TaxTMI 
TaxTMI 
2008 (9) TMI 1024
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....assessee admitted an income of Rs. 4,57,87,442. During the course of assessment, the assessing officer noted that the gross receipts of the assessee-club were Rs. 129.54 crores. Out of this Rs. 12.72 crores was paid towards betting tax and Rs. 129.54 crores was paid towards winnings on Horse Races, and it was only the balance receipts of Rs. 29.40 crores that were credited to the Profit & Loss Account as Club's commission. The assessing officer further noticed that payments towards winnings are made in cash. Since even payments exceeding Rs. 20,000 each were also made by way of cash, the assessing officer noted that such payments, aggregating to Rs. 2,33,04,992, were made in contravention of the provisions of Section 40A(3) of the Income tax Act, 1961(the Act). The assessing officer accordingly issued a show-cause notice to the assessee. 4. In response, assessee made elaborate submissions contending inter-alia- (a) That the assessee conducts Horse Races under the provisions of Andhra Pradesh Gaming Act, 1974, under which the Club collects, solicits the bets and distributes the winnings, with government permission on a day on which the horse race is to be run; ....
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.... submitted that in the game of racing as punters insist cash payments, and as they cannot leave the race meeting point till last race is completed, cheque payments would not be accepted and to this extent, it is to be treated as if no banking facilities are available to the Punters at that point of time. (iv) Object of Section 40A(3) was to check tax avoidance. Since there is no tax avoidance in the instant case, the provisions of Section 40A(3) are not applicable. (v) Summing up these reasons, it was submitted that if business expediency and other relevant factors are taken into account, provisions of Section 40A(3) cannot be invoked. 6. The assessing officer rejected the plea of the assessee against splitting of the game, etc., against the provisions of the Gaming Act, etc. observing that provisions of Income tax Act, 1961 are as much applicable to the assessee-club as the provisions of the Gaming Act, 1974. He also rejected the contention of the assessee that receipts and payments do not form income and expenditure of the Club, holding that the receipts and payments are directly related to the computation of income of the Club. Consequently, he also held tha....
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....0; disallowance of Rs. 46,60,998 and disallowance of excess depreciation amounting to Rs. 16,362. By the impugned appellate order, the CIT(A) while restricting the disallowance out of winnings of less than Rs. 2,500 aggregating to Rs. 120.30 crores, to 10% as against 15% made by the assessing officer, sustained disallowance of Rs. 12.03 crores on account of unverifiable expenditure. He however, confirmed the other two disallowances of Rs. 46,60,998 made in terms of Section 40A(3) and disallowance on account of excess depreciation amounting to Rs. 16,362 made by the assessing officer. 10. Aggrieved by the relief granted by the learned CIT(A) out of the ad-hoc disallowance made by the assessing officer, Revenue preferred its appeal ITA No. 972/Hyd/08, assessee preferred its appeal ITA No. 212/Hyd/08 aggrieved by. the additions sustained by the CIT(A). 11. Though assessee has raised elaborate grounds of appeal, numbering 23 and running into four typed pages, as against sole effective ground raised by the Revenue, the issues that arise for our consideration in these appeals fall under a narrow compass. The first and foremost issue that arises for consideration in this appeal is w....
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....urpose of distribution amongst the winners. The club retains its commission on winning tickets, deducts, Betting Tax to be paid to Government of Andhra Pradesh. Thus, the payment of winning tickets which arises out of the collections made from the punters are interlinked with a substantial nexus and thus the winning tickets are a direct charge against the collections. Thus, there is an overriding title against collection. No part of the receipts or the payments for winning tickets are either income or expenditure of the assessee-club. The winning tickets are paid on the same day without any delay which are certified and audited by a Chartered Accountant. Thus, it is the claim of the Authorised Representative that except for the commission, no other receipts arising out of the aforesaid transactions are the income of the assessee-club. Apart from the above source of income to the club, some royalty received from other centers for Hyderabad races, members' subscriptions and other receipts also constitute the income of the assessee. Thus, right from 1963 till date, the assessee-club maintained the same method of accounting, which is followed consistently. Explaining the detailed m....
