Kerala H.C : The petitioners in this original petition challenge Ext. P4 letter of the second respondent—State Government— addressed to the first respondent—Director of State Lotteries—dt. 17th March, 1999.

High Court Of Kerala

M.S. Hameed & Ors. vs. Director Of State Lotteries & Ors.

Sections 194G

M. Ramachandran, J.

OP No. 11573 of 1999

10th November, 2000

Counsel Appeared

K.R. Prasad, S. Gopakumaran Nair, P.S. Sreekumaran & Ashok Kulkarani, for the Petitioners : N. Manoj Kumar, P.K. Raveendranatha Menon & George C. George, for the Respondents



The petitioners in this original petition challenge Ext. P4 letter of the second respondent—State Government— addressed to the first respondent—Director of State Lotteries—dt. 17th March, 1999. For easy reference, the text of Ext. P4 is extracted hereinbelow : Sub : Kerala State Lotteries—Tax on sale of lottery tickets—Non-deduction of income-tax— regarding. Ref : Your letter No. SA(3)/16065/97/DSL(2) dt. 29th Dec., 1998. I am to invite a reference to the letter cited and to inform you as follows : Sec. 194G of the IT Act, 1961 specifically imposes a liability on person responsible for paying to any person who is or has been stocking, distributing, purchasing or selling lottery tickets, any income by way of commission, remuneration or prize on such tickets in all amount exceeding one thousand rupees, deduct income-tax thereon at the rate of ten per cent. This 10 per cent of tax can be collected at the time of selling the lottery tickets to registered agents of any other person where the amount exceeds, Rs. 1,000. Whether, the registered agents purchasing the tickets sell the ticket direct to public or to sub- agents or not does not change the nature of the responsibility to collect the tax and the further sale of tickets need not be considered by lottery officer. They can collect the tax at the time of first sale by them. In these circumstances, there is no illegality on the demand of the IT authorities to remit the tax. Therefore, I am to request you to comply with the relevant provisions of IT Act.”

From the letter it appears that the IT Department had demanded deduction of tax and remittance thereof from registered agents when the amounts exceeded one thousand rupees. The second respondent found nothing objectionable in the demands, and Ext. P4 instructions were consequently issued. The three petitioners, who are directly affected by the said directions have approached this Court for quashing the said proceedings mainly on the plea that s. 194G of the IT Act cannot have application on the facts of the case, and consequently the stand taken by the Government is illegal, and warrants interference. The CIT and the ITC are respondents 3 and 4 in this writ petition.

The question, therefore, to be decided is as to the scope of s. 194G of the Act vis-a-vis the transactions carried out by the petitioners, and whether a deduction at source as contemplated could be upheld. The relevant facts for determining the issue are give below.

The petitioners receive in bulk quantities of lottery tickets from the State Government. They are given a discount which is on a slab system Ext. P1 is the governing order issued in 1998. The agents commission presently payable is as follows :

The import of the order will be that for a ticket worth Re. 1 an agent need pay between 75 paise to 71.5 paise only, depending on the offtake. Petitioner submits that there is no agency agreement, and the petitioners are termed as agents only on a loose basis. From the nature of transactions, the Government and petitioners deal as principals to principals. The tickets purchased are thereafter distributed through other agents, and sub-agents, according to them, on commission basis. They point out that after purchase of the tickets, it is not the Government’s lookout as to how and when they are divided or distributed, and there is no control over the affairs thereafter. Therefore, the principal contention of the petitioner is that there is only payment of the price of the tickets fixed as payable by the principal, and no commission or discount are paid to them by the Government. As such, it is the contention of the petitioners that s. 194G of the Act has no application, and hence the demand of tax, as coming through Ext. P4 is unsustainable and without jurisdiction.

