9911796707
TMI Blog2021 (5) TMI 793X X X X Extracts X X X X X X X X Extracts X X X X ..... ickets is sought to be taxed under the head Income from Other Sources as pointed out by the ld PCIT in his section 263 order, the business loss is still required to be set off with the prize winnings from unsold lottery tickets u/s 71 of the Act and the net income thereon would be liable for tax at special rate of 30% in terms of section 115BB of the Act. As long as the tax rate under normal provisions of the Act and tax rate prescribed u/s 115BB of the Act are same, the entire issue becomes revenue and tax neutral. Hence there could be no prejudice that could be caused to the interest of the revenue for the Asst Year 2014-15 even if the order of the ld AO is found to be erroneous. We find that the Hon ble Supreme Court in the case of Malabar Industrial Co. Ltd [ 2000 (2) TMI 10 - SUPREME COURT ] had categorically held that for the ld PCIT to invoke revision jurisdiction u/s 263 of the Act, the twin conditions should be cumulatively satisfied i.e. the order passed by the ld AO should be erroneous and it should be prejudicial to the interest of the revenue. In the instant case, since the entire issue is revenue and tax neutral, the twin conditions stipulated in section 263 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The income from nature of activities covered within the ambit of section 2(24)(ix) of the Act are such which are carried out, as part of hobby or enjoyment or pastime. However, if a person is engaged in the business of say lottery or organizing horse races, then income earned by such person cannot be brought within the ambit of section 2(24)(ix) of the Act as the same would be chargeable as regular income from business. The words winnings from lottery cannot be read in isolation and would take its colour from the words with which it is associated with. The nature of income covered within its ambit cannot be read in isolation or dissected from each other. A holistic reading of clause (ix) in section 2(24) of the Act would suggest that it is not intended to apply to a person who is engaged in the business of distribution of lotteries or owning and maintaining race horses or a bookmaker with whom a punter places his bets. Winnings from lottery is read with the other kinds of winnings included within the ambit of section 2(24)(ix) of the Act, it becomes apparent that it is only attracted to those people who have such winnings by reason of their participation in draw of lotte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e but as income within the meaning of section 115BB of the Act in the facts and circumstances of the case. The interconnected issue involved therein is as to whether the assessee firm is entitled for set off of business loss with the income determined u/s 115BB of the Act in the facts and circumstances of the case. c) Whether the ld PCIT was justified in directing the ld AO to examine the allowability of expenses within the meaning of section 58(4) of the Act in the facts and circumstances of the case. 3. We have heard the rival submissions and perused the materials available on record. At the outset, we would like to place on record, the elaborate arguments advanced by the counsels of both the sides with regard to the impugned issues in dispute. This Bench deems it fit to appreciate the enormous efforts taken by the counsels for better representation of the issues in dispute before us by appraising the business model and placing all the facts before us. It would be relevant to discuss the business model in which the assessee is operating which sets out the primary facts of the appeal also. We find that the assessee is carrying on the business as a Sole State Level Distr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kets in a designated area. The area distributor is governed by the terms and conditions agreed by and between the Organizing State and the Main Distributors. The Area Distributor purchases lottery tickets from the Main Distributor for sale / distribution, in their designated area. 3.5. Generally, the unsold lottery tickets purchased by the Area Distributor like the assessee, are not taken back by the Main Distributor. In other words, in the event of lottery tickets remaining unsold with the Area Distributor, these unsold lottery tickets are not taken back by the Main Distributor. In such circumstances, the purchase price paid by the Area Distributor to the extent of unsold lottery tickets, is a loss. However, the losses of Area distributor are mitigated by prize monies attributed to prize winning tickets out of unsold lottery tickets lying with it. 3.6. The Area Distributor then appoints Stockists who further sell lottery tickets to the Retailers . Lastly, the Retailers sell lottery tickets to the public who participate in the draws of lottery. At all levels, the portion of price towards CPF would remain the same and only the CPD portion changes. 3.7. The above bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 3.8. In this example, under the first scenario, it is assumed that all 10,000 lottery tickets are sold. In such a case, each party would be realising profit on sale of lottery tickets. The profit margin of all the parties would be as follows: Particulars Amount (In Rs.) Organising State (₹ 5 x 10000 Tickets) 50,000/- Main Distributor (₹ 10 x 10000 Tickets) 1,00,000/- Area Distributor (₹ 5 x 10000 Tickets) 50,000/- Stockist (₹ 5 x 10000 Tickets) 50,000/- Retailers (₹ 10 x 10000 Tickets) 1,00,000/- Prize money distributed to the winners 6,50,000/- Total Value of the Lottery Tickets 10,00,000/- Viewed from another angle, the loss borne by the public would be ₹ 3,50,000/-. 