Iqbal Chand Khurana vs Income Tax Officer (Ito V. Iqbal ...
1994 Latest Caselaw 573 Del

JUDGMENT

VIMAL GANDHI, J. M. :

These three appeals - two by the assessed for asst. yrs. 1984-85 and 1985-86 and one by the Revenue for asst. yr. 1985-86, are directed against orders of CIT(A). As common points are involved, these appeals were heard together and are being disposed of through this consolidated order for the sake of convenience. The main controversy relates to denial of deduction under s. 80TT of the IT Act on the sum of Rs. 2,14,78,116 and Rs. 3,16,09,892 in the asst. yrs. 1984-85 and 1985-86, respectively which according to the assessed were "winnings from lottery".

2. Facts of the case briefly stated are that as per agreements in writing, the assessed was appointed "agent" to organise and conduct lotteries on behalf of Governments of Nagaland and Manipur on All India basis. The agreements provided that the assessed was to get lottery tickets printed of different denominations, carry and conduct lotteries for State Governments, realise sale proceeds against payment of guaranteed stipulated profit to the Governments. The number of tickets to be printed, printing press wherefrom the tickets were to be printed, the design of the tickets, etc., was to be got approved from the State Governments. All incidental expenses necessary for organising different draws of lotteries were to be borne by the assessed. The payment of lottery prizes of draws was the responsibility of the assessed. Prizes less than Rs. 1,000 were to be directly paid by the assessed, whereas prizes of denominations higher than Rs. 1,000 were to be paid by the State Governments after recovery from the assessed. The unclaimed prizes, unclaimed bonus and prizes on unsold tickets belonged to the assessed. These amounts were claimed as "winnings from lotteries" within the meaning of s. 80TT of the Act. The assessed thus claimed sums of Rs. 1,07,41,858 and Rs. 1,58,07,446 as deductions under s. 80TT in asst. yrs. 1984-85 and 1985-86, respectively.

3. The AO on consideration of terms of agreements with Governments of Nagaland and Manipur and the provisions of IT Act concluded that in respect of unsold tickets, there was cessation of liability of the assessed. There was no winning from lottery. It was further observed that person responsible for paying the winnings cannot include winnings in his income. There cannot be a liability to pay to himself. It was further observed that on the facts and the circumstances of the present case were entirely different from those prevailing in earlier years and, therefore, orders of Tribunal of earlier years were not applicable. The earlier years related to prize bonus and winnings on stocks left over and unsold tickets in the hands of the stockist. In the instant case the assessed was the source of payment of prizes on tickets of denomination higher than Rs. 1,000 which was paid by the Governments. In case of winnings less than Rs. 1,000, the prize was to be directly paid by the assessed. The AO also referred to provisions of s. 41(1) and held the same to be applicable to unrealised prize or prizes on unsold tickets. It being a case of cessation of trading liability cannot be treated as "winnings from lottery". The claim made by the assessed was accordingly rejected. Similar order was passed in asst. yr. 1985-86.

4. The assessed impugned the assessment in appeal before the CIT(A). The learned CIT(A) again noted relevant terms under which the assessed was to organise lottery tickets. The CIT(A) found that in P&L a/c relevant to the asst. yr. 1984-85, the assessed has credited a sum of Rs. 2,14,55,751 under the head "prizes" besides, share of purchases, agent bonus, stock bonus, unclaimed prize bonus, unclaimed stocks bonus and other miscellaneous receipts. The assessed charged unsold stock of three lotteries at Rs. 5,01,90,394 to P&L a/c with other items of expenses like salary, postage, publicity, depreciation paid, unsold tickets, unsold stock, etc. Before him it was contended that total sum of Rs. 2,14,55,751 included Rs. 1,72,92,444 as prizes of unsold tickets. The assessed was thus ticket holder/owner of unsold tickets and should be equated with any other person who purchased the lottery ticket. It was further pointed out that the above figure also included Rs. 22,965 representing share in prize of tickets purchased and sold by the assessed. It was further emphasised that TDS of Rs. 1,97,140 on unclaimed prize money of Rs. 5,97,392 in respect of certain prize money was deducted which clearly showed that prize money was nothing but income as "winnings from lottery".

