G. Sivarajan, J.
1. In all these Writ Petitions the sole question is as to whether the petitioners who are either conducting kuries or conducting business in consumer goods giving prizes by taking lots either for prompt payment of kuri instalments or for increasing the sale of consumer products is liable to pay advance tax under Section 194B of the Income Tax Act, 1961 (for short 'the Act'). In all these cases the Income Tax Officer (TDS) Division-II, Thrissur had issued notices regarding deduction of tax at source under Section 194B of the Act directing the petitioners to appeal before him for a personal hearing. Since the petitioners did not respond to the said notices they were asked to furnish details , regarding the scheme under which the lottery is taken. The petitioners have challenged the said notices in these Writ Petitions.
2. According to the petitioners who are conducting chits a scheme for taking lot for awarding certain prizes to subscribers who are making prompt payment of the kuri instalments was framed under which every month lot is taken with reference to prompt subscribers and gifts are given. It is the case of the said kuri companies that no independent consideration is involved so far as the gift is concerned. On the other hand, the Income Tax Officer (TDS) has taken a prima facie view that the prize amount either in kind or in cash given by taking lots is liable to tax under the Act. This is also the position, according to the petitioners, who are dealers in consumer goods. They also contend that no independent consideration is received in respect of the gift given to the winners in the lottery. Ordinarily this is a matter which has to be canvassed by the petitioners before the Income Tax Officer (TDS) pursuant to the notice issued by him. In some cases it so happened that the petitioners took up the matter with the Commissioner of Income Tax and the Commissioner of Income Tax has also taken the same view as taken by the Income Tax Officer (TDS) as is evident from the communication dated 20.5.1999 (Ext.P4 in O.P. 19342 of 1999). It is stated therein that as per Section 194B of the Income Tax Act the company is liable to deduct tax while distributing the prizes and the petitioners were directed to pay tax with interest demanded by the tax authority. In the circumstances, there is some justification in the petitioners challenging the notices issued by the Income Tax Officer, (TDS). That apart, all these Writ Petitions have been admitted somewhere in 1998-99. Apart from the above, having regard to the fact that the prize schemes are introduced by the kuri companies and dealers in consumer goods through out the State, a decision with regard to the liability to deduct tax at the time of distribution of the prizes under Section 194B of the Act will enable the authorities under the Act to decide the matters in a uniform way. This is particularly so, since it is stated that in no other districts such notices were issued.
3. Sri. P. Balachandran, learned counsel for the petitioners in all these cases submits that petitioners in O.P. Nos. 5589, 6638, 6639, 21311/1998 and O.P. No. 31027 of 1999 are kuri companies and that the said kuri companies, in order to ensure prompt payment of kuri instalments by the subscribers, framed a scheme as per which every month lots are taken among the subscribers who are promptly remitting the kuri instalments and a prize is given to the person in whose favour the lot is taken. The counsel submits that in the matter of awarding such gift there is no independent consideration other than prompt payment of the kuri instalments. In other words, no separate consideration is required for participation in the draw. Sri. Balachandran also submitted that the petitioners in O.P. Nos.7197 and 7208 of 1998 and OP. Nos. 19342/99 and 29291/99 are dealers in consumer goods and that in order to have more sales of their consumer goods a scheme is framed under which certain discount/incentives are given .to persons who win in the draw conducted pursuant to the scheme. There also the counsel submits that there is no independent consideration for the draw. In short Sri. Balachandran submitted that the provisions of Section 194B has no application to the petitioners' case. The counsel in support of the above submissions took me to the decision of a Full Bench of five Judges of the Madras High Court in Sesha Ayyar v. Krishna Ayyar AIR 1936 Mad 225 where the Full Bench inter alia considered the question as to whether a kuri is a lottery. The Full Bench has formulated the elements which appear to be essential to constitute lottery, viz; (1) a prize or some advantage in the nature of a prize, (2) distribution by chance, (3) consideration paid or promised and (4) risk or loss. The counsel submits that the transactions in question did not satisfy the essential elements mentioned above. The counsel submits that the aforesaid four elements stated by the Full Bench of the