2014 (5) TMI 159 - HC - Income Tax

Court rules prize money from unsold lottery tickets taxable as 'winnings', disallows loss claim, remands credit account issue.

The High Court upheld the Tribunal's decision classifying prize money from unsold lottery tickets as 'winnings from lotteries' taxable under Section ... Nature of income – Prize money received on unsold tickets – Business income OR income from any winnings from lotteries u/s 2(24)(ix) r. w section 115BB of the Act – Held that:- The assessee was appointed as a Stockist by the State Government on payment of commission on the sale of lottery tickets - the assessee was appointed as a stockist on principle to principle basis and not an agent to sell tickets on behalf of the State Government - In case of non-intimation within 24 hours from the closing date of the draw about the unsold tickets through the telegraphic message, the unsold lottery tickets would be treated as sold and included in the draw and the assessee was made liable to pay the price of the tickets to the State Government - the assessee has not been held to be organizer of the sale and to conduct draw of the lottery – thus, the amount of prize received on unsold lottery tickets is an income by way of winning prize from lottery - the prizes awarded to the assessee by draw of lots fall within the ambit of lottery and the amount gained falls within the ambit of income by way of winnings from lotteries. Relying upon Commissioner of Income-tax Versus Manjoo and Co. [2010 (9) TMI 754 - Kerala High Court] - the entire lottery tickets ceased to be stock-in-trade on the date of the draw because after the draw those tickets were unsaleable and have no value except waste paper – Section 115BB is a special provision under the Act to tax the income by way of winnings from lotteries - the agreement was for the appointment of stockist on the payment of commission on the tickets sold by the assessee - The unsold tickets for which the information has not been given within the stipulated period was deemed to be sold by the State Government to the assessee - being the purchaser, the assessee gets right to participate in the draw through such tickets - Thus, prize won on such tickets amounts to income by way of winnings from lottery - The provision of Section 115BB of the Act is fully applicable – thus, the order of the Tribunal is set aside - Decided decided Assessee. Disallowance of expenses – Addition u/s 68 of the Act - Held that:- It is not clear from the order of the Tribunal that from which source the money has been brought and credited in the accounts of the creditors - If the amount has been credited in the creditors' accounts by debiting the account of the State Government, the source is fully proved and the addition of the balance amount of Rs.7,21,840/- cannot be added u/s 68 of the Act - from the assessment order, it appears that the assessee maintains mercantile system of the accounts - It is not clear whether the assessee has claimed deduction and same has been disallowed or since the amount was found deposited in credit side therefore added u/s 68 of the Act or added treating it as revenue receipt – thus, the matter is remitted back to the Assessing Authority for the fresh adjudication – Decided in favour of Assessee. Disallowance of amount – Burden to prove - Held that:- There was no error in the order of the Tribunal - The burden lies upon the assessee to prove loss claimed by it - The assessee has claimed loss at Rs.21,13,848/-, out of which furnished details to the extent of Rs.19,22,168/-, therefore, disallowance of loss to the extent of Rs.1,91,680/- for want of evidence cannot be said to be unjustified – Decided against Assessee. Issues Involved:1. Classification of prize money on unsold tickets as 'business income' or 'winnings from lotteries.'2. Interpretation of the agreement between the Directorate and the assessee regarding the nature of the relationship.3. Disallowance of entries in the Prize-winning Tickets Creditors Account amounting to Rs.7,21,840/-.4. Disallowance of loss of Rs.1,91,680/-.Issue-wise Detailed Analysis:1. Classification of Prize Money:The primary issue was whether the prize money retained by the assessee on unsold tickets should be classified as 'business income' or 'winnings from lotteries' under Section 2(24)(ix) and Section 115BB of the Income Tax Act, 1961. The Tribunal concluded that the assessee was not appointed as an agent by the U.P. State Lotteries but was selling lottery tickets as a stockist. For tickets not surrendered within the specified period, these were treated as sold to the assessee, making the assessee eligible to participate in the draw and receive prize money. Consequently, the prize money received was considered 'winnings from lotteries' and subject to tax under Section 115BB. The Tribunal reversed the CIT (A)'s decision and restored the assessment order, applying Section 115BB.2. Nature of Relationship in the Agreement:The Tribunal examined the agreement between the Directorate and the assessee, determining that the assessee was appointed as a stockist on a principal-to-principal basis, not as an agent. The agreement stipulated that unsold tickets not reported within 24 hours of the draw's closing date would be deemed sold to the assessee, who would then participate in the draw through these tickets. This arrangement meant the assessee's prize winnings from these tickets were categorized as 'winnings from lotteries,' thus taxable under Section 115BB.3. Disallowance of Entries in Prize-winning Tickets Creditors Account:The Tribunal upheld the disallowance of Rs.7,21,840/- in the Prize-winning Tickets Creditors Account. The amount retained was considered part of the trading receipts, and the assessee failed to prove the liability. The Tribunal found that the CIT (A) was not justified in deleting the addition, as the nature of the amount was taxable. The High Court, however, noted that the issue was not properly examined by the authorities and remanded the matter to the assessing officer for fresh consideration, emphasizing the need to clarify the source of the credited amount.4. Disallowance of Loss:Regarding the disallowance of Rs.1,91,680/- claimed as a loss on unsold tickets, the Tribunal found that the assessee could only substantiate a loss of Rs.19,22,168/- out of the total claim of Rs.21,13,848/-. The Tribunal directed the assessing officer to restrict the disallowance to Rs.1,91,680/-. The High Court agreed with the Tribunal, affirming that the burden of proof lay on the assessee to substantiate the claimed loss, and the disallowance for the unsubstantiated amount was justified.Conclusion:The High Court upheld the Tribunal's decision on the classification of prize money and the disallowance of the loss, affirming that the prize money from unsold tickets is taxable under Section 115BB as 'winnings from lotteries.' The matter concerning the disallowance of Rs.7,21,840/- was remanded for fresh examination. The appeal was allowed in part, with specific directions for reassessment on the disallowed entries in the Prize-winning Tickets Creditors Account.