4. Sec. 194G of the Act had been introduced by Finance Act, 1991, effective from 1st Oct., 1991. I may extract the section, as it might be relevant to appreciate the stand of the parties better : “194G. Commission, etc. on sale of lottery tickets.—(1) Any person who is responsible for paying on or after the 1st day of October, 1991 to any person, who is or has been stocking, distributing, purchasing or selling lottery tickets, any income by way of commission, remuneration or prize (by whatever name called) on such tickets in an amount exceeding one thousand rupees shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of ten per cent. (2) Where the AO is satisfied that the total income of any person who is or has been stocking, distributing, purchasing or selling lottery tickets justifies the deduction of income-tax at any lower rate or no deduction of income-tax, as the case may be the AO shall, on an application made by such person in this behalf, give to him such certificate as may be appropriate. (3) Where any such certificate is given the person responsible for paying the income referred to in sub-s. (1) shall, until such certificate is cancelled by the AO , deduct income-tax at the rates specified in such certificate or deduct no tax, as the case may be : Explanation : For the purposes of this section, where any income is credited to any account, “whether called Suspense account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.” Before Ext-P4, the deduction of 10 per cent was not being made and petitioners submit that thereafter the tax deduction has commenced. The submission of Mr. K.R. Prasad, senior counsel, appearing on instructions, for the petitioners, could be summarised as following : Provisions for collection and recovery of income-tax appearing in Chapter XVII of the Act refers to various methods viz., deduction at source, collection at source, advance payment of tax, collection by recovery and levy of interests, etc. Sec. 194G comes within the sub- heading “deduction at source”. For the mechanism, according to the counsel, a statutory authorisation is essential. When the petitioners purchase tickets, they became absolute owners thereof. He also referred to r. 25 of the Kerala State Lottery Rules, to the effect that in the case of loss of tickets, no compensation was payable. Petitioners were never agents of the State, and in no capacity, render any service to the State. For the face value of ticket of Re. 1 the petitioners were expected to pay 71.5 paise and he could have purchased a ticket worth one rupee by raising only 11.5 paise. That the ticket might worth one rupee did not mean that the balance of 28.5 paise was the petitioners’ income Referring to the text book (Kanga & Palkiwala on Income-Tax) (p 92, 7th Edn) he referred to the discussion based on authorities to urge that mere relief from expense cannot be income. A person is chargeable to tax not on what he saves in his pocket, but what, goes into his pocket. The counsel urged that s. 194G as it stands in the statute book, cannot have application to the petitioners, as has been attempted to be explained by Ext. P4.

It was further submitted that it was difficult to digest a suggestion that at the stage of purchase, it is possible to derive an income as well. The petitioners, according to him, were engaged in a transaction, as spoken to by the section. As there was no statutory authority for attempting collection of tax from them, he submitted that Ext. P4 was misconceived, and the State Government simply obliged the IT Department, when a request had forthcome, without independent application of mind.

The counsel also referred to s. 206C of the Act, which was in Part BB of Chapter XVII which authorised collection of tax at source. This was confined to specified items, and a comparable provision was not there in respect of lottery tickets. As the authority for demand was vested on s. 194G, since the precondition for application of the section was conspicuously absent, according to the counsel, the levy was unauthorised.

The counsel also relied on the decisions in Union of India vs. A. Sanyasi Rao (1996) 132 CTR (SC) 81 : (1996) 219 ITR 330 (SC) : TC S5.562 referring to a statutory fiction being employed. A concession or rebate was never considered as the income derived by an assessee, and for the proposition, reliance was placed on CIT vs. Udhoji Shrikrishnadas (1981) 21 CTR (MP) 171 : (1983) 139 ITR 827 (MP) : TC 18R.394. Counsel also referred to the instructions of the CBDT, quoted in 192 ITR (St) 1999 [sic—This may be Circular No. 616 dt. 22nd Nov., 1991 (1991) 100 CTR (St) 15—Ed.] and contended that it had never been visualised that in the case at hand, a tax under s. 194G was justified.