3.9. In second scenario, out of above said 10,000 lottery tickets purchased by the Area Distributor, only 8,00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es realised on unsold tickets 6,50,000 Net Loss 1,50,000 3.12. This can be further understood from another angle. The purchase price paid by Area distributor was ₹ 80/- per lottery ticket. This had two components: (i) Contribution towards Prize Fund which was ₹ 65/-per lottery ticket; (ii) Cost for Right of Participation in the Draw which was ₹ 15/- (i.e. margin of the Organising State being ₹ 5/- and margin of the Main distributor being ₹ 10/-). Thus, even if the Area distributor is able to realise all the prize monies on account of all lottery tickets remaining unsold, the Area distributor would be incurring loss to the extent of CPD components in the lottery scheme. 3.13. Thus, in the lottery business, the various parties are involved, and the structure can further be understood with the help of following diagram :- Lottery Organized by State Government Main Distribution of Lottery Tickets Area Distributors Stockist Retailers Customers 4. From the above business mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Prize Money Won Loss Incurred Qty. Cost 2014-15 4,71,09,105 41,88,36,709 41,86,55,718 (1,80,991) 2015-16 4,61,11,046 51,18,57,848 46,83,67,965 (4,34,89,883) 2016-17 1,55,60,930 18,56,34,219 18,39,05,610 (17,28,609) 4.1. We also find that the assessee in the said affidavit had duly stated that in respect of weekly draw of lottery for the period 25.3.2013 to 31.3.2013, as per the usual business practice, the purchase invoices would have been raised on Monday i.e 1.4.2013. However, the purchase invoice in respect of this draw of lottery tickets, was raised by the seller of the tickets (i.e National Distributor) on the assessee on 31.3.2013 (Sunday). This is evident from the sample copy of invoice raised by Best Co. enclosed at Page No. 258 of the Paper Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... From this database, full and complete details of unsold tickets are always available. Therefore during the assessment proceedings, in reply dated 29.11.2016 filed before the ld AO, the quantity of unsold tickets and prize money won on unsold tickets were submitted by the assessee. This reply is enclosed at Page Nos. 56 to 60 of the Paper Book I filed before us. 4.1.4. We find that the assessee firm had also affirmed in its affidavit that the lottery tickets remaining unsold with it, are not taken back either by the Government who is organising the lottery or by the National Distributor. We find that the assessee firm had further affirmed that the averment that the State Government who is organising the lottery or the National Distributor, does not take back the ticket is proved by commercial reality. The purchase price of a lottery ticket comprises of two elements CPF and CPD. CPD includes cost of lottery tickets, margins of the Government who is organising the lottery, margins of the Sole Distributor. Even if prize monies are won on entire lot of unsold lottery tickets, then also the assessee would only be getting the CPF and not the payments made in respect of CPD. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 58,66,41,200 96,43,82,890 47,19,10,190 3 Sale Return Amount 13,68,01,129 16,62,18,396 6,52,51,128 4 Net Sale Amount 44,98,40,072 79,81,64,494 40,66,59,063 5 Percentage of Sales Return to Sales 23 17 14 4.4. From the perusal of the financial statements of the assessee for the year ended 31.3.2014, we find that assessee had shown net profit during the year at ₹ 94,38,441/- which has admittedly been arrived after considering the prize money from unsold lottery tickets amounting to ₹ 41,86,55,718/-. If these winnings from unsold lottery tickets are taken out and dealt separately, then the position of income from business of the assessee firm would be as follows:- Net profit as per profit and loss account 94,38,441 Add: Donation 5,42,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly accepted to the nature of business activities carried on by the assessee firm by categorically stating that the assessee is engaged in the business of reselling of Government lottery tickets and during the year, the assessee has declared income from its business activities. 4.5.2. In the assessment proceedings for the Asst Year 2015-16, the issue had arisen as to whether the income by winnings from lotteries from unsold lottery tickets, is assessable as business income or income from other sources. Further, the Ld. AO had also questioned the allowability of expenses claimed against the winnings from lottery tickets and as to why such winnings should not be assessed u/s. 115BB of the Act. In response to the same, the assessee furnished an explanation on 12.12.2017 which is reproduced in the assessment order for Asst Year 2015-16 enclosed in Page 189 of the Paper Book III filed before us. 4.5.3. For the Asst Year 2015-16, the ld AO held that the winnings from lottery ticket is required to be assessed u/s 56(2)(ib) of the Act and is taxable at 30% u/s 115BB of the Act. Further, the ld AO also held that the cost of unsold ticket is also not allowable as deduction u/s 58(4) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x u/s 115BB of the Act is on the