2024 (10) TMI 649 - AT - Income Tax

Correct head of income - income for prize winnings from unsold lottery tickets - assessee claimed credit of TDS as deducted by the Director of Lotteries of Sikkim and Director of Lotteries of Mizoram u/s 194B - assessee considered winning from unsold lottery tickets as business income and claimed set-off of various expenses inclusive of cost of tickets against the said winning - HELD THAT - As in the present case there is no such restriction of set-off of business loss against income from lottery either u/s 70 / 71 / 74A or u/s 115BB of the Act. Prior to Finance Act, 1986, sub-section (1) and (2) to Sec.74A provided that the loss from lotteries etc. shall be set-off against income from lotteries only. By the Finance Act, 1986, these two sub-sections were omitted and thus, the bar on setoff of losses was removed. Second distinction is the fact that, in that case, the assessee did not contend that betting income would be income from owning and maintaining of the horse races. In the present case, the winnings realized on unsold tickets are realization of closing stock of unsold lottery tickets. This prize money so earned by the assessee was business income which was realized during the course of business of distribution of lottery tickets. Regarding revenue s written submissions on stock-in-hand, it has been submitted that this contention has already been dealt with by Mumbai Tribunal in its order. The factual position, in this regard, has already been noted in the order of Mumbai Tribunal. It has been noted that in respect of draws to be held in the next year, there would be no opening and closing stock since the purchase and sale invoices would be raised in the next year only. For the draws that were to be held in the same financial year, the value of unsold tickets would become zero. The assessee, would, therefore, have no stock in its financial statements. Referring to various finding of Mumbai Tribunal, it has finally been submitted that the purchase price paid for lottery tickers was for onwards distribution of tickets to the stockiest. The purchase price could not be bifurcated between those tickets which have been sold to the stockiest and the unsold lottery tickets which have fetched prized money. The prize winnings are nothing but realization of unsold lottery tickets during the course of business. Thus opposed any interference in the impugned order. After going through the order of Mumbai Tribunal in assessee s own case for AY 2014-15 2021 (5) TMI 793 - ITAT MUMBAI we concur that all the aspects / facts of the matter as well as applicable case laws have elaborately been dealt with by the co-ordinate bench in its order. The bench has not only considered the validity of revisionary jurisdiction u/s 263 but also decided the issue on merits. After much deliberation, the impugned issue has ultimately been decided in assessee s favor. As in the case of CIT vs. Dr. M.A.M. Ramaswamy 2015 (1) TMI 439 - MADRAS HIGH COURT has elaborately been distinguished by Ld. Sr. Counsel in its written submissions. The same has already been deliberated upon by us in preceding paragraphs. The same found our concurrence. Nothing has been shown to us that the aforesaid decision of Mumbai Tribunal has been reversed by higher judicial authorities in any manner or the same is not applicable to the facts of this year. No distinguishing feature has been shown to us. The issue, on merits, has elaborately been dealt with by the Tribunal in its order. Under these circumstances, respectfully following the aforesaid decision of Mumbai Tribunal in assessee s own case, we dismiss the appeal of the revenue.

Summary

Issues Involved:

1. Determination of the appropriate head of income for prize winnings from unsold lottery tickets.
2. Applicability of tax provisions under Sections 56(2), 58(4), and 115BB of the Income Tax Act.
3. Eligibility for deduction of expenses against winnings from unsold lottery tickets.
4. Consideration of prior judicial decisions and their applicability to the case.

Issue-wise Detailed Analysis:

1. Determination of the appropriate head of income for prize winnings from unsold lottery tickets:

The central issue in this case was whether the prize winnings from unsold lottery tickets should be classified as "business income" or "income from other sources." The assessee, a partnership firm engaged in the distribution of lottery tickets, argued that the prize winnings were part of its business income. The firm contended that the prize money from unsold tickets was essentially a refund of the cost incurred for purchasing the tickets, and therefore, it should be treated as business income. However, the Assessing Officer (AO) classified the winnings under "income from other sources" as per Section 56(2)(ib) of the Income Tax Act, which specifically deals with winnings from lotteries.

2. Applicability of tax provisions under Sections 56(2), 58(4), and 115BB of the Income Tax Act:

The AO argued that under Section 56(2)(ib), winnings from lotteries should be taxed as "income from other sources," and as per Section 58(4), no deduction for expenses is allowed against such income. Additionally, Section 115BB mandates a tax rate of 30% on such winnings. The AO maintained that these provisions are mutually exclusive and that the prize winnings from unsold tickets should be taxed accordingly, without allowing any deductions for the cost of tickets.

3. Eligibility for deduction of expenses against winnings from unsold lottery tickets:

The assessee claimed that the prize winnings should be offset against the cost of unsold tickets, treating them as business expenses. However, the AO rejected this claim, citing Section 58(4), which prohibits any deduction of expenses in connection with income from lotteries. The AO emphasized that the assessee's participation in the lottery draw by holding unsold tickets constituted a separate activity from its business operations, thus disallowing any expense deductions.

4. Consideration of prior judicial decisions and their applicability to the case:

The assessee relied on a prior decision by the Mumbai Tribunal in its own case for AY 2014-15, where similar issues were adjudicated in favor of the assessee. The Tribunal had previously ruled that prize winnings from unsold lottery tickets could be considered business income, allowing the set-off of business losses against such income. The Tribunal also distinguished this case from other judicial decisions, such as the Kerala High Court's ruling in CIT vs. Manjoo & Co., which did not involve the set-off of losses under Section 71. The Tribunal's decision was based on the interpretation that the winnings were part of the business activity of distributing lottery tickets and not mere participation in a lottery draw.

Conclusion:

The Appellate Tribunal upheld the decision of the CIT(A), which sided with the assessee, classifying the prize winnings as business income. The Tribunal noted that the issue was already settled in the assessee's favor by the Mumbai Tribunal's previous decision, which had not been overturned by higher judicial authorities. The Tribunal dismissed the revenue's appeal, affirming that the prize winnings from unsold lottery tickets should be treated as business income, allowing the assessee to debit the expenditure towards the purchase of unsold tickets and credit the prize winnings in the Profit & Loss Account as part of its business activities. The decision applied to both assessment years 2015-16 and 2016-17, as the facts and issues were identical.