1. This appeal is directed against the order of the Commissioner (Appeals)-X, Calcutta and it relates to the assessment year 1988-89.
2. First appellate authority has decided the matter ex parte and the reasons for the same are mentioned in pages 1 and 2 of his order. The ld. counsel for the assessee though contended that the first appellate authority has not given proper and sufficient opportunity of being heard, the matter was not seriously pressed as he has submitted his case on merits of the issues in dispute before us. Therefore, Ground No. 1 is disposed of accordingly.
3. Ground No. 2 relates to the addition made by the Assessing Officer by rejecting the claim of the assessee with regard to the sale of lottery tickets at a lesser price than the normal sale price. Though the Assessing Officer as well as the first appellate authority has discussed the matter in detail, but the basis upon which the matter was considered was that the assessee has shown a loss of Rs. 8,32,934 in the trading account and the loss arose due to expiry of tickets and also because large number of tickets were sold at a substantially reduced price for which no proper evidence was placed.
4. Before us, the ld. counsel for the assessee has filed a paper book containing Balance-sheet, copy of the order of the Tribunal in the assessee's own case for the assessment year 1987-88, copy of distributorship agreement with the Directorate of State Lotteries, etc.
He has adverted our attention to pages 1 and 2 of the paper book and submitted that in fact, the assessee has shown a gross profit of Rs. 8,32,933 and as such the basis upon which the authorities below have proceeded, i.e., by presuming that the assessee has shown a loss in the trading account, is not factually correct and consequently, the decision thereupon is not in accordance with law. He has furnished before us copy of the order of the Tribunal in S. Pal & Co. [IT Appeal No. 3416 (Cal.) of 1990 dated 9-12-1995], wherein the Tribunal has restored same issue to the file of the Assessing Officer. On the other hand, ld. departmental representative supported the orders of the authorities below.
5. We have heard the rival submissions and also perused the records. As the facts and circumstances as discussed in the order of the Tribunal cited (supra) are similar, by respectfully following the aforesaid order of the Tribunal, we restore this issue to the file of the Assessing Officer to pass fresh order after giving proper opportunity to the assessee. The Assessing Officer is free to collect all the information and decide the same in accordance with law after giving the assessee an opportunity of being heard on the information upon which the Assessing Officer chooses to rely upon.
6. Ground No. 3 relates to the addition of Rs. 20,000 in Coolie and Cartage A/c. and Rs. 15,000 in Advertisement expenses A/c. Out of a sum of Rs. 14,24,126 claimed on account of day-to-day expenses like Coolie charges, Cartage, etc., the Assessing Officer disallowed a sum of Rs. 20,000 and in this regard he observed that even the self-made vouchers did not show the evidence of payment to the recipients. First appellate authority was of the opinion that in the given facts, the disallowance is reasonable.
7. Further aggrieved, the assessee is in appeal before us. Though it was contended before us that no opportunity was allowed to contest this issue before the Assessing Officer, no further evidence was produced before us to show that the entire expenses claimed under that head is reasonable. As we have dismissed Ground No. 1, the assessee could not have a grievance merely on account of the fact that the first appellate authority decided the matter ex parte. On merits, in the absence of any further evidence, we are unable to accept the contention of the assessee. As we find that the addition made by the Assessing Officer is reasonable in the circumstances of the case, we confirm the order of the first appellate authority.
8. Out of the total advertisement expenses of Rs. 56,21,889 claimed by the assessee, a sum of Rs. 15,000 was disallowed by the Assessing Officer on the ground that the expenditure on publication of results was not verifiable with reference to the vouchers, bills, etc. The aforesaid sum was added back on estimate being expenses for non-business purpose. The first appellate authority confirmed the addition as in his opinion, the disallowance is quite reasonable.
9. For the same reasons, mentioned in paragraph 7 above, and also in the absence of any further evidence before us, we confirm the addition made by the Assessing Officer in this regard.
10. Ground No. 4 gives rise to an interesting issue. The assessee is a sole-selling agent/distributor of lottery tickets in India. As per the agreement between the assessee-firm and the Institute of Public Assistance (Provedoria), the assessee-agent has to procure paper and got the tickets printed at a printing press decided by the Director, Provedoria and also should arrange for the transportation to the press and at various other places for sale at its own cost and responsibility. Prize amount of the unsold tickets and other tickets for which no claim is made within a specified and reasonable period stipulated in clause 17 shall be refunded to the assessee-agent. Some of the clauses in the agreement dated 15-2-1985 may be relevant for the purpose of appreciating the issue in dispute before us : "Clause 8 : The Agent agrees for the procurement of paper, printing of tickets and their transportation to the press and at the various other places for sale at his own cost and responsibility. The paper for the tickets shall be of Maplitho quality of 70 grammage per sq.m. and the size of the ticket shall ordinarily be 6 cm X 12 cm.
The tickets shall be printed at a printing press decided by Director, Provedoria. The delivery of the tickets from the press shall be on the specific authorisation from the Director. The Agent, after taking delivery of the tickets from the printing press, shall intimate in writing to the Director, Provedoria, the details of the total quantity of paper supplied, total number of tickets received, total number of tickets rejected and also serial numbers of the tickets and their series, etc.
