1974 (4) TMI 1 - HC - Income Tax

Levy of income-tax on winnings from lottery validity - only Parliament can levy tax on it as taxation of any income from lottery will be covered by article 82 of the Union List - contention raised by the learned counsel is that tax on lotteries is discriminatory and is hit by article 14 of the Constitution. The argument is that the tax is levied only on cash prizes in a lottery while lotteries of other kinds have been left out. According to the learned counsel, there are other kinds of lotteries also such as lotteries for allotment of houses. This argument has no merit. A lottery for the allotment of houses does not partake of the nature of gambling or betting. There a person who is allotted a houses by drawing lots pays full price for the house. Drawing of the lots is only a method of selecting buyers when the buyers are more than the houses to be sold. The type of lottery that we are dealing with forms a class separate from the type of lottery where houses or other things are allotted to a purchaser by drawing lots. There is thus no question of discrimination. In the result the petition fails

Issues Involved:
1. Competence of Parliament to levy tax on lottery winnings.
2. Applicability of Entry 82 or Entry 97 of List I (Union List) versus Entry 62 or Entry 34 of List II (State List).
3. Whether lottery winnings constitute "income" under the Income-tax Act.
4. Discrimination under Article 14 of the Constitution.

Issue-wise Detailed Analysis:

1. Competence of Parliament to Levy Tax on Lottery Winnings:
The primary issue is whether Parliament has the authority to levy tax on lottery winnings. The petitioner argued that such tax does not fall under Entry 82 (taxes on income) or Entry 97 (residuary powers) of List I of the Seventh Schedule of the Constitution, but rather under Entry 62 of List II (State List), which pertains to taxes on luxuries, including betting and gambling. The court, however, held that the word "income" in Entry 82 should be given its widest connotation to include every kind of receipt and gain, including lottery winnings. Therefore, Parliament was competent to impose this tax.

2. Applicability of Entry 82 or Entry 97 of List I (Union List) versus Entry 62 or Entry 34 of List II (State List):
The court examined whether the tax on lottery winnings falls under Entry 82 or Entry 97 of the Union List, or under Entry 62 or Entry 34 of the State List. The court concluded that Entry 62 allows the State Legislature to tax the entertainment or participation in gambling but not the income or gains arising from such activities. Entry 82 of the Union List, which covers taxes on income, was deemed applicable. Even if it were under Entry 97, Parliament could still enact such a tax within the Income-tax Act.

3. Whether Lottery Winnings Constitute "Income" under the Income-tax Act:
The court noted that prior to the 1972 amendments, winnings from lotteries were exempt from income-tax as casual and non-recurring receipts. However, the Finance Act, 1972, amended the Income-tax Act to include winnings from lotteries as taxable income under Section 2(24)(ix). The court referenced the Supreme Court decision in Navinchandra Mafatlal v. Commissioner of Income-tax, which upheld the broad interpretation of "income" in legislative contexts. Thus, lottery winnings are considered "income" under the amended Income-tax Act.

4. Discrimination under Article 14 of the Constitution:
The petitioner argued that taxing only cash prizes from lotteries while exempting other forms of lotteries (e.g., lotteries for house allotments) was discriminatory. The court rejected this argument, stating that lotteries for house allotments do not constitute gambling or betting, as the participants pay the full price for the house. The court found no merit in the claim of discrimination, as the two types of lotteries form distinct classes.

Conclusion:
The court dismissed the petition, upholding the amendments to the Income-tax Act that made lottery winnings taxable. The court affirmed that Parliament was competent to levy such a tax under Entry 82 of the Union List and that there was no violation of Article 14 of the Constitution. The petition was dismissed with costs.

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