winnings from lottery. b) The assessee s activity was two fold. Firstly, earning of profit on account of sale of tickets at a higher price than the cost borne out by it which would constitute business income. Secondly, the winning from the unsold lottery tickets, which cannot be termed as business activity. c) The assessee had purchased lottery tickets from M/s Future and M/s Teesta . Therefore, prize winning retrieved from unsold lottery tickets cannot be considered as retrieval of the cost of tickets. By holding such tickets, the assessee had participated in the draw. d) The assessee had returned tickets in substantial number to M/s Future and M/s Teesta. e) The factual position involved in the case of Commercial Corporation of India Ltd vs ITO reported in 201 ITR 348 (Bom) is different. Further, from the ratio laid down by the Hon ble Kerala High Court in the case of CIT vs Manjoo Co. reported in 335 ITR 527 (Ker) and Hon ble Allahabad High Court in the case of J N Sharma vs ACIT reported in 270 CTR 594 (All) , it is clear that winnings of lotteries from unsold tickets is chargeable to tax at the rate of 30% on the amount of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tation of tax payable on such total income, is done. As per Section 4 of the Act, the income-tax is charged on total income, at the rates specified in the Finance Act. However, if an income is chargeable at specified rate as provided for in Chapter XII of the Act, then such income shall be chargeable to tax at such special rate. (vii) In this background, the ld AR submitted submitted that computation of tax payable on an income whether taxable at special rate or rates specified in the Finance Act, takes place only after giving effect to the provisions of computation mechanism laid down under Chapter IV - Heads of Income, followed by Chapter - VI - Set off or carry forward of losses and lastly, Chapter - VIA - Deductions from gross total income. The exercise relating to computation of tax payable on total income starts after arriving at the total income. The provisions relating to computation of tax, whether special rate or non-special rate, would not take place before giving effect to the provisions of the Act which deals with the determination of total income. In other words, the computation of tax does not precede the computation of total income. (viii) For computing ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by us) (xi) The ld AR argued that the set-off of loss is not a choice given to an assessee. It is a statutory provision which is required to be given effect to , in computation of total income. He argued that Section 71 of the Act does not contain any restriction or exclusion for the assessment year under consideration that income chargeable at special rate shall not be set-off against loss under any head of income. Prior to the amendment by the Finance Act, 1986 w.e.f. 01-04-1987, Section 74A(1) dealt with set-off and carry forward of losses from the lotteries. Section 74A(1) of the Act interalia provided that losses from lotteries can be set-off only against winnings from lotteries. Such losses were not allowed to be set-off against income from any other source or under any other head. However, with the introduction of Section 115BB of the Act, Section 74A(1) of the Act was omitted. Thus, the restriction on set-off of losses from lotteries was removed from the Act. Hence he argued that there is no bar on set off of losses u/s 115BB of the Act. Such a bar is there is section 115BBDA of the Act from inception. Such a bar was introduced in section 115BBE of the Act w.e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rising from the transfer of a long-term capital asset, which is chargeable under the head Capital gains , such long-term capital gains shall be chargeable to tax at appropriate rates. This income was chargeable at special rates. In this regard, doubts had arisen as to whether set-off of loss u/s. 71 of the Act is allowable against the long-term capital gain chargeable at special rates u/s. 112 of the Act. The CBDT vide its Circular No. 721 dated 13.9.1995 clarified the position to say that: 3. ...The total income is to be computed in the manner prescribed in the Income-tax Act. Set-off of loss as per the provisions of sections 70 to 80 is a stage which is part of this procedure. When this procedure is adopted for computing gross total income or total income, only the amount of income after setoff remains under a head as part of gross total income or total income. Only that amount of long-term capital gains which is included in the total income would be subject to tax at a prescribed flat rate. Thus, if there was a loss of ₹ 10,000 from business and there is long-term capital gains of ₹ 30,000, then after setting off of loss of ₹ 10,000 with long-term capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et profit for the year is ₹ 94,38,441/- was arrived at by the assessee after considering the prizes from unsold lottery tickets amounting to ₹ 41,86,55,718/-. If these winnings are to be assessed as Income from Other Sources u/s 56(2)(ib) of the Act, then the net result of the business of distributing lottery tickets would be a net loss of ₹ 40,86,75,277/- as worked out elsewhere in this order. 