2021 (5) TMI 793 - AT - Income Tax

Revision u/s 263 - Taxability of income by way of winnings from lotteries u/s 115BB of the Act and set off of loss under the head Profits and Gains of Business or Profession - PCIT directing the ld AO to compute the winnings from lottery not as business income but as income within the meaning of section 115BB - whether the assessee firm is entitled for set off of business loss with the income determined u/s 115BB? - HELD THAT - We find lot of force in the argument advanced by the ld AR on the point that there is no bar on set-off of loss provided in section 115BB of the Act as stated supra. Section 115BB of the Act talks only about taxability of such winnings at a special rate of 30%. Hence only the net winnings is taxable at 30%. The net winnings is to be determined after setting off the business loss of ₹ 40.86 crores as worked out above with the income from other sources. We find that the ld AR had not disputed the rate of taxability of winning from lotteries in terms of section 115BB of the Act. We find that even if the prize winnings from unsold lottery tickets is sought to be taxed under the head Income from Other Sources as pointed out by the ld PCIT in his section 263 order, the business loss is still required to be set off with the prize winnings from unsold lottery tickets u/s 71 of the Act and the net income thereon would be liable for tax at special rate of 30% in terms of section 115BB of the Act. As long as the tax rate under normal provisions of the Act and tax rate prescribed u/s 115BB of the Act are same, the entire issue becomes revenue and tax neutral. Hence there could be no prejudice that could be caused to the interest of the revenue for the Asst Year 2014-15 even if the order of the ld AO is found to be erroneous. We find that the Hon ble Supreme Court in the case of Malabar Industrial Co. Ltd 2000 (2) TMI 10 - SUPREME COURT had categorically held that for the ld PCIT to invoke revision jurisdiction u/s 263 of the Act, the twin conditions should be cumulatively satisfied i.e. the order passed by the ld AO should be erroneous and it should be prejudicial to the interest of the revenue. In the instant case, since the entire issue is revenue and tax neutral, the twin conditions stipulated in section 263 of the Act are not satisfied and hence the section 263 order passed by the ld PCIT is eligible to be quashed thereon. Whether the prize winnings from unsold lottery tickets derived by the assessee dealer could be assessed under the head Income from Business or under the head Income from Other Sources , per se, is clearly a debatable issue. Hence the law is now well settled that a debatable issue cannot be subject matter of revision proceedings u/s 263 . All the requisite details were indeed filed by the assessee before the ld AO in response to the queries raised by the ld AO along with the notice u/s 142(1) of the Act dated 16.8.2016 and thereafter by oral queries raised during assessment proceedings. We find that the assessee had duly replied to those queries before the ld AO in the assessment proceedings vide reply letters dated 22.11.2016 and 29.11.2016 together with all the supporting details and workings for arriving at the profits including prize winnings from unsold lottery tickets Hence it could be safely concluded that this is not a case where no enquiries at all, were carried out by the ld AO in the assessment proceedings. We hold that requisite enquiries were indeed carried out by the ld AO and after duly getting satisfied on the same, he had proceeded to frame the assessment accepting the contentions of the assessee. It is not necessary for the ld AO to deal with each and every matter that had cropped up in the assessment order. He is not expected to write a thesis in the assessment order. He is only required to address the issues on which he is not agreeable with the contentions of the assessee. It could be safely concluded that the ld PCIT grossly erred in invoking revisionary jurisdiction u/s 263 of the Act by trying to substitute his own view against the view already taken by the ld AO and also on a purely debatable issue. Hence we have no hesitation in quashing the revision order passed by the ld PCIT u/s 263 of the Act . Accordingly, the first issue framed hereinabove at the beginning of this order is decided in favour of the assessee. Characterization of income - Income by way of winnings from lotteries on unsold lottery tickets - Winnings from unsold lottery tickets is incidental to the carrying on of business of distribution of lottery tickets and therefore assessable under the head income from business or profession . The income from nature of activities covered within the ambit of section 2(24)(ix) of the Act are such which are carried out, as part of hobby or enjoyment or pastime. However, if a person is engaged in the business of say lottery or organizing horse races, then income earned by such person cannot be brought within the ambit of section 2(24)(ix) of the Act as the same would be chargeable as regular income from business. The words winnings from lottery cannot be read in isolation and would take its colour from the words with which it is associated with. The nature of income covered within its ambit cannot be read in isolation or dissected from each other. A holistic reading of clause (ix) in section 2(24) of the Act would suggest that it is not intended to apply to a person who is engaged in the business of distribution of lotteries or owning and maintaining race horses or a bookmaker with whom a punter places his bets. Winnings from lottery is read with the other kinds of winnings included within the ambit of section 2(24)(ix) of the Act, it becomes apparent that it is only attracted to those people who have such winnings by reason of their participation in draw of lottery as part of their hobby or enjoyment or pastime. If these winnings have arisen as part of business of distribution of lottery tickets, then such winnings cannot be regarded as winnings from lotteries u/s 2(24)(ix) of the Act but would be taxable as profits and gains of business of distribution of lottery tickets. Whether the ld PCIT was justified in directing the ld AO to compute the winnings from lottery not as business income but as income within the meaning of section 115BB? - The interconnected issue involved therein is as to whether the assessee firm is entitled for set off of business loss with the income determined u/s 115BB of the Act in the facts and circumstances of the case? - In the instant case before us, there is absolutely no quarrel regarding the applicability of tax rate u/s 115BB of the Act. The real quarrel is only whether the business loss incurred by the assessee after exclusion of prize money from net profit is eligible for set off against winnings from lotteries u/s 71 of the Act. In the present case before us and in the subject assessment year, the income by way of winnings from lotteries is taxable at 30% u/s. 115BB of the Act whereas the maximum marginal rate of taxation was also 30% for both Individuals and firms In view of the elaborate observations on merits and respectfully following the various judicial precedents relied upon hereinabove, we decide the second issue framed at the beginning of this order in favour of the assessee.