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....ntly followed method of accounting cannot be disturbed by the Revenue. Besides submitting a detailed note on the law relating to principles of consistency, in support of these contentions, the learned Authorised Representative placed reliance on the following decisions- (a) DIT (International Taxation) v. Ravva Oil (Singapore) P. Ltd. (b) CWT v. Allied Finance P. Ltd. (c) DIT v. Lovely Bal Shiksha Parishad (d) DIT (Exemptions) v. Escorts Cardiac Diseases Hospital Society (e) CIT v. Lagan Kala Upvan (f) Samaj Kalyan Parishad v. ITO (g) ITO v. Tejmalbhai and Co. (h) CIT v. Bilahari Investments P. Ltd. 15. As for the ad-hoc disallowance made out of payments of winnings on racing of less than Rs. 2,500, the learned Authorised Representative submitted that actually, total payments of winnings of amounts of less than Rs. 2,500 on various events is Rs. 120.30 crores. An ad-hoc disallowance has been made @ 15% of Rs. 120.30 crores, which worked out to Rs. 18,04,50,000, on the ground that the data submitted is beyond scope of verification. Though the CIT(A) sustained disallowance to the extent of 10% giving relief of....
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....mitted that since the receipts which gave rise to payment of winning tickets above Rs. 20,000 are never the income of the assessee, the provisions of Section 40A(3) are not applicable. He submitted that these payments are diverted at source for winner and the balancing figure is not the winning tickets payments as understood by the Revenue. On the contrary, he explained the accounting procedure in the following manner- (a) First receipts from Punters arising from Sale of Race Tickets are collected; (b) Payment of Winning Tickets; (c) Earning of Commission to the assessee-club and Betting Tax; (d) Payment of Betting Tax by the assessee-club. Since the receipts which give rise to payment of winning tickets above Rs. 20,000 are never the income of the assessee, and since it is a collection made for payment to winners and the balance represents the commission of the assessee-club and amounts of betting tax payable to State Government, according to the learned Authorised Representative, the provisions of Section 40A(3) are not applicable. 18. The learned Authorised Representative also submitted that any disallowance in terms of Section 40A(3) in....
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....shila Chordia v. ITO (b) CIT v. P. Pravin and Co. (c) Walford Transport (Eastern India) Ltd. v. CIT (d) Attar Singh Gurmukh Singh v. ITO (e) Sri Renukeswara Rice Mills v. ITO 20. To sum up, the learned Authorised Representative submitted that the assessing officer was not justified in disturbing the books of account maintained by the assessee maintained by the assessee in accordance with the principles of accounting consistently and uniformly followed by the assessees in this line of business across the country, over the years, without pointing any specific defects relevant for the years under appeal, in the case of the assessee, and making ad-hoc disallowance out of winnings payments of less than Rs. 2,500 on the grounds of unverifiable nature of the same, and further disallowance in terms of Section 40A(3) in respect of winnings payments to punters exceeding Rs. 20,000 each. 21. The learned Departmental Representative on the other hand, strongly supporting the orders of the Revenue authorities, submitted that the major income of any race club business is income from 'bettings' and major expenditure is 'winning payments'. H....
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...., he submitted that in the earlier years, the Department has never-examined the issue relating to the gross receipts and no conscious decision was ever taken by the Department. Even otherwise, he submitted that merely because some mistake was committed in earlier year, assessee cannot have any right for the perpetual commission of the same mistake year after year because it was to his advantage. In any event, every assessment year is unique and need to be examined afresh and the principles of res judicata have no application to the income tax proceedings. 24. At this juncture, he submitted that the assessee has not produced any copy of the order of the Department, where the method of accounting and issue of income and expenditure of the club have been discussed and decided specifically. In this year, the assessing officer specifically examined these questions especially with regard to the method of accounting followed by the assessee and found the same to be inappropriate, as it would not be possible to deduce the correct income of the assessee from the same. Responding to contention of the assessee that the assessee has maintained records meticulously in-respect of all receipts....
