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TMI Blog2004 (9) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... o are either conducting kuries or conducting business in consumer goods giving prizes by taking lots either for prompt payment of kuri instalments or for increasing the sale of consumer products is liable to pay advance tax under section 194B of the Income-tax Act, 1961 (for short "the Act"). In all these cases the Income-tax Officer (TDS) Division-II, Thrissur, had issued notices regarding deduction of tax at source under section 194B of the Act directing the petitioners to appear before him for a personal hearing. Since the petitioners did not respond to the said notices they were asked to furnish details regarding the scheme under which the lottery is taken. The petitioners have challenged the said notices in these writ petitions. According to the petitioners who are conducting chits a scheme for taking lot for awarding certain prizes to subscribers who are making prompt payment of the kuri instalments was framed under which every month lot is taken with reference to prompt subscribers and gifts are given. It is the case of the said kuri companies that no independent consideration is involved so far as the gift is concerned. On the other hand, the Income-tax Officer (TDS) has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or participation in the draw. Sri Balachandran also submitted that the petitioners in O.P. Nos. 7197 and 7208 of 1998 and O.P. Nos. 19342 of 1999 and 29291 of 1999 are dealers in consumer goods and that in order to have more sales of their consumer goods a scheme is framed under which certain discount/incentives are given to persons who win in the draw conducted pursuant to the scheme. There also counsel submits that there is no independent consideration for the draw. In short Shri Balachandran submitted that the provisions of section 194B have no application to the petitioners' case. Counsel in support of the above submissions took me to the decision of a Full Bench of five judges of the Madras High Court in Sesha Ayyar v. Krishna Ayyar, AIR 1936 Mad 225 where the Full Bench, inter alia, considered the question as to whether a kuri is a lottery. The Full Bench has formulated the elements which appear to be essential to constitute lottery, viz., (1) a prize or some advantage in the nature of a prize, (2) distribution by chance, (3) consideration paid or promised, and (4) risk or loss. Counsel submits that the transactions in question did not satisfy the essential elements mentioned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act since no tax had been deducted at source and issued notice to the respondent treating him as the assessee in default. In that context the Madras High Court considered the meaning of the term "lottery" both with reference to the dictionary meaning and with reference to the decided cases. Counsel submits that on identical circumstances the Madras High Court held that the chance given to the investor to win a prize is a free chance, and is not a chance given in return for a price or contribution paid and therefore the scheme is not a lottery. Counsel also referred to me various other decisions which I do not think it necessary to consider. Sri P.K.R. Menon, learned senior counsel appearing for the respondents also relied on the decision of the Full Bench of the Madras High Court in Sesha Ayyar's case, AIR 1936 Mad 225. Senior counsel took me to page 227 of the Full Bench decision and the illustration discussed in the right hand column which reads: "Then clause 7 provides that at the end of the 51st month the 575 subscribers who have not drawn prizes will be repaid without interest, the total amount of their subscription, viz., Rs. 150, clause 6 shows the benefit which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r (TDS) under the provisions of the Act. Section 194B of the Act under which notices are issued by the Income-tax Officer (TDS) reads: "194B. Winnings from lottery or crossword puzzle. - The person responsible for paying to any person any income by way of winnings from any lottery or crossword puzzle in an amount exceeding five thousand rupees shall, at the time of payment thereof, deduct income-tax thereon at the rates in force." In view of the aforesaid provisions the question to be considered is as to whether the gifts made to subscribers of a kuri based on taking lots from prompt subscribers can be treated as a lottery. The question whether a kuri can be treated as a lottery was considered by the Full Bench of the Madras High Court in Sesha Ayyar's case, AIR 1936 Mad 225. The Full Bench with reference to the dictionary meaning of the term "lottery" and the decisions of the courts in England and in India have observed that from a study of decisions of both English and Indian courts the following four elements appear to be essential to constitute a lottery: (1) A prize or some advantage in the nature of a prize; (2) distribution by chance; (3) consideration paid or