1993 (2) TMI 149 - AT - Income Tax

Tax Tribunal Rules Sikkim Lottery Income Taxable for Indian Residents

The Tribunal held that lottery income from Sikkim is taxable under the Income-tax Act, 1961, for a Resident and Ordinarily Resident of India. Deductions ... Taxability of foreign-source or out-of-State receipts under the scope of total income - operation and scope of section 5(1)(a) - inclusion of income received in India - effect of Article 371F(k) and (n) on pre-existing State laws and their territorial application - double taxation and applicability of Explanation 2 to section 5 - deductibility under section 80TT - allowance after permissible deductions from gross receipts - treatment of tax deducted under local State law as tax deducted at source and credit thereof in computationTaxability of foreign-source or out-of-State receipts under the scope of total income - operation and scope of section 5(1)(a) - inclusion of income received in India - effect of Article 371F(k) and (n) on pre-existing State laws and their territorial application - Inclusion of winnings from Sikkim State Lottery in the assessee's total income under the Income-tax Act, 1961 - HELD THAT: - The assessee, a resident and ordinarily resident of India, received lottery winnings by demand drafts encashed at Jaipur. Section 5(1)(a) brings within total income income received in India by a resident. Once section 5 applies, computation of total income must follow the relevant provisions of the Act. Clauses (k) and (n) of Article 371F preserve pre-existing Sikkim laws for territories of Sikkim and permit selective extension of other enactments, but that protective scheme does not operate to exclude application of the IT Act to a resident person who received the income in India outside Sikkim. Deductions made by Sikkim authorities (agent's commission or Sikkim tax deducted) do not preclude assessment under the Act; tax deducted in Sikkim will operate as tax deducted at source for computation under the Act where applicable. [Paras 20]Winnings from the Sikkim State Lottery received in India by the resident assessee are includible in his total income under section 5(1)(a) and assessable under the Income-tax Act, 1961.Double taxation and applicability of Explanation 2 to section 5 - treatment of tax deducted under local State law as tax deducted at source and credit thereof in computation - Whether inclusion of the same lottery income in the assessee's total income results in impermissible double taxation - HELD THAT: - Explanation 2 to section 5 prevents including income twice on alternate bases where it has already been included in total income earlier; it does not apply here because the lottery income had not previously been included in the assessee's total income under the Act. The Sikkim tax deduction and notifications do not create a bar against assessment under the Act, and no constitutional prohibition against double taxation applies. Precedents permitting legislative double imposition where clearly enacted were noted, and on the facts the Tribunal found no vice of double taxation. [Paras 24]Inclusion and assessment of the lottery winnings under the Act does not amount to impermissible double taxation in the facts of this case.Deductibility under section 80TT - allowance after permissible deductions from gross receipts - Whether deduction under section 80TT is allowable on the gross prize amount or only after deduction of agent's/seller's commission - HELD THAT: - Drawing on the ratio in the Supreme Court decision in CIT v. P. K. Jhaveri, the Tribunal held that deduction provisions analogous to section 80TT must be applied after making permissible deductions from the gross receipts. The agent's/seller's commission is deductible from the gross prize money, and the deduction under section 80TT is therefore to be computed on the net amount after such commission is deducted. [Paras 26, 27]Deduction under section 80TT is allowable only after deduction of the agent's/seller's commission; the Assessing Officer's allowance on the net amount was upheld.Allowance of miscellaneous and legal expenses in assessment year or subsequent year - Treatment of Misc. and legal expenses of Rs. 3,100 disallowed in the assessment year - HELD THAT: - The Tribunal found the assessee's submission reasonable that the expenses, if not allowable in the year under appeal, should be permitted in the subsequent year. The ITO was directed to allow the expenses in the subsequent year. [Paras 28]The ITO is directed to allow the miscellaneous and legal