Clause 11 : The Agent agrees to pay to the Provedoria from time to time in cash or by demand draft a sum of Rs. 2,25,75,000 (Two crores twenty-five lakhs seventy five thousand) as profit for a period of one year for the total value of the tickets worth Rs. 15 (Fifteen) crores. The aforesaid profit in respect of weekly draws shall be paid 4 weeks in advance from the date of the each draw and amount in respect of 4 draws shall be paid at a time. In respect of bumper draws, the profit shall be paid before the release orders to the printing press for tickets are issued. On receipt of the aforesaid amount, release orders shall be issued by the Director, Provedoria to the printing press for delivery of tickets to the Agent. The Agent also agrees to deposit additional profit at the rate of 0.05% in case the agreement is extended by one more year.** ** ** Clause 15 : The Agent agrees to deposit with the Provedoria the prize amount in cash or in the form of a demand draft payable at Panaji in respect of each weekly draw covering prizes over and above Rs. 1,000 before the release orders to the printing press for delivery of tickets are issued. The aforesaid deposit shall relate to 4 weekly draws at a time.
Clause 17 : Both the parties agree that the prize amount shall be allowed to be claimed within a period of 60 days from the date of the draw in case of a weekly lottery and within 90 days from the date of a bumper draw. The Agent shall be entitled for the refund of the unclaimed prize amount after the lapse of 30 days from the expiry of the date for receipt of prize claims. The prize amount in respect of disputed claims shall be refunded only after the dispute is finally decided by the Director, Provedoria.
Clause 18 : The Agent agrees to keep and maintain proper accounts of tickets received from the printing press and the tickets sold, unsold, cancelled or condemned. The Agent agrees in particular to ensure that no duplicate lottery tickets are printed or issued for sale. The sole responsibility in this regard shall be of the Agent only and the Provedoria shall not in any way be responsible therefor and shall be fully indemnified by the agent and civil/penal action.
The accounts shall be open for inspection by the authorised officer of the Provedoria. The Provedoria also reserves the right to enquire into Lottery business of the Agent concerning this agreement." 11. In the course of carrying on its business as a sole-selling agent, some of the lottery tickets remained unsold and were available with the assessee. Prizes earned on some of the unsold lottery tickets, as per clause 17 of the agreement, are the unclaimed prizes and hence, the same is the property of the assessee-agent and, accordingly, the assessee has treated the refund as income in the course of carrying on its business and claimed the same in the return of income for the assessment year 1988-89. Assessing Officer was of the opinion that the income earned by the assessee against the unsold lottery tickets should be treated as lottery income and taxable under section 115BB of the IT Act, 1961. It was also observed that similar receipts from prize money were claimed by the assessee as lottery income in all the preceding previous years and hence the assessee cannot change the claim in the year under consideration.
12. Aggrieved, the assessee contended before the first appellate authority that the prize money of Rs. 10,46,000 from unsold stock cannot be taxed under section 115BB of the Act, inasmuch as, the said income is earned in the course of carrying on its business as a sole-selling agent and the tickets were not purchased with an intention to win a lottery. First appellate authority, however, declined to interfere with the decision of the Assessing Officer.
13. Further aggrieved, assessee is in appeal before us. The ld. counsel for the assessee has filed a copy of the agreement between the Institute of Public Assistance (Provedoria) and the assessee-firm and also explained that there is no purchase by the assessee of lottery tickets as the tickets were got printed by the assessee itself and the entire activity of printing, selling, etc., was in the course of carrying on the business of selling lottery tickets for commission and hence, the main ingredient of purchasing lottery tickets with an expectation of a windfall gain is absent. He, therefore, submitted that the income earned by the assessee is income in the course of carrying on the business and not taxable under section 115BB of the Act.
14. On the other hand, the ld. departmental representative submitted that the assessee has purchased the tickets from the Directorate of Lotteries and from out of the unsold stock, some lottery tickets have won the prizes and hence, both the ingredients of a 'lottery' were present in the case as there is purchase and there is a chance of winning. He thus supported the orders of the authorities below and submitted that section 115BB of the Act was correctly applied by the Assessing Officer.
15. We have heard the rival submissions and also perused the records.
The term 'lottery' is not defined under the IT Act though the lottery income is brought to tax under section 115BB of the Act w.e.f.
1-4-1987. As per the Chambers English Dictionary (Re-print in 1991), the meaning of the word 'lottery' is "an arrangement for distribution of prizes by lot; a matter of chance; a card game of chance". In Aiyar's Judicial Dictionary (Eleventh Edition), the meaning of the word 'lottery' is given as under : "A lottery is a game of chance in which the event of either gain or loss of the absolute right to a prize or prizes by a person concerned is made wholly dependent upon the drawing or casting of lot. Transactions in which prizes are decided by lots or by chance amount to a lottery. The keeping of any office or place for the purpose of drawing any lottery not authorised by Government is punishable under section 294A, IPC. An agreement for contributions to be paid by lot or a transaction requiring skill for winning prizes is not a lottery." 16. From the dictionary meaning we find that 'lottery' is chance for a prize. Whether the amount received by the assessee falls within the meaning of 'lottery' depends on the question as to whether the assessee has participated in the lottery - to take a chance - by purchasing a ticket. On a reading of the clauses in the agreement we are of the opinion that the assessee has not participated in the 'lottery' - neither it purchased the ticket nor it got the amount by winning a prize - and the amount was refunded to the assessee only because of the terms of agreement, i.e., all unclaimed prize amount after a period of 60/90 days is refundable to the assessee-agent. Under identical circumstances, the Hon'ble Bombay High Court had considered the issue as to whether the prize-money received by the agent should be considered as lottery income or not. In the case of Commercial Corpn.
