place. Based on this, the AO was of the opinion that in view of the nature of the assesse‟s business, the tickets would be released as and when the purchasers make the payment at the kiosks and that

ITA 1098/2011 Page 3

therefore, the whole of the tickets were not released to the assessee. On this reasoning, the AO held that the liability of `1,42,12,620/- was artificial and was made to mislead the assesse‟s taxable profit. The amount was added back to the total income of the assessee. The Appellate Commissioner, upon the assesse‟s grievance, deleted the inclusion. The revenue‟s appeal to the Tribunal was rejected by the impugned order. 4. It is argued by Counsel for the revenue that the Appellate Commissioner and the ITAT fell into error of law in deleting the inclusion (of ` 1,42,12,620/- by the AO). It is urged that the finding of the AO that the liability was an artificial creation to conceal taxable profit, was overlooked. It was sought to be urged that the liability was squared up without any monetary transaction as a result of which the Tribunal‟s order has to be restored. 5. Counsel for the assessee argued that the impugned order should not be interfered with. It was urged that the assessee is only a sole selling agent; and the actual sale of lottery tickets and lottery prize distribution is done by sub-agents who are responsible for distribution of profits. These sub-agents credit the assessee with amounts of PWT payable; the assessee passes similar entries in respect of such PWT amounts payable to its stockist. Eventually the stockist, makes a similar entry to square up accounts with the Government in the State Lotteries Department. It is argued further that transactions take place on a day-to-day basis and it is on the next day that the credit entry in respect of PWT payable is squared up when a debit entry is passed. Counsel submitted that PWT amounting to `1,36,77,950/- had already been received by the assessee against the PWT payable of `1,42,12,620/- as on 31.3.06. This amount was shown as PWT in hand as on

ITA 1098/2011 Page 4

31.3.2006; and the balance amount of ` 5,34,670 was duly squared up on the next day, i.e., 01.04.2006. Consequently there was no need for any cash payment. 6. In the impugned order, the Tribunal held inter alia, as follows: “8. We have heard the parties and have perused the material on record. Undisputedly, as rightly observed by the CIT(A), the PWT payable in this case is accounted for in the accounts of the assessee, on a day-to-day basis. Rather than the assessee, it is the sub-agent who is responsible for selling the lottery and to make the payment for Prize Winning Tickets and also to account for in the P&L A/c. It is the State Lotteries Department of the Government, which ultimately accounts for the amount of PWT payable. The sub-agent makes the entry with respect to PWT vis-a-vis the assessee, who is the sole selling agent, in such a manner. Pertinently, the assessee is at no stage responsible for payment of PWT. So far as regards the amount in question, the entry for PWT payable as on 31.3.06 was matched to the extent of `1,36,77,950 by the amount of PWT in hand. This reflected the PWT received from the sub-agents. Undisputedly, the different of `5,34,670 was squared up on the next day, i.e., on 1.4.06. The AO was obviously oblivious of this process, which led to the erroneous addition having been made. The CIT(A), on the other hand, has correctly taken these facts into consideration and has thereby arrived at, and in our considered opinion a correct finding that the addition had been wrongly made. 9. In view of the above, the order of the CIT(A) cannot be found fault with and it is confirmed. The grievance of the department is, accordingly, rejected.” 7. This Court has considered the submissions and the materials on record. CIT (Appeals) and the ITAT made observations and recorded findings on the nature of business, on the manner by which the assessee treated Prize Winning Tickets in its books, regarding the fact that at no stage it received monies towards satisfaction of those tickets, and also that the ultimate liability is that of the State Government. These observations and findings, in our opinion are purely factual. The AO‟s findings are based on the existence of the entries, without taking into account the

ITA 1098/2011 Page 5

nature of the trade and business, especially that the assessee is neither responsible for the sale of tickets to the customer (which is done by the sub-agent) nor is obliged to pay the prize winners (a liability borne by the State Government). These details were not considered at all by the AO, but were taken into account by the CIT (Appeals) and the Tribunal. Such findings amount to pure appreciation of facts, and we find no manifest error of law, or unreasonableness in them. As a result, this Court is of opinion that no substantial question of law arises for consideration. The revenue‟s appeal is, consequently dismissed.

S. RAVINDRA BHAT (JUDGE)

July 23, 2012

R.V. EASWAR (JUDGE)