By TIOL News Service

NEW DELHI, MAY 12, 2014: THE issue before the Bench is - Whether income arising to a stockist by winning the prize on unsold lottery tickets is business income or income from other sources u/s 56(2)(ib). And the answer is 'income from other sources'.

Facts of the case

Assessee is appointed as a stockist by the State of U.P. on payment of such commission on the sale of lottery tickets under the terms and conditions provided in the agreement. Assessee gained income by winning the prize on unsold lottery tickets as a business income. AO treated the same as income by way of winning prize money on lottery tickets and assessed u/s 115BB at the rate of 40%. Assessee also claimed loss towards unsold tickets. Under the agreement, assessee was to collect the prize of winning tickets, out of the tickets sold by him and shall make the payment of prizes of winning prize upto Rs.1,000/- on the basis of the left hand counter foils kept with him. A sum of Rs. 1.30 lacs had been determined as value of the prize winning tickets payable by the assessee to the prize winners. However, a sum of Rs. 1.23 crores had been paid to the winners and the balance amount remained unclaimed and unpaid to the winners were shown as a liability. AO sought the details of such tickets against which the amount had been paid and details of those winning tickets against which the amount could not be paid to the winners. On non-furnishing of such details, AO invoked provisions of section 145(2) and made addition u/s 68.

CIT (A) held that the amount gained by assessee by way of winning the prize on the unsold tickets was the business income and could not be assessed u/s 115BB. The loss on account of unsold tickets was quite normal in the line of business and merely because the details of unsold tickets could not be furnished, the loss could not be disallowed. The assessee had maintained various registers in the regular course of business and authenticity of credit worthiness had not been doubted by AO. The provision for the last dates in the month of March could not be made because in fact it makes time to submit statement to U.P. State Lottery and, therefore, unless the statement is submitted, it is not possible to create the provision and the provision has not been created as stated by the appellant in subsequent year. The source of credit is explained and, therefore, Section 68 does not have any applicability.

ITAT restored the order of AO observing that for sale of lottery tickets, assessee was entitled to a specified commission, where as the unsold tickets were to be notified/surrendered and the consequences for not intimating timely or for not surrendering any in a specified period entails certain consequences such as the tickets were to be treated as sold, which were not surrendered within the specified time and such tickets were eligible for participation for draw of prizes. Therefore, even by conduct the assessee became purchaser of tickets and as a consequence he participated in draw for prizes and also received prize money and not commission, therefore, the amount in his hands in respect of such tickets was very much an amount winning from lotteries and is subject to provisions of section 115BB. The amount retained was out of sale proceeds and the amount which remained in disbursement is a portion of trading receipt only and in view of no provision for surrendering such amount to U.P. State Lotteries, the amount not so disbursed being a trading receipt is to be accounts for profit and loss of the appellant assessee. Merely because AO added the amount by resorting to proviso to section 145(2) & section 68 for making the impugned disallowance the CIT (A) is not justified in deleting the same since the nature of the amount is such which is liable to be taxed.

Assessee contended that the provision of Section 115BB of the Act will apply in a case where the income is by way of winning from lottery. Section 2 (24) defines income which includes profits and gains and further includes any winnings from lotteries. The lottery is defined by the explanation which provides that lottery includes winnings from prizes awarded to any person by draw of lots or by chance or in any other manner whatsoever, under any scheme or arrangement by whatever name called. Therefore, under Section 2(24) of the Act, the income from profits and gains and the income by winning lotteries have been treated as two separate incomes. As per instruction of the Board dated 25th November, 1993 where prizes are declared on unsold tickets lying with the Organiser, or, prizes remain unclaimed, the amount of money representing such prizes is to be treated as the normal trading/business income of the organiser, and, subjected to tax, accordingly. Thus, the provision of Section 115BB does not apply.

Assessee had to pay the amount prize to the winners below Rs. 1000/- and the same was to be reimbursed from the State Government. During the year under consideration, the amount recoverable had been shown as the liability payable to the winners, which was subsequently paid. Thus, assessee contended that this amount could not be considered as unexplained.

After hearing both the parties, the Hon’ble High Court held that,

++ assessee was appointed as a stockist on principal to principal 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 said 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 unsold tickets which remained with the assessee and deemed to have been sold by the State Government, the assessee got the right to participate in the draw through the tickets like any other purchaser of the lottery tickets gets right. The participation in the draw is always through the ticket number and not by physical participation. Thus, the amount of prize received on unsold lottery tickets is an income by way of winning prize from lottery. Section 2(24) defines "income", which includes any winnings from lotteries. 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;

++ at the time of draw the assessee is only a participant in the draw for all the tickets held by him and this does not involve in any business activity and so much so that the prize won by him is only in his capacity as the holder of prize winning tickets. It has been held that participation in a draw which alone can win lottery prize does not involve any business. Therefore, income by way of winnings from lottery is always "income from other sources" u/s 56(2)(ib). Even assuming that winnings from lotteries are received by him in the course of his business and are incidental to the business and as such they are his business income is right, still, such income is liable to be taxed u/s 115BB, which is a special provision to tax the income by way of winnings from lotteries;

++ 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 or added treating it as revenue receipt. Therefore, the matter be relegated to AO to examine the issue afresh after giving opportunity.

(See 2014-TIOL-703-HC-ALL-IT)