promised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts. In this context it can be said that there is a consideration for the draw, in that, some of the persons will get a benefit of Rs. 150 for making a remittance of less amounts. It is in that context, it must be noted, the Full Bench decision has taken the view that the kuri scheme amounted to a lottery. True that one of the judges constituted in the Full Bench, Justice Varadachariar in his separate judgment has taken the view as a general proposition that a scheme may fairly be regarded as a lottery if it is clear that whatever other benefit the subscriber or competitor may get in return for his money, the chance of his getting the prize was also part of the bargain and must have entered into his calculation and that it is the fact of the prize and not the source from which it is paid that is the deciding factor. This proposition of the learned judge cannot be sustained in view of the decision of the Supreme Court in H.M.M. Ltd.'s case [1998] 94 Comp Cas 132. In that case the appellants therein manufacture and market consumer products, including Horlicks. The appellants advertised a scheme they called the "Hidden Wealth Prize Offer", coupons were inserted in some bottles of Horl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... term "lottery" with reference to the decisions of other High Courts and observed that "it is clear that a lottery is a chance for a prize against a price and, therefore, the element of purchase of a lottery ticket must be present and secondly, the purchaser of a lottery ticket has a right to participate in the draw", The Madras High Court in a later decision in CIT v. Deputy Director of Small Savings [2004] 266 ITR 27 considered the question with reference to the provisions of section 194B of the Act. In that case the Government, in order to encourage thrift as also to mobilise funds for developmental works, saving schemes are operated by the Government. Under the gift linked scheme, a prize coupon is given to the investor when the investment made is in excess of Rs. 1,000. The investor does not pay any price for those coupons. Prizes are awarded to the holder of the lucky coupon, which is chosen by lot. The prizes given are consumer goods, such as, fan, colour television, moped, etc. During the accounting year ended March 31, 1998 the assessment year being 1998-99, the respondent released prizes worth Rs. 72,94,480. According to the Revenue, before distributing those prizes, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required to be construed without the aid of the Explanation that was subsequently added on April 1, 2002, since the Explanation is not retrospective nor can the Explanation be regarded as merely clarificatory. Since the cases on hand also relate to the assessment years prior to the commencement of the Explanation, i.e., prior to April 1, 2002, the said Explanation on the same reasoning has no application to present cases also. Thus from the decision of the Full Bench of the Madras High Court in Sesha Ayyar's case, AIR 1936 Mad 225 [FB] and the decision of the Supreme Court in H. Anraj's case [1986] 61 STC 165 the following propositions emerge. The essential elements that go to constitute a lottery are: (1) a prize or some advantage in the nature of a prize, (2) distribution thereof by chance, and (3) consideration paid or promised for purchasing the chance. Thus unless all the three elements are satisfied the prize scheme cannot be considered as a lottery. A price was charged for participating in the draw. The chance of a person getting the prize cannot be treated as part of the bargain unless independent consideration is there with respect to the prize awarded. Here, the general ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the prize scheme are not contained therein. If what is stated in the pamphlet represents the correct position it is a matter for consideration whether the said scheme is similar to the scheme considered by the Full Bench of the Madras High Court in Sesha Ayyar's case, AIR 1936 Mad 225. In short, it is for the Income-tax Officer (TDS) Division No. II, Thrissur, who issued notices to consider the objections to be taken by the petitioners keeping in mind the principles laid down by the Full Bench of the Madras High Court and by the decision of the Supreme Court which are summarized in this judgment. All these writ petitions are accordingly disposed of by directing the petitioners to file detailed objections to the notices issued by the Income-tax Officer (TDS) Division No. II, Thrissur, within a period of three months from today and the said authority will consider the matter and pass orders in the light of the principles discussed and summarized in this judgment and also the observations made herein after affording an opportunity of being heard to the petitioners also, the interim orders passed in these cases will continue till orders are passed as directed in this judgment. W ..... X X X X Extracts X X X X X X X X Extracts X X X X
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