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....o. (2007) 108 ITD 626 (Pune). 26. He further submitted that after the race is over, the payments are made to punters on winning tickets, which is definitely in the nature of expenditure incurred by the club and the balance has to be taken into account as profit. The profit arising out of gross collections from a race would generally ~be more than the commission income worked out on tickets sales because it includes gate collections, unclaimed prizes, royalty etc. Thus, the gross collections made by the assessee club on account of conduct of races have to be considered as revenue receipts chargeable to tax, against which actual payments made to be punters have to be considered as expenditure. In support of these contentions, reliance is placed on the following decisions- (a) Chowringhee Sales Bureau (b) Bijli Cotton Mills (P) Ltd. (c) Bazpur Cooperative Sugar Factory (d) Karam Chand Thapar and Ors. (e) Food Specialities Ltd. 54 ITD 352 (Del) (f) Harshvardhan Chemicals and Minerals 101 ITD 66 (Jodh) 27. With regard to the contention of the assessee as to the overriding charge of the payments due to punters, over the collecti....
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....her submitted that making of payments on bank holidays does not ipso facto permit he assessee to make cash payments in violation of ' provisions of Section 40A(3) of the Income-tax Act. In any event, he submitted that the argument of the learned Authorised Representative assessee does not hold much force because nowadays many banks are operating even on holidays at places where substantial collections/payments are involved and the exception provided under Rule 6DD(h) is basically for places which are not served by banks. Moreover, he pleaded, no urgency has been established by the assessee for the payments made to the punters on account of which the payments were required to be made in cash and the assessee also could not establish in any manner that the conditions prescribed in any of the present Clauses of Rule 6DD are fulfilled so as to take the payments made by the assessee outside the purview of Section 40A(3) of the Act. In support of these contentions with regard to disallowance under Section 40A(3), the learned Departmental Representative placed reliance on the following decisions- (a) S. Venkata Subba Rao v. CIT (b) Attar Singh Gurmukh Singh v. ITO ....
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....oticed by the assessing officer was that it is difficult to match the winning ticket number to the winner (payee), since the assessee has not maintained the details of the payee like, addresses, acknowledgement vouchers etc. to enable the assessing officer to cross-examine for ascertaining the genuineness of the transaction. 33. With regard to arguments of the Authorised Representative on the impossibility of performance, in view of innumerable instances of payments and inherent problems connected with the nature of business of the assessee, learned Departmental Representative submitted that even though the number of prize winning tickets may be big, number of winners may not be high and the club could have certainly devised a mechanism to obtain details of payees regarding the payments actually made, and maintained proper evidence, which would establish the payments, viz. expenditure, actually having been made. Inviting our attention to page-4 of the assessment order for assessment year 2004-05, it was submitted that maintenance of details regarding cash transactions at different counters was found unsubstantiated as per mention in the daily report of 14.2.2004. Thus, he pointe....
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....cally these two disallowances that call for our adjudication in these appeals. 35. Before going into the merits of the above disallowances made by the assessing officer, the moot question that requires to be considered is whether the Department is justified in disturbing the consistent accounting policy followed by the assessee from the beginning, in consonance with such policy followed by other race clubs in the country, though such policy was accepted by the Department itself in assessee's own cases in earlier years. The learned Authorised Representative firstly questioned the action of the Revenue authorities in disturbing the book results on the ground that a uniform accounting policy is being followed for the last several years and the same has never been disturbed by the Department even in earlier years. We do not find much force in this argument of the learned Authorised Representative. It is settled position of law that every assessment year is separate and need to be freshly examined and the principles of res judicata have no application to the proceedings under Income-tax Act. Further, as contended by the learned Departmental Representative, the assessee has not pr....