7. We find lot of force in the argument advanced by the ld AR on the point that there is no bar on set-off of loss provided in section 115BB of the Act as stated supra. Section 115BB of the Act talks only about taxability of such winnings at a special rate of 30%. Hence only the net winnings is taxable at 30%. The net winnings is to be determined after setting off the business loss of ₹ 40.86 crores as worked out above with the income from other sources. We find that the ld AR had not disputed the rate of taxability of winning from lotteries in terms of section 115BB of the Act. We find that even if the prize winnings from unsold lottery tickets is sought to be taxed under the head Income from Other Sources as pointed out by the ld PCIT in his section 263 ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... him cannot be termed as erroneous. In such a scenario, the view canvassed by the ld PCIT would only result in substitution of his view in the place of one of the possible view already taken by the ld AO. The law is very well settled on this point that in these circumstances, the revision jurisdiction u/s 263 of the Act cannot be invoked by the ld PCIT. Reliance in this regard is placed on the decision of the Hon ble Jurisdictional High Court in the case of Gabriel India Ltd reported in 203 ITR 108 (Bom) and in the case of Nirav Modi reported in 71 taxmann.com 272 (Bom). It is pertinent to note that the Special Leave Petition preferred by the Revenue against the judgement of Hon ble Bombay High Court in the case of Nirav Modi supra had been dismissed by the Hon ble Supreme Court reported in 77 taxmann.com 15 (SC). 7.2. Moreover, we also find that all the requisite details were indeed filed by the assessee before the ld AO in response to the queries raised by the ld AO along with the notice u/s 142(1) of the Act dated 16.8.2016 and thereafter by oral queries raised during assessment proceedings. We find that the assessee had duly replied to those queries before the ld AO in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for his conclusion. This would enable the Assessee to challenge the same, if aggrieved. In fact the Gujarat High Court in CIT v. Nirma Chemical Works Ltd. [2009] 309 ITR 67/182 Taxman 183 has observed that if an assessment order were to incorporate the reasons for upholding the claim made by an assessee, the result would be an epitome and not an assessment order. In this case, during the assessment proceedings for both the Assessment Years, the Assessing Officer issued a query memos to the assessee, calling upon him to justify the genuineness of the gifts. The Respondent-Assessee responded to the same by giving evidence of the communications received from his father and his sister i.e. the donors of the gifts along with the statement of their Bank accounts. On perusal, the Assessing Officer was satisfied about the identities of the donors, the source from where these funds have come and also the creditworthiness/capacity of the donor. Once the Assessing Officer was satisfied with regard to the same, there was no further requirement on the part of the Assessing Officer to disclose his satisfaction in the Assessment Order passed thereon. Thus, this objection on the part of the Revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue placed reliance upon the decision of the Delhi High Court in D.G. Housing Projects Ltd., (supra) that as the Assessing Officer had not enquired into the source of the source of the gifts received by the Assessee, the Assessment Order is erroneous. The aforesaid decision holds that the power of Revision under Section 263 of the Act would normally be exercised in case of no enquiry and not in cases of inadequate enquiry. However, even in case of inadequate enquiry by the Assessing Officer, the order of the Assessing Officer could be erroneous in two classes of situation. The first class would be where orders passed by the Assessing Officer are ex facie erroneous i.e. a decision rendered ignoring a binding decision in favour of the Revenue or where enquiry is per se mandated on the basis of the record available before the Assessing Officer and that is not done. In the second class of cases, where the order is not ex facie erroneous, then the CIT must himself conduct an enquiry and determine it to be so. The Court held that it is not permissible to the CIT while exercising power under Section 263 of the Act to remit the issue to the Assessing Officer to re-examine the same and find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ckets amounting to ₹ 41,88,36,709/- became irrecoverable and a net loss of ₹ 40,86,75,277/- under the head Profits and gains of business or profession was suffered by the assessee. This business loss of ₹ 40,86,75,277/- is allowable to be set-off u/s. 71 of the Act, against the income chargeable under any other head including Income from other sources. It is irrelevant whether the income is chargeable to tax at special rates as provided under Chapter XII of the Act or at normal rates under the Finance Act, 2013 which is relevant to the year under consideration. 