1999 (7) TMI 105 - AT - Income Tax

Summary

Issues Involved:
1. Imposition of penalty under section 271C for failure to deduct tax at source under section 194B.
2. Charging of interest under section 201(1A) for contravening section 194B.

Detailed Analysis:

1. Imposition of Penalty under Section 271C:

The primary issue in ITA No. 273/MDS/99 revolves around the imposition of a penalty amounting to Rs. 29,17,792 under section 271C of the Income-tax Act for the failure to deduct tax at source under section 194B for the year ending 31-3-1998. The assessee, the Deputy Director of Small Savings, was involved in implementing the District Level Gift Linked Savings Mobilisation Scheme during 1997-98 as per Government Order G.O. Ms. No. 277, dated 29-5-1997, issued by the Government of Tamil Nadu.

The Assessing Officer considered the scheme as a lottery and initiated penalty proceedings under section 271C, relying on the definitions and judicial precedents that describe a lottery as a distribution of prizes by chance among persons who have paid consideration for a chance to win. The CIT(A) upheld this view, relying on the decisions of the Punjab & Haryana High Court in CIT v. Sanjiv Kumar and the Madras High Court in Sesha Ayyar v. Krishna Ayyar.

However, the assessee contended that the scheme did not constitute a lottery as no consideration was paid for the gift coupons. The coupons were given free of cost to investors who deposited Rs. 1,000 in specified savings schemes, and there was no risk of loss involved. The Tribunal agreed with the assessee, noting that the essential elements of a lottery, including consideration paid for a chance and the risk of loss, were absent. The Tribunal concluded that the scheme was an incentive to boost savings and did not amount to a lottery, thus section 194B was not applicable. Consequently, the penalty under section 271C was cancelled.

2. Charging of Interest under Section 201(1A):

The second issue, addressed in ITA No. 274/MDS/99, pertains to the charging of interest amounting to Rs. 2,39,919 under section 201(1A) for contravening section 194B. The Tribunal examined whether the Deputy Director of Small Savings could be considered an assessee in default under section 201(1A).

The assessee argued that the Deputy Director was not responsible for managing and distributing the gifts, as per G.O. Ms. No. 277, dated 29-5-1997. The responsibility lay with the Director of Small Savings and the District Collectors. The Tribunal found merit in this argument, noting that the Deputy Director was merely a functionary and subordinate to the Director of Small Savings. Furthermore, since the scheme did not fall under the purview of section 194B, the interest under section 201(1A) was not applicable.

Conclusion:

The Tribunal held that the transactions under consideration did not amount to a lottery or raffle, and thus the provisions of section 194B were not applicable. Consequently, the penalty under section 271C was cancelled, and the interest under section 201(1A) was not upheld. The appeals filed by the assessee were allowed.