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....ts the true income of the assessee and whether the assessing officer is justified in disturbing the same on account of inherent deficiencies pointed out by him on account of crediting of net receipts and not gross receipts to the Profit & Loss Account. 37. First contention of the assessee in this behalf is that it is only an agent and commission alone, viz. net receipts, exclusive of winnings payments to the punters and Betting Tax payable to the Government, constitutes its income and not the gross receipts. We do not find force in this contention of the assessee. The major income of any race club business is income from bettings and major expenditure is winning payments. All the punters are the customers of the assessee, from whom the assessee derives income from gate collections, royalty etc., which shows the nature of the business of the assessee. The theory of 'fixed commission' is not based on factual evidence, as in the case of the assessee, the net collection is the resultant surplus after netting the gross receipts with expenditure and this net collection is not fixed as claimed by the assessee, on account of various factors like unclaimed winning amounts. In thi....
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....come, viz. the balancing figure out of gross receipts, after elimination of Betting Tax and Winning Payments from the gross receipts. This contention has a clinching effect and bearing not only on the action of the assessing officer in rejecting of the books of account maintained by the assessee, and also on the decision of the Revenue authorities in treating the receipts from the punters which constitutes gross receipts, as the income of the assessee creditable to the Profit & Loss Account and the winnings payments to the punters as the expenditure of the assessee, and consequently on the disallowances out of such winnings payments made by the assessing officer. 39. On careful consideration of the rival contentions on this aspect, we find no merit in the plea of the assessee with regard to overriding title. We agree with the Revenue authorities that so as to apply the concept of overriding title, charge over the income should arise before it reaches the coffers of the assessee. The principle of over-riding title has been explained by the Hon'ble Supreme Court in the case of CIT v. Sitaldas Tirathdas (supra), wherein it has been held in the penultimate para of the said decis....
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....t the taxes are diverted to the State even before the profits on which the taxes are levied reached the hands of the assessee. The assumption regarding the applicability of the doctrine of overriding title of the State is totally unrealistic and factually incorrect. The liability to pay tax under the Companies (Profits) Surtax Act, 1964, would arise only after the computation of the total income was done under the Income-tax Act. The doctrine is applicable to cases where the assessee has alienated or assigned the sources of income, so that it is no longer his (vide Kanga and Palkhivala's "The Law and Practice of Income-tax ", Vol. I, Seventh edn., pp. 99-100).... 41. We may state at this juncture, that there is no quarrel with regard to the legal principles relating to the concept of overriding title, but the question that remains to be answered is whether, there is an overriding charge for the winnings payments due to be paid to the successful punters and Betting Tax payable to the State Government. We find that in the instant case, the liability towards Betting Tax in the instant case is akin to the liability to surtax considered by the jurisdictional High Court in the cas....
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....e contention of the learned Authorised Representative that gross receipts are disclosed in the annual report, does not satisfy the user of the financial statements. Material items must be disclosed in the financial statements and not in the Annual Reports. The contention of the learned Authorised Representative that the revenue did not reject the books of accounts of the club and not disturbed the income shown by the club is not correct as the Department, effectively rejected the books and the accounting practice followed by it, by treating the gross receipts/collections as receipts of the club and payments to the punters as expenditure. There is no warrant for any further rejection of books of accounts and disruption in the declared profit of the club. 43. In the circumstances, our considered view is that it is only the gross receipts/collections have to be considered in the audited financial statements in computing the net income of the assessee. When the club collects the amount on account of sale of tickets, the same is in the nature of revenue receipts in the hands of club which is conducting the race. As per Accounting Standard 9 titled 'Revenue Recognition' notifi....
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....tinkered with howsofar universally followed such policy is. There is no proposition in law to force the revenue to accept the accounting system, merely because it is followed by others clubs, more so, when it is proved to be not disclosing the true and correct picture of the state of affairs of the assessee so as to enable the assessing officer to deduce the correct income of the assessee. 46. As per Section 194BB, the club is responsible, before paying to any person any income by way of winnings from any horse race in an amount exceeding Rs. 2500 shall, at the time of payment thereof, to deduct income tax thereon at the rates in force. In the case under consideration, the undisputed fact is that the assessee deducted the income tax [TDS] from the winning payments exceeding Rs. 2500. By doing so, the assessee has admitted the winnings payments as its expenditure. Hence, the assessee is required to show all these payments in their financial statements. When the payments are to be shown in the financial statements, obviously, the gross receipts needs to be taken as the income of the assessee and then deduct the winning payments and taxes, other expenditure and net resultant figure....
