2012 (8) TMI 192 - HC - Income Tax

Treatment of Prize Winning Tickets (PWT) in the books of assessee - AO stated that liability was an artificial creation as it was without any monetary transaction - Held that - The assessee is only a sole selling agent and the ultimate liability is that of the State Government - the actual sale of lottery tickets and lottery prize distribution is done by sub-agents who are responsible for distribution of profits. These sub-agents credit the assessee with amounts of PWT payable & the assessee passes similar entries in respect of such PWT amounts payable to its stockist. Eventually the stockist, makes a similar entry to square up accounts with the Government in the State Lotteries Department and as that transactions take place on a day-to-day basis and it is on the next day that the credit entry in respect of PWT payable is squared up when a debit entry is passed consequently there was no need for any cash payment - no substantial question of law arises for consideration - in favour of assessee.

Summary

Issues:
1. Whether the impugned order disallowing a sum of Rs. 1,42,09,820/- by the Assessing Officer was correct.
2. Whether the liability of Rs. 1,42,12,620/- was an artificial creation to conceal taxable profit.
3. Whether the Appellate Commissioner and the ITAT erred in deleting the inclusion of Rs. 1,42,12,620/- by the AO.

Analysis:
1. The revenue appealed against the decision of the ITAT regarding the disallowance of Rs. 1,42,09,820/-. The assessee firm, a sole selling agent of lotteries, had reflected this amount as "Prize Winning Tickets payable" in its balance sheet. The AO added back this amount to the total income, considering it an artificial liability. However, the Appellate Commissioner and the Tribunal disagreed, stating that the liability was accounted for daily and was eventually squared off without any monetary transaction. The Tribunal upheld the deletion of the inclusion based on these facts.

2. The AO contended that the liability of Rs. 1,42,12,620/- was created artificially to conceal taxable profit. The revenue argued that the Appellate Commissioner and the ITAT erred in deleting this inclusion. They claimed that the liability was squared off without any actual monetary transaction, leading to the misrepresentation of taxable profit. The revenue sought restoration of the AO's decision based on these grounds.

3. The Tribunal's order was supported by the arguments of the assessee's counsel, who emphasized the daily accounting of liabilities and the subsequent settlement without cash payments. The Tribunal found that the assessee was not responsible for the payment of Prize Winning Tickets, as it was handled by sub-agents and ultimately the State Lotteries Department. The Tribunal concluded that the AO overlooked the daily accounting process, leading to the erroneous addition. The High Court upheld the Tribunal's decision, stating that the findings were factual and based on the nature of the business, finding no error of law or unreasonableness. Consequently, the Court dismissed the revenue's appeal.

This detailed analysis covers the issues raised in the legal judgment, providing a comprehensive overview of the arguments presented and the decisions made by the authorities involved.