TaxTMI 
TaxTMI 
2007 (5) TMI 298
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.... appreciate the fact that the income received by the assessee from tote receipts is in fact winnings from horse race and is liable to be taxed at the rate of 40 per cent as provided under section 115BB of the Income-tax Act. 3. The order of the learned CIT(A) on the issue may be vacated and that of the Assessing Officer be restored. 4. The appellant craves leave to add, amend or alter any of the above grounds of appeal." 4. We proceed to decide the issue raised in these three appeals by making reference to the assessment order as well as the order of the CIT(A) for assessment year 1991-92, having common and identical facts for assessment years 1992-93 and 1994-95. 5. The facts as emerging from the assessment order as well as the contentions of both the parties may be set out in brief as under:- (i) The assessee is an individual, he is a Book Master who ran a business of booking races in the name and style of M/s. Raghunath and Company. The assessee along with the business of booking races, also bets on horse races in order to minimize the probable losses. Such winnings are popularly called as 'Tote Winnings'. (ii) In assessment year 1991-92, the assessee showed in....
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....rescribed under section 115BB of the Act. You are requested to explain why the flat rate of 40 per cent as provided under section 115BB shall not be applied in your case of winning from Tote on the amount of Rs. 11,49,600 thereby taking the same accordingly and not as business income as declared by you." 7. Thereafter, on 28-1-1999, the assessee filed a written submission stating the nature of business carried out by the assessee in the year under consideration. The assessee's submissions has been discussed by the Assessing Officer as under:- "... He filed a written submission on 28-1-1999 inter alia stating the nature of the business carried out by the assessee during the year under consideration. In elaborate submission the A.R. tried to identify the 'Book Maker' and also the 'Punter'. It was stated by the AR that the assessee was carrying on the business of Book Maker in Racecourse and the profit of the said business were regularly taxed by the Income-tax Department as Business Income. It was also emphatically stated that since last number of years the assessee has been disclosing 'Tote Winnings' in his P&L account as integrated components of his business receipts and such....
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....en a view that the receipts from the tote winning is to be charged to tax at the flat rate of 40 per cent by observing as under- "4. I have considered the submissions made by the A.R. in the letter filed on 28-1-1999 and also AR's argument in this score and I do not agree with the submissions made by the AR due to following reasons:- (i) The definition of the word 'Income' was widened by the Finance Act, 1972 with effect from 1-4-1997 and according to memorandum explaining the provisions of the 'Finance Bill', 1972, winning from lottery, horse races, gambling etc., were made chargeable to tax under the head 'Income from other sources'. (ii) The facts of the case of the appellant are that the income is from horse race winning and in view of specific provision of section 56 of the Income-tax Act, 1961, it has to perforce fall under the head 'Income from other sources'. It is immaterial whether the appellant's winnings were as 'Book Maker' or as a 'Punter' so far as the bets were in the nature of gambling. This is also re-enforced in item (iv) of para 1.3 of the memo explaining provisions in the 'Finance Bill', 1972. (iii) Reference may be made to para 102 of the 'Budget S....
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....cing establishment made in some cases be taxable under the head 'Business' while in other case it may be taxable under the head 'Income from other sources' but winning from races must in all cases be charged under the letter head referred to section 56(2)(ib) read with section 2(24)(ix). On page 320 again the Learned Author have also observed that section 58 has been introduced to deny any deduction or any expenditure or allowance under any provisions of this Act in computation of income from such winnings. 5. In view of the aforesaid discussion, I firmly disagree with contention raised by the AR as above and opine that receipts from 'Tote Winnings' are taxable under the head 'Income from other sources' and not as 'Business Income' and the said receipts are required to be taxed at the special rate as provided in section 115BB of the Income-tax Act, 1961. I, accordingly, charge tax at the rate of 40 per cent being rate applicable for these years for such winnings while charging the tax on the 'Tote Winnings' for this year under consideration. Since the assessee did not file any return against notice under section 148 of the Income-tax Act, 1961 and in no occasion the tax on Tote ....
