2008 (9) TMI 1024 - AT - Income Tax

Summary

Issues Involved:
1. Whether gross collections or net collections should be taken as income.
2. Justification and reasonableness of ad-hoc disallowance out of winnings payments of less than Rs. 2,500 each.
3. Applicability of Section 40A(3) regarding disallowance out of winning payments exceeding Rs. 20,000 made in cash.

Detailed Analysis:

1. Gross Collections vs. Net Collections as Income:
The primary issue is whether the gross collections of the assessee should be taken to the Profit & Loss Account or only the net collections after deducting winnings payments and Betting Tax. The assessee argued that it acts as an agent, and only the commission (net collections) should be treated as income. However, the Tribunal held that the gross collections must be considered as the income of the assessee, and the winnings payments and Betting Tax are expenditures. The Tribunal rejected the concept of overriding title, stating that liabilities towards winnings payments and Betting Tax arise only after the receipt of bettings from punters, and thus, the principle of overriding title does not apply. The Tribunal also noted that the accounting practice followed by the assessee does not reflect the true income and is not in line with the Accounting Standards.

2. Ad-hoc Disallowance out of Winnings Payments of Less than Rs. 2,500 Each:
The assessing officer made an ad-hoc disallowance of 15% of winnings payments less than Rs. 2,500 each, which was reduced to 10% by the CIT(A). The Tribunal found that the assessee maintained a fool-proof computerized system for recording receipts and payments, which was audited by an independent Chartered Accountant. The Tribunal held that the ad-hoc disallowance was not justified as the assessee had satisfied the conditions laid down in Section 37(1) of the Act. The Tribunal deleted the entire ad-hoc disallowance, emphasizing that the Revenue did not bring any material on record to show that the payments were inflated or baseless.

3. Applicability of Section 40A(3) Regarding Disallowance out of Winning Payments Exceeding Rs. 20,000 Made in Cash:
The assessing officer disallowed 20% of the cash payments exceeding Rs. 20,000 made by the assessee, invoking Section 40A(3). The assessee contended that the provisions of Section 40A(3) were not applicable as banking facilities were not available at tote points, and most races were conducted on Sundays and public holidays. The Tribunal noted that the disallowance under Section 40A(3) is mandatory unless payments are covered by exceptions under Rule 6DD. The Tribunal observed that the payments to punters might not fall within the scope of business expenditure under Section 40A(3) as they arise out of a wagering contract. The Tribunal set aside the orders of the Revenue authorities and remanded the matter to the assessing officer to examine the nature of the payments and recompute the disallowance, if any, after giving the assessee a reasonable opportunity of hearing.

Conclusion:
- The gross collections must be considered as the income of the assessee.
- The ad-hoc disallowance of winnings payments less than Rs. 2,500 each was deleted.
- The matter of disallowance under Section 40A(3) was remanded to the assessing officer for fresh examination.

Result:
- Assessee's appeals were partly allowed for statistical purposes.
- Revenue's appeals were dismissed.