Madras High Court was approved by the Supreme Court in H. Anraj v. Government of Tamil Nadu 1986) 61 STC 165. The counsel took me to the observations of the Supreme Court at page 174 of the report where the Supreme Court referred to the decision of the Full Bench of the Madras High Court in Sesha Ayyar's case where in the context of the question whether a kuri chit fund was a lottery or not, the Supreme has emphasised the same three essential elements that go to constitute a lottery, viz., (a) a prize or some advantage in the nature of a prize (b) distribution thereof by chance and (c) consideration paid or promised have purchasing the chance. The counsel submits that in view of these two decisions, unless the case of the petitioners fall within the three elements mentioned above, the kuri cannot be considered to be a lottery for the application of the provisions of Section 194B of the Act. The counsel also took me to the decision of the Supreme Court in HMM, Ltd. v. Monopolies & Restrictive Trade Practices Commission : AIR1998SC2691 , where, in the context of a scheme called 'Hidden Wealth Prize Offer'; Coupons were inserted in some bottles of Horlicks in the various pack sizes and prizes are given to those persons who purchase Horlicks bottles which contains such coupons. The Supreme Court in that context has observed in paragraph 10 of the judgment that there is no material that indicates that there was a draw of lots or that a prize was charged for participation in the draw and the fact that some bottles of Horlicks contained a slip of paper which entitled the buyer to a prize is not a lottery in the ordinary sense of the word. The counsel took me to another decision of the Madras High Court in Commissioner of Income Tax v. Deputy Director of Small Savings : [2004]266ITR27(Mad) where the Madras High Court considered a case where the Government operated a. scheme in order to encourage thrift as also to mobilise funds for developmental works. Under the gift linked scheme a prize coupon is given to the investor when the investment made is in excess of Rs. 1000/-. The investor does not pay any price for those coupons and prizes are awarded to the holder of the lucky coupon, which is chosen by lot. The Income Tax Department invoked the provisions of Section 201 of the Act since no tax had been deducted at source and issued notice to the respondent treating him as the assessee in default. In that context the Madras High Court considered the meaning of the term 'lottery' both with reference to the dictionary meaning and with reference to the decided cases. The counsel submits that on identical circumstances the Madras High Court held that the chance given to the investor to win a prize is a free chance, and is not a chance given in return for a price or contribution paid and therefore the scheme is not a lottery. The counsel also referred to me various other decisions which I do not think it necessary to consider.
4. Sri. P.K.R. Menon, learned senior counsel appearing for the respondents also relied on the decision of the Full Bench of the Madras High Court in Sesha Ayyar 's case supra. The senior counsel took me to page 227 of the Full Bench decision and the illustration discussed in the right hand column of page 227 which reads:
'Then Clause 7 provides that at the end of the 51st month the 575 subscribers who have not drawn prizes will be repaid without interest, the total amount of their subscription, viz., Rs. 150, Clause 6 shows the benefit which the temple, was to derive from the arrangement, it permitted the subscription money to be deposited for interest with Banks and merchants or to be lent to subscribers, and the temple was to get the profit from these deposits and loans. So that a subscriber to the kuri had the prospect of at least getting back the amount of his total subscription of Rs. 150 at the termination of the drawings, but his purchase of a ticket for Rs. 3 gave him a chance of a prize of Rs. 150 if his ticket was drawn at the first drawing, a chance of a prize of Rs. 150 for a payment of Rs. 6 if his ticket was successful at the second drawing and so on down to the 49th drawing, when the winner would get Rs. 150 for an expenditure of Rs. 147 on his ticket. In my opinion this kuri was clearly within the above mentioned definition of a lottery'.
The senior counsel also took me to the separate judgment of Justice Varadachariar, (J.) occurring at page 230 of the report particularly the passage obtained in the right hand column of the said passage which reads:
'The result of the authorities seems to me to be that a scheme may fairly be regarded as a lottery if it is clear that whatever other benefit the subscriber or competitor may get in return for his money, the chance of his getting the prize was also part of the bargain and must have entered into his calculation. It is the fact of the prize and not the source from which it is paid that I think is the deciding factor'.