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....f the business or profession. 50. Thus, Section 37[1] allows deduction of any expenditure which fulfils the conditions noted above. In the case under consideration, payments made to winners less than Rs. 2,500 satisfies all the conditions mentioned above. The department has not brought on record to show that the said expenditure not fulfilled the above conditions. It is no doubt true that the onus is on the assessee to prove that it fulfils the above conditions, more importantly, the last one, i.e. that it has been incurred wholly and exclusively for the purposes of the business or profession. For this purpose, assessee has to produce necessary evidence, in the form of bills and vouchers, to the satisfaction of the assessing officer. 51. Admittedly, the assessee is maintaining the entire activity is computerized environment. The entire computerized activity relating to issue of computerized tickets, computerized winning tickets and the computerized financial entries is explained in the page 37 to 39 of the paper book furnished by the learned Authorised Representative for the assessee before us. As soon as a punter purchases a racing ticket, window terminal printout, the ticke....
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....sessee is accepted and the same has been verified and scrutinized by the Revenue. There is no material on record brought out by the revenue to show that the cash transactions, like number of tickets sold, quantity sold and the rates at which the tickets were sold, are not genuine/correctly recorded. The names of the customers are also given in respect of the transaction above Rs. 2500. The only thing that is not done by the club is that the details of the payees are not entered for tickets sales. Since, having regard to the nature of the transactions and the manner in which they had been effected, there was no necessity whatsoever for the assessee to have maintained the details of the payee below Rs. 2500. The failure to maintain the same cannot be regarded as a circumstance giving a rise to a suspicion with regard to the genuineness of the transactions. 54. Therefore, it cannot be said that by not maintaining the names of the payee, etc, the assessee has violated the provisions of the income tax, since it was practically impossible on his part to do so. While the assessee has compared its business with the businesses of a cinema theatre and restaurant, which also deal with mult....
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....ussion, in the absence of any material brought on record by the department to show that the assessee claim of payments to wining tickets is inflated or baseless or wrong, we find no justification for the ad-hoc disallowance out of winnings payments of less than Rs. 2.500 each made by the assessee during the year. 58. Our view is supported by the case law relied upon by cited by the learned Counsel for the assessee. In case of Shanker Trading Co. P. Ltd. v. CIT 152 Taxman 49 [Delhi] it was held that the assessing officer was not empowered to make any ad-hoc disallowance without pointing out defects in vouchers produced by the assessee. Hence, ad-hoc disallowance made by the assessing officer was deleted by the Tribunal. In the instant case, the assessee having satisfied all the four conditions laid down under Section 37(1) of the Act, by establishing the foolproof nature of the accounting procedure followed by it for recording its receipts and payments, the assessing officer was not justified in making any no disallowance. 59. In the case of CIT v. Transport Corporation of India limited (supra) relied upon by the learned Departmental Representative, the assessee has not proved....
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....en categorically held that the word 'expenditure' is of wide import and when Section 40A(3) refers to the expenditure incurred by the assessee in respect of which payment is made in cash, it means that all outgoings are brought under the word 'expenditure' for the purpose of that section. 62. The next contention of the assessee is that assuming without admitting that the entire gross collections constitute its income and winnings payments to punters constitute its expenditure, provisions of Section 40A(3) are not applicable to its payments, as banking facilities are not available at the tote points and on most of the racing days which are generally Sundays and public holidays. It is also the contention of the assessee that there is no tax avoidance in the hands of punters, who received wining amounts above Rs. 20,000 since TDS at highest rate was made on such payments. Not finding merit in these contentions, and holding that the provisions of Section 40A(3) are mandatory, the assessing officer has made the disallowance under Section 40A(3), which was upheld by the learned CIT(A). 63. Before going into the above contentions of the assessee on the applicability ....
