2018 (4) TMI 1078 - SC - Income Tax

Income from Sikkim State Lottery - taxability under the Income Tax Act, 1961 - deduction u/s 80TT is applicable on the net winning amount received by the assessee and not on the gross amount of the winning prize? - place of residence - taxability in India - income accrued in India - Held that - The appellant, being a resident of Rajasthan, received the income arising from winning of lotteries from Sikkim during the Assessment Year in question was liable to be included in the hands of the Assessee as resident of India within the State of Rajasthan where IT Act was in force notwithstanding that the same had accrued or arisen to him at a place where the IT Act was not in force even in respect of income accruing to him without taxable territory A combined reading of both the clauses makes it clear that any income accrued or received in India would be included in his total income for taxing purposes under the IT Act. However, in the present case, we find that the amount has been earned by the appellant-assessee in the State of Sikkim and the amount of lottery prize was sent by the Government of Sikkim to Jaipur on the request made by the appellant. While Section 5 of the IT Act would not be applicable, the existing Sikkim State Income Tax Rules, 1948 would be applicable. Thus, on the income, it would appear that Income-tax would be payable, under Sikkim State Income Tax Rules, 1948 and not under the IT Act. Since Sikkim is a part of India for the accounting year, there would appear to be, on the same income, two types of income-taxes cannot be applied. Once the assessee has paid the income tax at source in the State of Sikkim as per the law applicable at the relevant time in Sikkim, the same income was not taxable under the IT Act, 1961. Having decided so, the other issue whether the income that is to be allowed deduction under section 80 TT of the IT Act is on Net Income or Gross Income , becomes academic.

Summary

Issues Involved:
1. Taxability of income from Sikkim State Lottery under the Income Tax Act, 1961.
2. Applicability of deduction under Section 80TT of the Income Tax Act on 'gross income' or 'net income'.

Issue-wise Detailed Analysis:

1. Taxability of Income from Sikkim State Lottery under the Income Tax Act, 1961:

The primary issue in this case was whether the income from the Sikkim State Lottery, earned by the appellant, a resident of Rajasthan, was taxable under the Income Tax Act, 1961 (IT Act), especially since the income was already taxed under the Sikkim State Income Tax Rules, 1948. The appellant contended that the IT Act was extended to Sikkim only from 01.04.1989, and hence, income accrued in Sikkim before this date could not be taxed under the IT Act. The appellant also argued that Article 371F of the Constitution, particularly clauses (k) and (n), prevented the application of the IT Act in Sikkim until 31.03.1989, and taxing the same income by both the Union of India and the State of Sikkim would amount to double taxation.

The court examined the historical context of Sikkim's merger with India and the introduction of Article 371F, which allowed pre-existing laws in Sikkim to continue until amended or repealed. It was noted that the IT Act was made applicable to Sikkim only by a notification in 1989, with the first assessment year being 1990-91. For the assessment year 1986-87, the IT Act was not applicable in Sikkim, and the Sikkim State Income Tax Rules, 1948, were in force.

The court considered Section 5 of the IT Act, which includes all income received or accrued in India within its ambit. However, since the income was earned in Sikkim and already taxed there, the court concluded that the IT Act would not apply, and only the Sikkim State Income Tax Rules, 1948, would be applicable. The court emphasized that double taxation is not permissible unless expressly provided by the legislature, and there was no specific provision in the IT Act to include income from Sikkim lottery tickets before 01.04.1990.

2. Applicability of Deduction under Section 80TT on 'Gross Income' or 'Net Income':

The second issue was whether the deduction under Section 80TT of the IT Act should be applied to the 'gross income' or the 'net income' from the lottery. The High Court had held that the deduction under Section 80TT should be on the net winning amount received by the assessee after deducting the agent/seller commission.

However, since the court concluded that the income from the Sikkim State Lottery was not taxable under the IT Act, this issue became academic. The court did not need to address whether the deduction under Section 80TT should be on the gross or net income, as the primary issue of taxability under the IT Act was resolved in favor of the appellant.

Conclusion:

In conclusion, the Supreme Court held that the income from the Sikkim State Lottery, already taxed under the Sikkim State Income Tax Rules, 1948, was not taxable under the IT Act, 1961. Consequently, the question of applying the deduction under Section 80TT on gross or net income became irrelevant. The appeal was allowed, and the judgment of the High Court was set aside.