5. The senior counsel based on the above submitted that a kuri or a lottery conducted under a scheme by a dealer in consumer goods has to be treated as a lottery. Whatever other benefit the subscriber or competitor may get in return for his money the chance of his getting the prize was also part of the bargain and must have entered into his calculation. The senior counsel submits that in the present case the same principle would apply and consequently the kuri or the prize scheme for taking lots of the dealers in consumer goods must be treated as lottery falling under Section 194B of the Act. The senior counsel also took me to the pamphlet (Ext.P1) produced in O.P. No. 7197 of 1998 and submitted that the same would show that there is an element of lottery involved in the scheme as obtained in the Full Bench decision of the, Madras High Court. The senior counsel accordingly submitted that this is a matter to be evaluated by the I.T.O. (TDS) under the provisions of the Act.
6. Section 194B of the Act under which notices are issued by the Income Tax Officer (TDS) reads:
'194B. Winnings from lottery or crossword puzzle.-- The person responsible for paying to any person any income by way of winnings from any lottery or crossword puzzle in an amount exceeding five thousand rupees shall, at the time of payment thereof, deduct income tax thereon at the rates in force'.
In view of the aforesaid provisions the question to be considered is as to whether the gifts made to subscribers of a kuri based on taking lots from prompt subscribers can be treated as a lottery. The question whether a kuri can be treated as a lottery was considered by the Full Bench of the Madras High Court in Sesha Ayyar's case supra. The Full Bench with reference to the Dictionary meaning of the term 'lottery' and the decisions of the Courts in England and in India have observed that; from a study of decisions of both English and Indian Courts the following four elements appear to be essential to constitute a lottery; (1) A prize or some advantage in the nature of a prize; (2) distribution by chance; (3) consideration paid or promised; (4) risk or loss.
7. The Supreme Court, as already noted, in H. Anraj's case supra has referred to the above decision of the Full Bench of the Madras High Court and approved the first three elements as essential to constitute a lottery. In view of this authoritative position with regard to the elements which constitute a lottery the question involved in these cases has to be considered by applying the same. In this context it must be noted that though the aforesaid three elements were stated with reference to the kuri conducted by the appellants in the said case the same principle will apply in the matter of considering prize scheme of dealers in consumer goods also with which some of the cases on hand are concerned.
8. Thus while considering the question of applicability of the provisions of Section 194B of the Act with reference to the prize scheme introduced by the petitioners in these cases the question has to be considered with reference to the three elements which constitute a 'lottery' as laid down in the aforesaid decisions.
9. Coming to the application of the principles to the facts of the case the Full Bench of the Madras High Court was concerned with a lottery scheme -- (printed kuri regulations) which contained the following clauses:
'Each subscriber agreeing to pay at the rate of Rs. 3 per month for 50 months. In all amounting to Rs. 150 per ticket (Clause 4). On the 25th of every English month after 25th March, 1929, one ticket will be drawn out of the 625 tickets and the winning ticket will be paid as prize, Rs. 150, without any liability to pay for future instalments. Fifty such tickets will be drawn in 50 months (Clause 5).'
From the aforesaid clauses it is clear that an element of lottery is involved in the kuri scheme. As per the said clause each subscriber has to agree for payment at the rate of Rs. 3 per month for 50 months, in all amounting to Rs. 150 per ticket. On the 25th of every English month after 25th March, 1929, one ticket will be drawn out of the 625 tickets and the winning ticket will be paid as prize. Rs. 150, without any liability to pay for future instalments. Fifty such tickets will be drawn in 50 months. Thus in so far as the persons who subscribe for the chitty there is an element of lottery in that if the subscriber wins in the first draw he will get the entire 150 rupee with no further obligation to pay any instalments. In this context, it can be said that there is a consideration for the draw, in that, some of the persons will get a benefit of Rs. 150 for making a remittance of less amounts. It is in that context, it must be noted, the Full Bench decision has taken the view that the kuri scheme amounted to a lottery. True that one of the Judges constituted in the Full Bench, Justice Varadachariar, J. in his separate judgment has taken the view as a general proposition that a scheme may fairly be regarded as a lottery if it is clear that whatever other benefit the subscriber or competitor may get in return for his money, the chance of his getting the prize was also part of the bargain and must have entered into his calculation and that it is the fact of the prize and not the source from which it is paid that is the deciding factor. This proposition of the learned Judge cannot be sustained in view of the decision of the Supreme Court in H.M.M. Ltd. 