5. The learned CIT(A) was unable to agree with the submissions advanced on behalf of the assessed. He found no infirmity in the reasoning of AO and in his approach refusing to allow deduction under s. 80TT. He agreed with AO that prize money of Rs. 2,14,55,751 did not relate to winnings from any ticket held by the appellant as investment but represented reduction of his liability to this extent. The assessed was holding tickets as stock-in-trade and not investment and out of tickets sold some winning friends did not claim prize which belonged to the assessed. Such prize on the unsold tickets cannot be treated as lottery prize as "winnings from lottery" by the assessed. The fact that tax at source was deducted from an unclaimed prize money did not advance the case of the assessed. The learned CIT(A) in support of his conclusion relied upon decision of Tribunal, Bangalore Bench in the case of First ITO vs. Visweswaraiah Lucky Centre (1983) 5 ITD 132 (Bang). He accordingly upheld rejection of claim of deduction under s. 80TT. Similar order was passed for asst. yr. 1985-86.

6. The assessed has come up in appeal. Shri R. Santhanam, C. A., learned counsel for the assessed, strongly assailed orders of CIT(A). He submitted that similar claim of assessed under s. 80TT out of unprize money was allowed by the Tribunal in asst. yrs. 1973-74 to 1975-76. Even reference application was dismissed as withdrawn in asst. yr. 1976-77. The ITO himself had allowed the claim in asst. yr. 1983-84 as per assessment order available on page 58 of the paper book. In the light of the above orders of the Tribunal, the rejection of claim under s. 80TT was totally unjustified.

7. Shri Santhanam further submitted that the CIT(A) in the impugned order was wrongly influenced by the fact that unsold tickets were charged to the P&L a/c. He did not appreciate that similar amounts were shown as closing stock in the trading accounts. The unsold tickets after the draw had no value and, therefore, figure was required to be squared up. But nothing turned on entries made in books and the question was to be decided on legal principles. Thus, the CIT(A) took into account extraneous consideration.

8. Shri Santhanam drew our attention to the meaning of word "lottery" as available in Shorter Oxford Dictionary 3rd Edn. Vol. I. He also drew our attention to Law Lexicon explaining the word "lottery" to be a "scheme for distribution of prizes by draw or chance". Shri Santanam placed strong reliance on decision of the Supreme Court in the case of H. Anraj vs. Govt. of Tamilnadu AIR 1986 SC 63 wherein essential elements of a lottery namely, chance, consideration and prize were discussed and considered. It was submitted that the assessed paid consideration by incurring cost of printing of tickets and other expenses. The assessed held tickets but could not be sure of winning the prize, thus other two elements, chance and prize were duly involved in the prizes allotted on the unsold tickets. The character and nature of unclaimed prizes could not be different in the hands of the assessed. Therefore, the sums received were nothing but "winnings from lottery". Shri Santhanam in particular drew our attention to last para of observations of Sabhyasachi Mukherjee, J. (as he then was) to the following effect :

"I, however, agree with my learned brother that the right to participate in the draw under a lottery ticket remains a valuable right till the draw takes place and it is for this reason that licensed agents or wholesalers or dealers of such tickets are enabled to effect sales thereof till the draw actually takes place and, therefore, lottery tickets, not as physical articles but as slips of paper or memoranda evidencing the right to participate in the draw can be regarded as dealers merchandise and, therefore, goods which are capable of being bought or sold in the market. With these observations, I respectfully agree with the conclusion reached by my learned brother and concur with the order proposed by him."

Shri Santhanam fairly conceded that decision of Hon'ble Bombay High Court in the case of Commercial Corporation of India vs. ITO (1993) 201 ITR 348 (Bom) and of Karnataka High Court in the case of Visweshwaraiah Lucky Centre vs. CIT (1992) 189 ITR 698 (Kar) were against the assessed but in the above cases the decision of Hon'ble Supreme Court referred to by the learned counsel were not cited or considered. Having regard to decision of Hon'ble Supreme Court, the assessed was entitled to deduction by way of "winnings from lottery".