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.... on which there occurred a default of this nature. The appellant was required to make hedge betting only as part of his business transaction because if he does not do this there would be many occasions when the price fixed on certain horse in a given race would render him to suffer great losses. This was so because certain horses are favourable and certain other horses are not so favourable. In case he fixes the prices as per business ethics on horses as per their demand, he would be made to suffer losses and he would not be in business. The appellant demonstrates that once the Assessing Officer has charged to tax the 'Tote Winnings' in assessment year 1991-92, the appellant has suspended these activities from the subsequent financial year and in such financial years, the appellant has actually suffered losses. This proves the point that hedge betting is an integral part of the business of a book making and it is pointed out that each book maker will necessarily have to indulge in this activity without which there would be no profitable business. In view of this, the betting made by the appellant was not like any other normal betting to be taxed under the head 'Income from other so....
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....vity yielding or likely to yield a large income merely because the income would suffer tax. The inference drawn by the Hon'ble CIT(A) is against the preponderance of human probabilities and hence deserves to be vacated. It appears that while deciding the issue, the learned CIT(A) was guided by the aforesaid two reasons due to which his impugned order has become contrary to the law for the reasons mentioned hereinafter, and hence needs to be vacated. Legal submissions in the matter.-(1) A bookmaker is given a liberty to layover a bet but is under no compulsion to layover the bet if he otherwise decides. While taking a decision of laying over the bet, a bookmaker also considers the chances of a particular horse winning the race for which a bookmaker has to apply his knowledge about the factors involved in the game of race such as, the age of a horse, past performance of a horse, and pedigree of a horse and the competence of the other horses competing in the race. Excess betting is not the only factor which compels a bookmaker to layover the bet. If a bookmaker has good knowledge about the horses he can opt for not laying over the bet and earn more profits. When a bookmaker take....
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....from Other Sources' even though a person may be a Punter. The rationale behind enacting this provision is that the gambling is never a Business or Vocation of a person as observed by the Hon'ble Madras High Court in the case of Janab A. Syed 39 ITR 660 wherein it has been held as under: 'What is a bet? A bet is merely an irrational agreement that one person should pay another person something on the happening of an event. A, agrees to pay B, something if C's horse runs quicker than D's or if a coin comes one side up rather than the other side up. There is no relevance at all between the event and the acquisition of property. The event does not really produce it at all. It rests, as I say, on a mere irrational agreement.' We are in respectful agreement with these observations. To these observations we can add: when a person places a bet and loses it, that money is gone; if he wins the bet he gets his own money plus what the other party has lost as his bet; in neither case can the placing of a bet be equated to an investment or even an expenditure to produce an income or receipt. What that learned Judge said about the realization of successful bets would also apply, at any r....
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....tting on the official counters of the concerned Race Club. The race club at the end of the race, distributes the dividend from out of the collection of bets, after deducting the State tax. The punters however, find that they are likely to get more money if they place bets with licensed bookmakers. The bookmakers are licensed by the race club and they are required to strictly follow the rules and regulations of the club. There books are required for inspection at any time by the club authorities. The rules of the race club are primarily designed to protect the interests of the punters. 2. The bookmakers accept bets from the punters on various races Bets are accepted for (i) Winners, i.e., winning horse in the particular race, (ii) for place, i.e., first three places in a race of 8 or more horses or first two places in a race of 7 or less horses. There are other bettings also but winners and places are the main bets. When a punter bets he places his amount and he is given a card showing the rate of odds he has played. The odds are the chance of the concerned bet. For example when the odds for Winner are 100 to 175 it means that if the concerned horse wins, the punter will get his ....