's case supra. In that case the appellants therein manufacture and market consumer products, including Horlicks. The appellants advertised a scheme they called the 'Hidden Wealth Prize Offer', coupons were inserted in some bottles of Horlicks in the various pack sizes, some of these coupons indicated that the purchasers of the bottles in which the coupons were placed would get prizes, the advertisements of this scheme made it clear that the prizes were available only to buyers in Delhi city and they were required to claim their prizes by 15.1.1986, the appellants were served with a notice dated 28.1.1986 by the Assistant Director of Inspection of the Commission stating that the scheme required investigation to find out whether it attracted the provisions of the Monopolies and Restrictive Trade Practices Act, 1969. It was contended for the Director General that there was an increase in price covered the cost of prizes under the scheme and the Commission found that the price increase that took place on 1.7.1985 could 'surely be taken to reflect partly the cost of the gifts. It further says that the said scheme 'was intended to wean away the consumers from Bournvita by allurements of lucky prizes of high value rather than by fair means which may benefit the general run of the consumers'. It was held that for holding a trade practice to be an unfair trade practice under Section 36A(3), it must be found that it causes loss or injury to the consumer. Insofar as prizes are concerned, there has to be the intention of not providing them as offered or creating the impression that they are being given or are being offered free of charge when in fact they are fully or partly covered by the amount charged in the transaction as a whole. The conduct of a lottery for the purpose of promoting the sale, use or supply of a product is an unfair trade practice. However, in paragraph 10 of the said judgment it was held that there is no material that indicates that there was a draw of lots or that a price was charged for participation in the draw and that the fact that some bottles of Horlicks contained a slip of paper which- entitled the buyer to a prize is not a lottery in the ordinary sense of the word. It was also observed that it is difficult to hold that a consumer who bought a bottle of Horlicks that did not entitle him to a prize suffered a loss.
10. The Bombay High Court-Panaji Bench in Commercial Corporation of India Ltd. v. I.T.O. : [1993]201ITR348(Bom) in the context of a claim for deduction under Section 80TT of the Act made by a sub agent of lottery tickets considered the meaning of the term 'lottery' with reference to the decisions of other High Courts and observed that 'it is clear that a lottery is a chance for a prize against a price and, therefore, the element of purchase of a lottery ticket must be present and secondly, the purchaser of a lottery ticket has a right to participate in the draw'.
11. The Madras High Court in a later decision in Commissioner of Income Tax v. Deputy Director of Small Savings : [2004]266ITR27(Mad) considered the question with reference to the provisions of Section 194B of the Act. In that case the Government, in order to encourage thrift as also to mobilise funds for developmental works, saving schemes are operated by the Government. Under the gift linked scheme, a prize coupon is given to the investor when the investment made is in excess of Rs. 1,000/-. The investor does not pay any price for those coupons. Prizes are awarded to the holder of the lucky coupon, which is chosen by lot. The prizes given are consumer goods, such as, fan, colour television, moped, etc. During the accounting year ended March 31,1998 the assessment year being 1998-99, the respondent released prizes worth Rs. 72,94,480/-. According to the Revenue, before distributing those prizes, the assessee ought to have deducted tax at source in a sum of Rs. 29,17,792/-. The Division Bench after referring to the provisions of Section 194B, Section 2(24)(ix) as also the dictionary meaning of the word 'lottery' noted that the Assessing Officer, as also the Commissioner, had placed strong reliance on an old decision of that Court in Sesha Ayyar v. Krishna Ayyar in which the majority had held that a chit scheme under which rupees three per ticket was to be paid for fifty months by 625 persons and to the holder of one lucky ticket to be drawn each month Rs. 150 was to be paid with the recipient no longer being liable to pay the monthly subscription for the remaining period, amounted to a scheme of lottery. It was also noted that Varadachariar, J. who formed part of that majority, observed that the scheme may fairly be regarded as a lottery if it is clear that whatever other benefits the subscriber or competitor may get in return for his money, the chance of his getting the prize was also part of the bargain and must have entered into his calculation. The Division Bench, however, noted that the decision in Sesha Ayyar's case supra was based on the earlier decision of the English Courts and that the said Courts have later taken a different view. The Division Bench however, distinguished the case in Sesha Ayyar's case. It was finally observed that the scheme here is not one for the promotion of sale of any goods. The investor is not offered interest payable on a larger sum, even when a smaller sum is invested; when the investment is made the full amount is payable and interest is paid thereon for the specified period, the investment as also the interest being eligible for concessions/exemptions under the Income Tax Act. It was also held that the chance given to the investor to win a prize is a free chance, and is not a chance given in return for a price or contribution paid and the scheme is not a lottery. The Division Bench had noted that in the Finance Act, 2001 an explanation was added below Section 2(24)(ix) which gave a definition of the term 'lottery' as per which 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. It was then observed that in that case lottery is required to be construed without the aid of Explanation that was subsequently added on 1.4.2002 since the Explanation is not retrospective nor can the Explanation be regarded as merely clarificatory, Since the cases on hand also relate to assessment years prior to the commencement of the Explanation, i.e. prior to 1.4.2002 the said Explanation on the same reasoning has no application to present cases also.