9. Smt. Sinha, learned Departmental Representative, supported the impugned order of CIT(A). She contended that earlier decisions of the Tribunal given in assesseds case were not applicable in the year before us as in those years assessed was a dealer of lottery tickets and not organising agent. Thus, on facts, decisions of Tribunal were distinguishable. The assessed as organising agent for Governments of Nagaland and Manipur carried on business of organising and conducting lotteries. The assessed was to derive different benefits like prize money, sale commission, prizes on unsold tickets, bonus, etc. All these benefits were part of business regularly carried on by the assessed. Thus unrealised prizes money or prizes on unsold tickets or bonus were business receipts and not income by way of winning from lotteries. This was more than clear from the P&L a/c maintained by the assessed. The assessed as agent of Nagaland and Manipur Governments, functioned under their control and supervision. The assessed cannot be deemed to have purchased lottery tickets. Smt. Sinha strongly relied upon decision of Hon'ble Punjab & Haryana High Court in the case of CIT vs. Sanjiv Kumar (1980) 123 ITR 187 (P&H). She also relied upon decision of Hon'ble Karnataka High Court in the case of Vishweswaraiah Lucky Centre vs. CIT (supra) and on decision of Bombay High Court in the case of Commercial Corporation of India Ltd. vs. ITO (supra). Smt. Sinha pointed out that in the last decision their Lordships had considered and applied decision of Hon'ble Supreme Court in the case of H. Anraj (supra) relied upon by the counsel for the assessed. Smt. Sinha further submitted that w.e.f. 1st April, 1987, the provisions of s. 80TT were amended and, thereafter in similar circumstances, the assessed did not claim similar receipts as "winning from lottery" but as business income. The above clearly showed that amounts in dispute were not "winnings from lotteries".

10. We have given careful thought to the rival submissions of the parties. The assessed, no doubt, succeeded in getting relief under s. 80TT of the Act from the Tribunal in earlier years, but those decisions are not applicable to the facts in the year before us and are distinguishable. The assessed in those years was not acting as organising agent as is the case in the years under consideration. The Tribunal further did not have the advantage of decisions of Karnataka and Bombay High Courts which as fairly conceded by the learned counsel for the assessed are against the assessed. Similar receipts were held to be business receipts and not from "winnings from lotteries" for the purposes of IT Act. On consideration of detailed judgment of Hon'ble Bombay High Court in the case of Commercial Corporation of India Ltd. (supra), we find that assessed in that case was to organise lotteries on behalf of State of Goa against payment of guaranteed profit to the Government. The terms and conditions in the reported case are quite similar to the terms and conditions of agreements entered into by the assessed with the two State Governments. The question in the reported case was whether the prize money on unsold lottery tickets was income by way of "winnings from lotteries". Their Lordships after considering the terms and conditions of the relevant agreement held that "prize" on unsold tickets was not winnings from lotteries. Their Lordships held that the assessed merely acted an agent of the Government for organising lotteries and had neither purchased lottery tickets nor participated in the draws of the lotteries. In the said decision their Lordships considered dictionary meaning of the words "lottery ticket" and "lottery" and the relevant decisions of the different High Courts on the subject including the decision of Hon'ble Supreme Court in the case of H. Anraj (supra) and held :

"It is clear that a lottery as a chance for a prize against a price and, therefore, the element of purchase of lottery ticket must be present and secondly, the purchaser of lottery ticket has a right to participate in the draw. Undoubtedly, it is a sale of goods and lastly it is an income liable to tax."

On consideration of agreement their Lordships held that assessed had entered into an agreement of agency where the Goa State were the "principal" and assessed petitioner an "agent". By stretch of no imagination the said agreement could be treated as an agreement where sale-purchase of lottery tickets was involved. It is interesting to note that at page 372 of report their Lordships mentioned specifically that States of Nagaland, Manipur, Himachal Pradesh and Madhya Pradesh have entered into similar agreements with some parties to organise and conduct lotteries on behalf of State Governments.

Having regard to the aforementioned decision of Hon'ble Bombay High Court and similarity between the terms and conditions of agreements involved in the present appeal and those considered by the Hon'ble Bombay High Court, we have no hesitation in holding that prizes on unsold tickets, commission bonus, unclaimed prizes, etc., are business receipts and not "winnings from lotteries" in the hands of the assessed. The assessed acted as agent on behalf of the State Governments to organise and conduct lotteries and at no stage purchased lottery tickets. He paid no price for participating and take a chance at any draw. It cannot, therefore, be held that receipts in the hands of the assessed with which we are concerned in the present appeal were winnings from lotteries. The denial of relief to the assessed under s. 80TT of the Act has to be upheld.

11. Learned counsel for assessed had placed strong reliance on decision of Hon'ble Supreme Court in the case of H. Anraj vs. Govt. of Tamilnadu (supra) to contend that the assessed as organiser and promoter, had all the rights which the purchaser of the lottery tickets acquired. Those rights with all the elements of lottery were acquired by the purchaser from the assessed (promoter) only. The mere disability of the assessed to participate in the draw does not mean that assessed possessed lesser rights than holder of a lottery ticket. In this connection learned counsel for the assessed drew our attention to descriptions at page 181 of the report. He also drew our attention to separate observations made by S. S. Mukherjee, J. (as Hon'ble Chief Justice then was) and in particular to the remarks in the last para of the decision, referred to above.