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....x Rules, attract automatic disallowance in terms of Section 40A(3) at 20 per cent of the such payments, whatever may be the other justification, which prompted the assessee to transact in cash. That being the statutory requirement, neither the inherent nature of the assessee's business nor the peculiar circumstances under which the assessee had to make the payments in question in cash, can save the case of the assessee from the rigours of disallowance under Section 40A(3). When the exceptions in terms of second proviso to Section 40A(3) are specifically prescribed under Rule 6DD of the Income Tax Rules, it is only the cases that fall under Rule 6DD which go out of the clutches of Section 40A(3) of the Act, and the scope of Rule 6DD cannot be extended to cover any circumstance not specified therein, however justified the rigorous the circumstance may be or however harsher in the given case, the provisions of Section 40A(3) may be. 66. Prior to 25.7.1995, Clause (j) of Rule 6DD of the Income-tax Rules read as follows: 6DD.... (j) in any other case, where the assessee satisfies the Assessing Officer that the payment could not be made by a crossed cheque drawn ....
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....can be made a foundation for attacking the validity of the said section. Therefore, it is not open for attacking the provision as violative of any provision of the Constitution. There is no arbitrariness or discrimination in the said provision warranting interference by this court under the circumstances. In view of the above there are absolutely no merits in the challenge made as to the validity of Section 40A(3) of the Act by mere deletion of Sub-clauses (1) and (2) of rule 6DD(j). The said provision is perfectly valid and we may hasten to add that the deletion of Sub-clauses (1) and (2) of Rule 6DD(j) is only a step forward in the achievement of the avowed object envisaged under Section 40A(3) of the Act. 67. Had the above Clause (j), as it stood prior to 25.7.1995, remained effective for the years under consideration, on the statute book, there could have been some justification for us to examine whether the payments mode by the assessee in the instant case in violation of provisions of Section 40A(3) were saved by the Clause (j) of the Income Tax Rules. 68. In the circumstance, the only exception that is available to the assessee in terms of Rule 6DD, as it was ....
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....he ad-hoc disallowance made by Revenue authorities, may appear to justify even the cash payments caught by the mischief of Section 40A(3) of the Act. They may a constitute a reasonable cause and any disallowance, not withstanding those peculiar features of the assessee's business, and peculiar circumstances in which the assessee has to make the cash payments exceeding Rs. 20,000 each, in terms of Section 40A(3) of the Act, may appear to be harsh. 73. However, as stated above, the disallowance in terms of Section 40A(3) of the Act is statutory, unless the payments are saved by the second proviso to Section 40A(3), on account of the payments having been made in the circumstances prescribed under Rule 6DD. In view of the amendment to the provisions of Rule 6DD, by virtue of omission of Clause (j) with effect from 25.7.1995, there is no scope for examining either the inherent features of the assessee's business or the peculiar circumstances in which the assessee had to make the cash payments. 74. In this context, we have also apprehensions as to whether the payments made to punters could be termed as expenditure so as to come within the scope of the provisions of Section ....
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....within the scope of the provisions of Section 40A(3), and if so, exclude the such of those payments which fall within the exceptions prescribed under Rule 6DD(j) as it stands during the relevant time, i.e. payments made on a day on which the banks are closed either on account of holiday or strike, from the scope of disallowance under Section 40A(3). He may accordingly recompute the disallowance under Section 40A(3), after giving reasonable opportunity of hearing to the assessee. Assessee's grounds on this issue are allowed in part for statistical purposes. 76. In a result, appeals filed by the revenue are dismissed. Appeals filed by the assessee are partly allowed. Assessee's Appeal: ITA No. 710/Hyd/08 Revenue's Appeal: ITA No. 973/Hyd/08: Assessment year 2005-06 77. As already noted, above, facts of the case and issues involved, besides contentions of the parties are identical with those considered by us while deciding the cross-appeals for the assessment year 2004-05 hereinabove. 78. With regard to ad-hoc disallowance out of winnings payments of less than Rs. 2,500 each, for the detailed reasons discussed in paras 49 to 60 above, for the assessment year....