12. Thus from the decision of the Full Bench of the Madras High Court in Sesha Ayyar's case and the decision of the Supreme Court in H. Anraj's case supra the following propositions emerge. The essential elements that go to constitute a lottery are: (1) a prize or some advantage in the nature of a prize, (2) distribution thereof by chance, and (3) consideration paid or promised for purchasing the chance. Thus unless all the three elements are satisfied the prize scheme cannot be considered as a lottery. A price was charged for participating in the draw. The chance of a person getting the prize cannot be treated as part of the bargain unless independent consideration is there with respect to the prize awarded, Here, the general proposition which is laid down by Justice Varadachariar, J. in Sesha Ayyar's case that the chance of a person getting the prize was also part of the bargain cannot be sustained in view of the decision of the Supreme Court in H.M.M. Ltd.'s case and (4) it is the duty of the assessing authority concerned to consider in each case as to whether a prize scheme introduced by the assessee satisfies the three elements of a lottery as laid down by the Full Bench of the Madras High Court and approved by the Supreme Court. For the said purpose it is necessary for the assessing authority to go into the prize scheme of the respective assessees.
13. In the instant case so far as the kuri companies are concerned, if as a matter of fact the prize scheme is introduced only for the limited purpose of ensuring the due payment of kuri instalments and if it is made available only to those subscribers who promptly remit the kuri instalments it cannot be said that there is any consideration for the draw. In other words, even de hors the scheme there is an obligation cast on the subscribers to remit the kuri instalments promptly failing which other consequences are provided in the variola of the respective kuries. Thus insofar as kuri transactions and the prize schemes thereunder are concerned unless there is independent materials to show that a separate consideration other than the instalment payments is provided in the scheme there is no question of treating the kuries conducted by the petitioners herein as lotteries to attract the provisions of Section 194B of the Act. However, this is a matter which has to be considered by the authorities concerned in appropriate proceedings with reference to the prize schemes of the respective petitioners.
14. So far as the prize schemes of the petitioners, who are dealers in consumer goods also it is a matter for the authority to consider the question of applicability of Section 194B with reference to the prize scheme introduced by the petitioners. Ext.P 1 in O.P. No. 7197 of 1998 already noted shows that if a person joins the scheme by making a payment of Rs. 12,500/- and if he wins in the draw which is being taken every month five times, he will get a chetak bajaj vehicle valued at Rs. 25,000/- without any obligation . to pay any further amount. Ext.P 1 is only a pamphlet. All the details regarding the prize scheme is not contained therein. If what is stated in the pamphlet represents the correct position it is a matter for consideration whether the said scheme is similar to the scheme considered by the Full Bench of the Madras High Court in Sesha Ayyar's case supra. In short, it is for the Income Tax Officer (TDS) Division No. II, Thrissur who issued notices to consider the objections to be taken by the petitioners keeping in mind the principles laid down by the Full Bench of the Madras High Court and by the decision of the Supreme Court which is summarized in this judgment.
15. All these Writ Petitions are accordingly disposed of by directing the petitioners to file detailed objections to the notices issued by the Income Tax Officer (TDS) Division No. II, Thrissur within a period of three months from today and the said authority will consider the matter and pass orders in the light of the principles discussed and summarised in this judgment and also the observations made herein after affording an opportunity of being heard to the petitioners also. The interim orders passed in these cases will continue till orders are passed as directed in this judgment.
Writ Petitions are disposed of as above.