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....se wins A will no doubt have to shell out 175 to the punter but to the extent of 125 he gets recoupment from B. This betting of one bookmaker with another bookmaker is known as hedging the bet. The purpose of the hedging is to reduce the loss. Of course, it may happen that hedge betting itself may result in loss, if the horse on which bet was placed does not win. 5. The hedge betting is common practice among the bookmakers. It is entirely different from ordinary betting. Firstly, it is permitted and subject to rules of the concerned race club. Secondly, as per the rules, no bookmaker is permitted to bet more than the betting he himself has received. Thus it is controlled by the rules. Thirdly, the purpose of the hedge betting is entirely to protect against the possible business losses. In that sense, it is incidental to the business of the bookmaker. It is integral part of his business and has to be considered as part of his business income and not as ordinary winning from horse racing which was considered to be casual and non-recurring receipt before 1972. The hedge betting can be compared to re-insurance. Just as the insurer in case of substantial risk undertaken may reinsure ....
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....e first point, in the note given by the assessee, it has been pointed out that there are three most important characteristics of hedge bet, which distinguishes it from normal bet. To say therefore that the bookmaker steps in the shoes of the punter is totally misconceived. If he however crosses the limit laid down in rule 9 he may possibly brought on par with the punter but this is not the case here. In Para 1 of the departmental note it is stated that there is no compulsion to layover the bet and in making such hedge bet the bookmaker does consider on the basis of his knowledge, the chances of the horse winning the race. This shows total non-consideration of the submission of the assessee where it was pointed tJ1at the layover of hedge bet is made when there is excessive betting on a particular horse and the bookmaker considers that he is likely to suffer substantial loss beyond his means possibly if the horse eventually wins the race. This is financial and business decision which is totally different from the mindset of the punter who makes his bet only to make money by taking a chance and not because of any considerations which bookmaker has in his mind. Paras 2 and 3 again show....
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.... of section 2(24)(ix), section 56(2)(ib) and section 115BB together. First two provisions have been introduced by the same Finance Act, 1972. Section 115BB was introduced by Finance Act, 1986 seeking to replace section 80TT which was introduced by Finance Act, 1972. In all these sections reference is to same type of income which is referred to section 2(24)(ix) namely winning from any lottery or crossword puzzle or race including horse race etc. In other words, section 115BB seeks to tax those incomes which were brought within the ambit of 'income' and which prior to 1-4-1972 were part of casual and nonrecurring receipts. Even before 1-4-1972 the receipts arising from business or exercise of a profession or occupation were outside the scope of section 10(3) as per proviso to that section. In those times, the winning by punter was not considered to be casual and nonrecurring. But hedge bets of bookmaker even in those times being arising from business of bookmaker were not exempted under section 10(3). The purpose of section 2(24)(ix) was to rope in those receipts which prior to 1-4-1972 were casual and non-recurring incomes which included winnings by a punter in a horse race. 5. ....
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....rse owner. These are not useful for deciding the question arising in the present appeal. For record, reference may be made to following cases: 1. Lala Inder Sen, In re. 8 ITR 187 (All.) 2. Janab A. Syed Jalal Saheb v. CIT 39 ITR 660 (Mad.) 3. CIT v. S.S. Thiagarajan 129 ITR 115 (Mad.) 4. N.K. Agarwal v. CIT 124 ITR 371 (Cal.) 5. CIT v. Mrs. Sunita Kumar 208 ITR 807 (Cal.) 6. Amar Kndiah v. ITO 106 ITR 73 (AP.) 7. M.A.A. Raoof v. ITO 152 ITR 228 (Mad.). In one of the above decisions, the case of bookmaker is considered except in the case of Janab A. Syed Jalal Saheb (referred by the learned D.R.) in Para 26 of the judgment it is observed that 'bookmakers is an obvious case of betting being his business'. In this case Hon'ble Madras High Court held that income from betting and horse racing cannot be considered as income from business as gambling did not constitute business. But they did make an exception in the case of bookmaker and held that betting is his business. This decision of Madras High Court holding that gambling was casual and non-recurring income and cannot be considered to be business was held to be no longer good law after introduction of section....