Summary

Issues Involved:
1. Whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking revisionary jurisdiction under section 263 of the Income Tax Act.
2. Whether the PCIT was justified in directing the Assessing Officer (AO) to compute winnings from lottery as income under section 115BB and not as business income.
3. Whether the PCIT was justified in directing the AO to examine the allowability of expenses under section 58(4) of the Act.

Issue-wise Detailed Analysis:

1. Invocation of Revisionary Jurisdiction under Section 263:
The Tribunal examined whether the PCIT was justified in invoking revisionary jurisdiction under section 263. It was found that the PCIT's assumption of jurisdiction was invalid as the order passed by the AO was neither erroneous nor prejudicial to the interests of the revenue. The Tribunal noted that the AO had conducted proper inquiries and accepted the assessee's submissions after due consideration. The Tribunal emphasized that a debatable issue cannot be a subject matter of revision under section 263. It was concluded that the PCIT's order was quashed as it did not meet the twin conditions of being erroneous and prejudicial to the revenue.

2. Computation of Winnings from Lottery under Section 115BB:
The Tribunal analyzed whether the winnings from unsold lottery tickets should be computed under section 115BB or as business income. The Tribunal noted that the assessee was engaged in the business of distributing lottery tickets and any winnings from unsold tickets were incidental to this business. The Tribunal referred to various judicial precedents, including the decision of the Karnataka High Court in Mysore Sales International Ltd., which held that such winnings are business income. The Tribunal also distinguished the Kerala High Court's decision in Manjoo & Co., stating that it did not address the issue of set-off of losses under section 71. The Tribunal concluded that the winnings from unsold lottery tickets should be treated as business income and allowed the set-off of business losses against such winnings.

3. Allowability of Expenses under Section 58(4):
The Tribunal addressed the issue of whether expenses related to the winnings from lotteries are allowable under section 58(4). Given that the winnings were considered business income, the Tribunal found that the provisions of section 58(4), which disallow certain expenses for income from other sources, were not applicable. Consequently, the Tribunal did not find it necessary to delve into the specifics of section 58(4) as the primary issue was resolved in favor of the assessee.

Conclusion:
The Tribunal allowed the appeal of the assessee, quashing the PCIT's order under section 263 and holding that the winnings from unsold lottery tickets should be treated as business income. The Tribunal also concluded that the set-off of business losses against such winnings is permissible, and the provisions of section 58(4) are not applicable in this context. The appeal was decided in favor of the assessee both on technical grounds and on merits.