of India Ltd. v. ITO [1993] 201 ITR 348/71 Taxman 528, their Lordships held that the amount received by an agent is in reality not a prize and further observed that a ticket which remains unsold cannot win a prize.
Their Lordships have considered the clauses in the agreement in detail in order to come to the conclusion that the amount received is not winning from lottery. Some of the observations of the Hon'ble High Court are reproduced hereinbelow : "One aspect of the matter which strikes immediately upon viewing these various clauses of the agreement is that barring the cost of printing and publicity material to be borne by the petitioner-company, nothing is paid to the Government, except under clause 17 of the agreement. The question that, therefore, arises is, 'where is the sale by the State Government to the company'. If there is sale in favour of the company, 'why is the company required to maintain account of tickets that are sold as also unsold tickets ?'** ** ** These clauses in fact mutually destroy the theory of the tax department that there is any sale of tickets to or purchase by the company. Payment of advance by the agent does not amount to a sale.
In fact what is paid in advance by the company is the cost of paper and cost of printing of the tickets and for its publicity. This being a contractual term bearing costs in advance, it cannot be said to be a purchase.
We, therefore, conclude that the agreement dated December 21, 1989 is an agreement of agency and the State of Goa is the principal and the petitioner-company is its agent. No transaction of sale can be read into the agreement. We have already seen, having regard to the definition of lottery, that it is chance for a prize. Therefore, there must be consideration paid for taking a chance. The company does not purchase any lottery tickets. Therefore, they do not take any chance at the draw. The company also does not equally participate in the draw. It is, therefore, not possible to hold that when the ex officio Director of Lotteries credits the amount under the second part of clause 15 of the agreement, the Government gives prizes to the petitioner-company for unsold tickets. Mr. Jetley's contention that the word "prize" in clause 15 is income from winning from lottery of unsold tickets, cannot be accepted merely because such expression has been incorporated in that clause. The word 'prize' which appears in clause 15 of the agreement obviously refers to clause 10 of the agreement. Under clause 10 of the agreement which we have extracted elsewhere in this judgment, the petitioner-company is required to deposit the prize money 30 days in advance before the draw. This is a guarantee to the Government as finally the Government is responsible to pay the prizes to the ultimate purchasers of winning tickets. When tickets remain unsold, the Government is required to return or credit the money in favour of the petitioner. The word "prize" used in clause 15 has to be understood in the context of clause 10 of the agreement. It is in reality not a prize, for a ticket which has remained unsold cannot win a prize." 17. On a careful reading of the aforesaid judgment, we are of the opinion that the facts and circumstances (as per the clauses in the agreement) having been similar in the instant case before us, the decision of the Hon'ble Bombay High Court applies on all fours to the facts of the present case. It is not disputed by the revenue that the prize money refunded to the assessee-agent arises out of the agreement dated 15-2-1985 mentioned above.
18. There is another case decided by the Karnataka High Court - Mysore Sales International Ltd. v. CIT [1979] 117 ITR 64/1 Taxman 279 wherein, their Lordships held that the income earned from prizes on unsold tickets is taxable as income arising out of the business carried on by the assessee and it cannot be separated from the business of the assessee. While holding so and deciding the issue in favour of the revenue and against the assessee, their Lordships made the following observations : "It is not the case of the assessee, which is a limited company, that it was open to it to invest its money on buying lottery tickets as any ordinary person would buy lottery tickets and earn, if possible, prizes declared in respect of such tickets. The assessee bought the tickets in question as a part of the bargain entered into by it with the Department of Lottery with the sole purpose of earning the commission payable thereon. In the instant case, it has so happened that in addition to the agreed commission the assessee was able to realise the sum of Rs. 6,69,152 also by way of prizes.
Secondly, it has treated the entire investment made on the tickets in respect of which prizes have been declared as business expenditure. We have, therefore, to hold that the receipt of Rs. 6,69,152 is an income which has arisen out of the business carried on by the assessee and it is difficult to separate it therefrom." 19. Though the issue before their Lordships was as to whether the prize money is exempt from payment of tax under section 10(3) as it stood then, or such income is taxable under the head 'Business income', the principle enunciated in the aforesaid decision and the observations of their Lordships have a direct bearing on the issue in the present case before us. By respectfully following the aforesaid two judgments, we are of the opinion that the income earned on the unsold lottery tickets is taxable under the head 'Income from business' and as a natural consequence, section 115BB of the Act has no application in this regard. Assessing Officer is directed to recompute the income accordingly.