8.2. We find that if the stand taken by the ld PCIT is to be accepted as correct, then it would result in a situation that the income by way of winnings from lotteries would be assessed as Income from Other Sources u/s 56(2)(ib) of the Act whereas the business loss arising on account of unsold tickets would be continued to be carried forward without any set-off. Resultantly, the business loss so determined would become a dead loss in the event of there being no business income. In any case, such a proposition would be contrary to law provided in Section 71 of the Act. We find that the ld AR drew ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee firm and any profit derived thereon would have to be taxed as business income of the assessee firm. Since purchases and sales are treated as part of business activities, the purchase returns and sales returns also would only be business activity of the assessee. We are now concerned with sales returns of lottery tickets to the assessee. The stockists return the unsold lottery tickets to the assessee firm and which are taken cognizance by the assessee firm as sales returns . We find that the assessee is engaged only in one activity of distribution of lottery tickets. It is not engaged in participation in the draw of lottery tickets. The participation in the draw of lottery tickets in respect of unsold stock lying with it (pursuant to sales returns from stockists) is an automatic fall out of business and becomes indivisible business activity with that of distribution of lottery tickets. Hence prize winnings from unsold lottery tickets would also constitute part of income arising from distribution of lottery tickets and to be construed as part realization of cost of unsold lottery tickets. Therefore, it would be incorrect to construe the unsold lottery tick ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... snake skins of any variety. The question is, whether, in these circumstances, the assessee, in the normal course of its accounting, is not entitled to value the price of the skins at the market price which, in the present case, happens to be nil . We are also unable to see how revenue is affected by this method of valuation. If these skins which are valued at nil happen to find purchasers in the next accounting year, it is obvious that the entire sale value will figure as a profit in the books and the assessee would have to pay tax on the entire sale value and not only on the difference between the sale value and the purchase value. Indeed, in the contingency of these skins finding a sale, it is revenue that would stand to gain. The observation of the Tribunal that this method of permitting him to value the goods would open the door for showing these very goods as obsolescent and then sell them off later without bringing the profits into the books is wholly uncalled for. It seems to suggest that the Tribunal found the assessee's intention to be to make a concealed profit by the sale of the goods in subsequent years. It is unfortunate that the Tribunal should have indulged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture . Thus, the word business is a word of large and indefinite import. It is something which occupies attention and labour of a person for the purpose of profit. Some of the essential characteristics of a business are continuous and systematic exercise of activity and profit motive. To regard an activity as business, there must be a course of dealings either actually continued or contemplated to be continued with a profit motive and not for sport or pleasure. It predicates a profit making motive pervading a whole series of transactions. In common parlance, it connotes activities in which a person is engaged with a set purpose and frequency or the repetition of the activity. From the financials of the assessee firm for the Asst Years 2014-15 to 2016-17, it could be seen that the assessee had time and again carried out the same set of activity by trying to realize the prize winnings from unsold lottery tickets to mitigate its loss incurred on purchase cost of lottery tickets. This is a purely a prudent business decision taken by the assessee firm with a set purpose to make profit as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is allied to transactions that constitute trade or business but may not be trade or business itself. It is characterized by some of the essential features that make up trade or business but not by all of them; and so, even an isolated transaction can satisfy the description of an adventure in the nature of trade. Sometimes it is said that a single plunge in the waters of trade may partake of the character of an adventure in the nature of trade. This statement may be true; but in its application due regard must be shown to the requirement that the single plunge must be in the waters of trade. In other words, at least some of the essential features of trade must be present in the isolated or single transaction. On the other hand, it is sometimes said that the appearance of one swallow does not make a summer. This may be true if, in the metaphor, summer represents trade; but it may not be true if summer represents an adventure in the nature of trade because, when the section refers to an adventure in the nature of trade it is obviously referring to transactions which individually cannot themselves be described as trade or business but are essentially of such a similar character th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with M/s Teesta or M/s Future had been declared to be sham by the ld PCIT. The law is very well settled that the intention of the parties need to be understood from the agreement , if any, entered into between them. The revenue cannot step into the shoes of the businessman and try to rewrite the agreement. As long as the agreements entered into by the assessee are not declared as sham or by way of any colorable device, the obligations discharged by the parties as per the said agreements cannot be questioned to suit the convenience of the revenue. We find that the assessee had also affirmed in its