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..... Both the parties were heard and rival contentions have been considered. We have gone through the terms and conditions for a Bookmaker operating at the race course being formulated by Royal Western India Turf Club, (RWITC) Ltd. We have carefully perused the material on record. 15. The present assessee is a licensed Bookmaker operating at the Pune race course under the terms and conditions for a Bookmaker's licence formulated by RWITC Ltd. It is not in dispute that the Bookmaker operates at the race course under the rules and regulations of the licence granted to them by the RWITC. The assessee is a Bookmaker used to accept bets for WIN or PLACE from the punters on the horse races as per the guidelines formulated by RWITC. The profit and loss of the Bookmaker on a particular horse will depend on the bets he has collected on different horses from punters. In a situation where favourite horse having high odds on which the punters have placed bet wins, the punters will get additional amount as per the odds on which they have placed the bet either for WIN and PLACE. In this situation, the Bookmaker stands to make a substantial loss. To save this situation or to minimize the loss, th....
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....ount of bets accepted by one Bookmaker on a particular horse at the time of such Hedge Betting and not with regard to the total amount of bets accepted by that Bookmaker on all horses. In other words, the limit of the amount of Hedge Betting is to be considered with reference to the total amount of betting accepted by that Bookmaker on a particular horse at the time of such layover. Therefore, the limit of the amount of Hedge Betting is to be seen not with reference to the aggregate of total amount of bets accepted by that Bookmaker on all horses at the time of such lay-over. Thus, the Bookmaker is allowed to make Hedge bet with another Bookmaker to the extent of total amounts of bets collected by him on horse-wise basis and not with reference to aggregate total amount of bets collected by him on all the horses. This thus makes it clear that hedge betting by one Bookmaker with another in respect of the bets already accepted by him on a particular horse is an integral part of the activity of a Bookmaker accepting bets on horse-races from others. In case the amount of hedge betting exceeds the total amount of bet accepted by one Bookmaker on a particular horse at the time of such hed....
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....loss that may arise from the bet accepted by him on a particular horse from the punter and not otherwise, provided the total amount of the bet laid over by that Bookmaker with another Bookmaker does not exceed the total amount of the bets accepted by him on a particular horse at the time of such layover. There is no doubt that it is the business decision of the Bookmaker whether to make hedge bet with another Bookmaker with a view to cover the losses that may arise to him on the bets accepted by him on a particular horse. The laying-over of bets by one Bookmaker with another Bookmaker in respect of the bets accepted by him on a particular horse is made with a view to hedge the loss that may possibly arise to him from the bets accepted by him on a particular horse. The such laying over of bets by a Bookmaker is a step or action to protect himself against anticipated loss that may arise from the bets already accepted by him on a particular horse. Therefore, such hedge treatment to the bets given by one Bookmaker is integrated with the bets already accepted by a Bookmaker on a particular horse, and the receipts/payments from both the activities are thus an integral part of the busines....
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.... the Act with a view to provide that no deduction shall be allowed, for and from assessment year 1987-88, in respect of any expenditure or allowance in computing the income by way of winnings from lotteries, cross-word puzzles, races including horse races (not being income from the activity of owning and maintaining race horses), card games and other games of any sort or gambling or betting of any form or nature whatsoever, which were provided to be charged at a specified flat rate under the provisions of section 115BB(1), which section was also inserted by the Finance Act, 1986, with effect from 1-4-1987. The said Circular reads as under:- "(xiii) Provisions of a flat rate of tax on winnings from lotteries, crossword puzzles, races, including horse races etc. 31.1 Under the existing provisions, any income by way of winnings from lotteries, crossword puzzles, races, including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever is chargeable to tax under the head 'Income from other sources' along with the other income of an assessee. By inserting a new section 115BB in the Income-tax Act, it has been provided that an....