expenses of Rs. 3,100 in the subsequent year.Admissibility of additional grounds before the Tribunal and consequences for Revenue cross-objection - Adjudication of assessee's additional ground that Sikkim lottery income is not taxable under the IT Act and the fate of Revenue's cross-objection - HELD THAT: - The Tribunal permitted the assessee to raise the additional ground and proceeded to decide it on merits, dismissing it. Having dismissed the additional ground, the cross-objection raising non-admissibility and seeking denial of TDS credit became infructuous and was dismissed. [Paras 25, 30]The additional ground that the lottery income is not taxable under the IT Act is dismissed; Revenue's cross-objection is dismissed as infructuous.Final Conclusion: The Tribunal dismissed the contention that Sikkim lottery winnings received in India by the resident assessee are outside the scope of the Income-tax Act and held the winnings taxable under section 5(1)(a); no impermissible double taxation arose; deduction under section 80TT was correctly allowed only after deduction of agent's commission; miscellaneous legal expenses of Rs. 3,100 to be allowed in the subsequent year; appeal partly allowed and Revenue's cross-objection dismissed. Issues Involved:1. Taxability of lottery income from Sikkim under the Income-tax Act, 1961.2. Deduction under section 80TT of the Income-tax Act, 1961.3. Disallowance of miscellaneous and legal expenses.4. Legality of the assessee's claim regarding non-taxability of Sikkim lottery income and corresponding TDS credit.Issue-wise Detailed Analysis:1. Taxability of Lottery Income from Sikkim under the Income-tax Act, 1961:The primary issue was whether the lottery income earned by the assessee from the Sikkim State Lottery is taxable under the Income-tax Act, 1961. The assessee argued that since the income accrued in Sikkim and was taxed under the Sikkim State Income-tax Rules, it should not be taxed again under the Income-tax Act, 1961. The Tribunal, however, noted that the assessee was a Resident and Ordinarily Resident of India, and under section 5 of the Income-tax Act, 1961, the global income of such a person is taxable. The Tribunal emphasized that Sikkim became a part of the Indian Union in 1975, and thus, income from Sikkim is not considered as arising outside India for the purposes of section 5. The Tribunal concluded that the lottery income was rightly included in the assessee's total income for the year under consideration.2. Deduction under Section 80TT of the Income-tax Act, 1961:The assessee claimed a deduction under section 80TT on the gross lottery income of Rs. 20 lakhs. However, the Income-tax authorities allowed the deduction on Rs. 18 lakhs, after deducting agent's/seller's commission. The Tribunal upheld the authorities' decision, relying on the Supreme Court's ruling in CIT v. P. K. Jhaveri, which held that deductions under sections 80K and 80AB should be allowed only on the net income after necessary deductions, not on the gross receipts. Therefore, the Tribunal dismissed the assessee's ground on this issue.3. Disallowance of Miscellaneous and Legal Expenses:The assessee contested the disallowance of Rs. 3,100 on account of miscellaneous and legal expenses. The Tribunal found the argument reasonable and directed the Income-tax Officer (ITO) to allow these expenses in the subsequent year if not in the current year.4. Legality of the Assessee's Claim Regarding Non-taxability of Sikkim Lottery Income and Corresponding TDS Credit:The Revenue raised a cross objection, arguing that the assessee's claim regarding the non-taxability of Sikkim lottery income was not tenable as it was not made before the Assessing Officer or the first Appellate Authority. The Revenue also contended that the tax charged by Sikkim State was merely a local tax and not Income-tax under the Income-tax Act, 1961, thus challenging the TDS credit claimed by the assessee. Since the Tribunal dismissed the additional ground regarding the non-taxability of Sikkim lottery income, the Revenue's cross objection became infructuous and was dismissed.Conclusion:The assessee's appeal was partly allowed, specifically regarding the allowance of miscellaneous and legal expenses in the subsequent year. However, the Tribunal dismissed the additional ground concerning the non-taxability of Sikkim lottery income and upheld the deduction under section 80TT on the net income. The Revenue's cross objection was dismissed as it became infructuous following the Tribunal's decision on the additional ground.