12. We have considered carefully the judgment of Hon'ble Supreme Court. We find nothing in the decision which would advance the case of the assessed. The relevant observations of their Lordships were considered and applied by the Hon'ble Karnataka High Court to arrive at conclusion that similar receipt was not "winnings from lotteries". The decision of Supreme Court does not suggest that assessed as organiser of lotteries on behalf of the State Governments can be said to have purchased lottery tickets for a price and was entitled to participate in the draw. In our considered view, decision of Hon'ble Karnataka High Court fully covers the controversy against the assessed. Respectfully following the aforesaid decision and after examining the facts of the case, we hold that assessed is not entitled to deduction under s. 80TT of the IT Act.

13. In the next ground of appeal for the asst. yr. 1984-85, the assessed has challenged the disallowance of Rs. 12,62,288 under s. 37(3A) of the Act. The learned CIT(A) upheld the disallowance with the following remarks :

"2. Next ground is against the disallowance made under s. 37(3A). The ITO has considered (a) car expenses Rs. 23,609; (b) car depreciation Rs. 15,722; (c) car insurance Rs. 2,466; (d) hotel payments Rs. 2,321; (e) conveyance Rs. 4,940; (f) expenses on advertisement and publicity Rs. 1,23,09,883, for purposes of s. 37(3A). It was claimed that expenses on advertisement and publicity were obligatory and s. 37(3A) was not attracted as also expenses on result publication. The ITO did not accept the contention of the appellant when it was held that there was no clear line of distinction between advertisement and publicity as also result publication. Shri Gupta contends that the ITO misread the facts. It is contended that 106 draws were held in respect of lotteries organized by the appellant and result of each of these draws was liable to be published in a number of newspapers as stipulated in the terms of contract. It is contended that the total amount involved on result publication is Rs. 72,23,861 out of the total claim of Rs. 1,23,09,483, the balance of Rs. 49,17,611 being scheme announcement or advertisement expenses. Shri Gupta contends that whereas the expenses at (a) to (e) only fall within the purview of s. 37(3A), the same on advertisement and result publications, do not fall within the meaning of s. 37(3A). I have heard Shri Gupta and seen the relevant record. While agreeing that result publication apart from being under the terms of contract cannot be called advertisement or publicity and not covered under s. 37(3A), the same cannot be said of scheme announcement expenses being advertisement expenses. During the course of the appellate proceedings, the appellant was called upon to substantiate the claim with regard to the result publication expenses at Rs. 72,23,861 as per break up given. A certain number of bills were selected at random and the ITO was called upon to verify the contentions of the appellant that the expenditure was related to result publications. On verification, it was found that while publishing the results in the newspapers, the assessed also announced the next draw details in the same publication. This is nothing but scheme announcement expenses or advertisement expenses and stand covered within the meaning of s. 37(3A). Such expenses are between 15 to 20%. Accordingly, it is held that the following amounts are covered under s. 37(3A) :

Rs.

(a) to (e)......

49,058

(f) Scheme announcement or publicity expenses

49,17,611

Further 20% of result publication expenses of Rs. 72,23,861

14,44,772

64,11,441

Less ....

1,00,000

63,11,441

20% of the above Rs. 12,62,288 as against Rs. 24,51,780 disallowed by the ITO.

Relief Rs. 11,89,492."

In appeal before us it was contended that inclusion of Rs. 14,44,772 in expenses to which s. 37(3A) was applied is totally unjustified when after examination it has been seen that these expenses pertain to result publication which was mandatory for the assessed as per agreements with the State Governments. Merely because date of next draw was also announced, the result publication did not amount to advertisement. Likewise, announcement and publicity of schemes of different draws of lotteries was imperative for carrying the business of lotteries on All India basis. The assessed placed before us copies of result and other publications carried by the assessed. The learned Departmental Representative supported the impugned order. After considering relevant material, we are of view that publication of results in the circumstances of the case cannot fall under any of items mentioned under s. 37(3A) of the Act. We, therefore, delete inclusion of above amount from the purview of s. 37(3A). The other expenses have rightly been held to be falling under s. 37(3A). There is no doubt that these expenses were incurred wholly and exclusively for the assesseds business falling under s. 37(1) of the Act. Only to expenses covered by the above provision, sub-s. (3A) of s. 37 was made applicable. Therefore, the disallowance other than on Rs. 14,44,422 is upheld.