affidavit that the assessee, in one exceptional case, in respect of one scheme of lottery which was very big, was unable to sell the lottery tickets to the extent of ₹ 8,41,74,385/- and M/s Future Gaming Solutions India Pvt Ltd agreed to take back the unsold tickets, as an exceptional case, having regard to large quantum of lottery and to avoid complete wiping off of the business of the assessee. In any case, we find that even if the assessee had refunded the unsold tickets ( on one off case) to M/s Future in one scheme of Government of Sikkim, the assessee had only tried to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the aforesaid definition, it could be safely concluded that the income from nature of activities covered within the ambit of section 2(24)(ix) of the Act are such which are carried out, as part of hobby or enjoyment or pastime. However, if a person is engaged in the business of say lottery or organizing horse races, then income earned by such person cannot be brought within the ambit of section 2(24)(ix) of the Act as the same would be chargeable as regular income from business. The words winnings from lottery cannot be read in isolation and would take its colour from the words with which it is associated with. The nature of income covered within its ambit cannot be read in isolation or dissected from each other. A holistic reading of clause (ix) in section 2(24) of the Act would suggest that it is not intended to apply to a person who is engaged in the business of distribution of lotteries or owning and maintaining race horses or a bookmaker with whom a punter places his bets. 8.9.2. We hold that the rule of construction noscitur a,sociis means that the meaning of a word is to be judged by the company, it keeps. It is a legitimate rule of construction to construe words ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business or the exercise of a profession or occupation. Reliance in this regard was placed on the decision of Hon ble Karnataka High Court in the case of Mysore Sales International Ltd vs CIT reported in 117 ITR 64 (Kar). In that case, the assessee was sole selling agent of the State of Karnataka for distribution of lottery tickets. Under the agreement, the assessee was responsible for sale of not less than 75% of total number of tickets released for each draw. In case, the 75% of the tickets released are not sold, then it shall be deemed to have been purchased by the sole selling agent. During the assessment year 1971-72, the unsold tickets out of the 75% of tickets, were deemed to have been purchased by the assessee. On these unsold tickets, the assessee became entitled to certain prizes. In the return of income, the prizes won on unsold tickets were claimed as casual and non-recurring receipts and consequently, exempt u/s. 10(3) of the Act which was accepted by the Income-tax Officer. However, the CIT in 263 proceedings took a view that such receipts are not casual and non-recurring and are chargeable to tax. On appeal, the Hon'ble High Court held that the receipts have aris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the Finance Act, 1972, taxability of income by way of winnings from lotteries, can be summarised as under:- a) If an assessee had participated in a draw of lottery as part of hobby or enjoyment, then such winnings from lotteries were treated as casual and non-recurring and exempt u/s 10(3) of the Act. b) If an assessee who is a distributor of lottery tickets, became entitled to winnings from lotteries on account of unsold lottery tickets, then such receipts were held to be arising out of the business carried on. Therefore, the same were covered within the exclusion provided in clause (ii) of section 10(3) of the Act and taxable as Profits and Gains of Business or Profession . 8.12. The ld AR further argued that the Finance Act, 1972 brought in an amendment to the taxation of casual and non-recurring receipts w.e.f. 1.4.1973 relevant to Asst Year 1973-74. Thereafter the position changed as follows:- a) Clause (ix) was inserted in Section 2(24) of the Act to provide that any winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort of from gambling or betting of any form or nature whatsoever, would be trea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endments brought in by the Finance Act, 1972 in amending section 2(24) and 56(2) of the Act were not meant for persons who were engaged in the business of distribution of lottery tickets etc. The mischief which was present in the law prior to the amendments by the Finance Act, 1972 was only for persons who were doing these activities as part of their hobby or enjoyment or pastime and such income were windfall gains for them. 8.15. We find that the ld AR also drew our attention to the Mischief Rule of construction, popularly known as Heydon s case appreciating the Rule of Purposive Construction. It provides for consideration of four matters in construing an Act :- a) What was the law before the making of the Act ; b) What was the mischief or defect for which the law did not provide ; c) What is the remedy that the Act has provided ; and d) What is the reason of the remedy. 8.15.1. The rule further provided that the courts must adopt that construction which shall suppress the mischief and advance the remedy, and to supress subtle inventions and evasions for continuance of the mischief, and pro private commondo, and to add force and life to the cure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consumer) who is just holding the lottery ticket and participates in the draw. The said provisions, in our considered opinion, cannot be made applicable for a person who is a dealer in lottery tickets. 