14. In the last ground of appeal for asst. yr. 1984-85 assessed has challenged charge of interest under ss. 139(8) and 217 of the IT Act. It was contended that in the assessment order the AO did not issue any direction to charge interest. The charging of interest in the notice of demand was invalid. The learned counsel for assessed relied upon decision of Hon'ble Sudhinendra Nath Patra vs. ITO (1980) 122 ITR 123 (Cal) and on decisions of Calcutta High Court in the case of CIT vs. Lalit Prasad Rohini Kumar (1979) 117 ITR 603 (Cal) and in the case of Monohar Gidwany & Ors. vs. CIT (1983) 139 ITR 498 (Cal). The learned CIT(A) rejected similar contention advanced before him. In his view, return was late and there was short payment of advance tax, and, therefore, provisions of ss. 139(8) and 217 were duly attracted. The interest demanded was duly charged and calculated in the notice of demand which was part of the assessment order. For the above view, the learned CIT(A) relied upon the decision of Tribunal, Jaipur Bench in the case of ITO vs. Thanmal Mohan Lal (1988) 30 TTJ (Jp) 540 (TM) : (1988) 24 ITD 132 (Jp) (TM). The learned counsel conceded that decision of the Tribunal was against the assessed. We further find that the Tribunal in the aforesaid decision had considered decision of High Courts relied upon by the assessed and the change made in the statutory provisions. We, therefore, hold that CIT(A) was right in applying the decision in case of Thanmal Mohan Lal (supra). The assessed then made an alternative submission that in this case on account of view taken by the Tribunal under s. 80TT in earlier years, the assessed bona fide paid advance tax and, therefore, the interest should be waived. We understand that an application for wavier of interest is already pending with administrative authorities. We do hope that said application would be expeditiously disposed of. With above observations, we confirm the order of CIT(A) on this ground.

Asst. yr. 1985-86 :

15. In the above assessment year the first ground of appeal relates to disallowance of Rs. 9,28,379 under s. 37(3A) of the IT Act. This disallowance also includes 20% of expenses amounting to Rs. 16,25,031 incurred on publication of results. For the reasons given in order for asst. yr. 1984-85, we see no justification for sustaining this disallowance. It is hereby deleted. The balance amount of disallowance under s. 37(3A) is upheld.

16. The next ground of appeal relates to disallowance of Rs. 4,51,490 claimed as embezzlement by an employee. The AO and on appeal the learned CIT(A) disallowed the claim as case of embezzlement came to the notice of assessed only in March, 1986, when a report was lodged with S. H. O., Lajpat Nagar Police Station, New Delhi. The loss due to embezzlement, if any, thus according to the learned authorities arose in asst. yr. 1985-86 and not in the assessment year under consideration. The loss claimed was accordingly disallowed.

17. The assessed has come up in appeal. We have heard submissions of both the parties. Learned counsel for assessed did not dispute that assessed became aware of embezzlement only in March, 1986, and not in the period under consideration. Thus, assessed cannot claim loss in the period under consideration. The learned counsel submitted that the loss be allowed in the next assessment year. The above question has to be determined in accordance with law and no directions can be issued in the appeal under consideration. We do hope that the matter would be considered judicially in the year in which it arises. The disallowance made is accordingly confirmed.

18. In their appeal the Revenue has challenged deletion of Rs. 11,87,875 added under s. 69 of the IT Act. The AO noted that assessed had acquired a property in Golf Links, New Delhi, relating to which IAC (Acq.), Range I, New Delhi, had held that market value of property was more by sum of Rs. 11,87,878 than the stated consideration. The above amount was added as undisclosed investment under s. 69 of the IT Act. On appeal, order of IAC (Acqn.) was set aside by Tribunal as per their order dt. 18th Dec., 1986. Taking note of order of Tribunal, learned CIT(A) deleted the addition. We have considered impugned order of CIT(A), New Delhi, in the light of submissions advanced before us. There is absolutely no material to show that assessed made impugned investment (in the acquisition of the property) to apply provisions of s. 69 of the IT Act. Thus, the addition has rightly been deleted by CIT(A). We confirm his order.

19. In the result, appeals of assessed are partly allowed whereas appeal of the Revenue is dismissed.