8.16. We find that the aforesaid decision of Hon ble Karnataka High Court in Mysore Sales International case still holds the field and this High Court order had become final as no further appeal was preferred to Hon ble Supreme Court by the assessee, as stated by the ld AR (treated as statement made from the Bar). We find that the facts before the Hon ble Karnataka High Court supra are exactly identical with the facts of the instant case before us. 8.17. We find that the ld DR before us heavily placed reliance on the decision of Hon ble Kerala High Court in the case of CIT vs Manjoo Co. reported in 335 ITR 527 (Ker) to drive home the point that the prize winnings from unsold lottery tickets would be taxable under the head Income from Other Sources only and not as business income. From the careful reading of the judgement of Hon ble Kerala High Court supra, we find that the issue in dispute before the Hon ble Kerala High Court was on account of rate of tax on the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77,11,306 7,77,293 Less: Income from lottery winnings (69,34,013) Income from Other Sources Income from lottery winnings Less: Exemption u/s.10 69,34,013 (5,000) 69,29,013 Gross Total Income 77,06,306 Total Income (rounded off) 77,06,310 Computation of Tax Particulars Amount (In Rs.) Total Income 77,06,310 Income-tax at normal rates 2,72,053 Income-tax at special rates 27,71,605 30,43,659 Add: Surcharge 3,04,365 33,48,024 Less: Demanded u/s.143(1) (29,68,855) Balance Payable 3,79,169 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (supra ) they are dealing with the issue. However, we notice that in 1979 when the matter was decided there was no specific provision like section 115BB and so much so in our view the decision should not influence interpretation on the scope of section 115BB of the Act. In our view winnings from lotteries is assessable under this special provision irrespective as to under what head winnings from lottery falls. Therefore, assuming for argument sake the contention of the respondent that winnings from lotteries is received by him in the course of his business and is incidental to business and so such it is so his business income is right. Still, we feel, in view of the specific provision contained in section 115BB, the special rate of tax is applicable for all winnings from lottery. What is provided in the said section is that where the total income includes any income by way of winnings from lottery or crossword puzzle etc., the Income-tax payable shall be calculated at the rate of 30 per cent. Total income under section 2(45), read with section 5 of the Act includes income from all sources and necessarily all such income are computed under five heads referred to in A to F of sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against income by way of winnings from lotteries, assumes significance. 8.17.5. We find that the ld AR placed on record the decision of Hon ble Supreme Court in the case of State of Andhra Pradesh vs H Abdul Bakshi and Bros reported in 15 STC 644 (SC). Though this decision was rendered in the context of sales tax proceedings, the ratio decidendi of the said judgement would be relevant for the facts of the instant case before us. The operative portion of the said apex court judgement is as under:- 4. We are unable to agree with this view of the High Court. A person to be a dealer must be engaged in the business of buying or selling or supplying goods. The expression business though extensively used is a word of indefinite import, in taxing statutes, it is used in the sense of an occupation, or profession which occupies the time, attention and labour of a person, normally with the object of making profit. To regard an activity as business there must be a course of dealings, either actually continued or contemplated to be continued with a profit motive and not for sport or pleasure. But to be a dealer a person need not follow the activity of buying, selling and supplyin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the observations from the judgement have to be considered in the light of the questions which were before the court. 8.17.8. Hence it could be safely concluded that the reliance placed on the decision of Manjoo Co. is factually distinguishable and accordingly does not advance the case of the revenue in the facts and circumstances of the instant case. 8.18. Yet another decision relied upon by the ld PCIT was the decision of Hon ble Allahabad High Court in the case of J N Sharma vs ACIT reported in 270 CTR 594 (All). This case related to the Asst Year 1989-90. The assessee was a stockist for sale of lottery tickets. During that year, that assessee had earned income by way of winnings from unsold lottery tickets. The assessing authority treated this receipt as taxable u/s. 115BB of the Act at the rate of 40%. The loss on account of unsold lottery tickets amounting to ₹ 21,13,848/- as claimed by the assessee, was restricted to ₹ 19,22,168/- by the assessing authority, on account of want of evidences. The matter travelled through appellate authorities and finally reached before the Hon ble Allahabad High Court. Amongst other questions, two questions were p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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