Mr. Prasad also had referred to the decision in Hyderabad Industries Ltd. vs. ITO (1991) 95 CTR (Kar) 164 : (1991) 188 ITR 749 (Kar) : TC 5R.401 to urge that a benefit not includible in a transaction cannot be an income for a deduction of tax at source. The transaction had in fact the characteristics of a rebate, and there was no element of income as understood by law. Reliance was also placed on CIT vs. A.K.S. Chetty & Sons (1980) 16 CTR (Mad) 252 : (1980) 123 ITR 592 (Mad) : TC 18R.396. Reference had also been invited to a decision of the Tribunal, Madras Bench, in ITA 2713/1996 and connected cases where on identical facts, it had been held that s. 194G had no application. He had also referred to a circular issued by the state dt. 10th Nov., 1999, wherein the Government had indicated that what had been allowed to the persons like petitioners was not discount, but only commission. The petitioners, according to him, had been repeatedly making submissions for a proper examination of the matter but no positive steps forthcome. He concluded his submissions by requesting that Ext. P4 had no statutory authority, and was misconceived and made inroad to the petitioner’s rights and it deserves to be set aside. Sri. P.K. Reveendranatha Menon, senior standing counsel for the IT Department, in his reply, submitted that the basic premises of the case of the petitioner was irrational. He referred to an instance of a financier giving a loan of rupees one lakh and deduction of 10 per cent as interest at the time of the very payment. Though the loanee received in hand Rs. 90,000 the loan amount continued to rupees one lakh. He stated that the passage referred to in Kanga, by the petitioners, had to be understood in this context. He had referred to the decision in Union of India vs. A Sanyasi Rao (supra) and contended that the word “income” though not defined, had to receive the broadest connotation. What can be converted to income, is income. In the case of lottery agents the only possible method is to assess at the first point, and tax could be collected by deduction at source. The express reference made in the section, according to the counsel, disclosed the legislative intent and the technical arguments, therefore, were unsustainable.

It was also stated that the tax worked to 10 per cent of the commission amount, and the maximum payable was 2.8 per cent, and at the time of regular assessment, further adjustments could be made. A revenue loss was sought to be plugged by appropriate statutory prescription. Referring to the decision reported in (1996) 132 CTR (SC) 81 : (1996) 219 ITR 330 (SC) : TC S5.562 (cited supra) with reference to s. 44A, it was highlighted that the tax deserved to be deducted at source, so as to prevent evasion. Nor could the method be dubbed as irrational for the reason that there was liability to pay tax. It was well accepted, according to the counsel, that notional income was also taxable. Coming to the facts of the case, it had been pointed out that by getting a one rupee ticket for 71.5 paise definitely the persons were making a profit of 28.5 paise per rupee, and it was a reality. Citing the Law Lexicon, it was also pointed out that commission is used as meaning discount, and in any case, if a commonsense view is taken, whatever is the nomenclature, the transaction resulted in an income—a profit, which was undeniable. For this purpose, the counsel also referred to the judgment in Narain Swadeshi Weaving Mills vs. CEPT (1954) 26 ITR 765 (SC) at p. 774 : TC 12R.111. Mr. Menon had also referred to the decisions in K.G. Subramanyam vs. CIT (1991) 100 CTR (Kar) 135 : (1992) 195 ITR 199 (Kar) : TC 19R.144 as also Harihar Cotton Pressing Factory vs. CIT (1960) 39 ITR 594 (Bom) : TC 17R.1024, in support of his submissions. He had referred to the clarification issued by the State Government, but stated that the nature of the income had to be borne in mind. The Tribunal’s decision also according to him did not take in the real issue which had involved in the case.

In reply, the petitioners had highlighted that in the counter affidavit filed by the Revenue, they had described the discount as commission. Now that the facts have been presented, it could be examined how far the contentions of the petitioners could be found as sustainable. The counsel on both sides agree that the name of the benefit have little relevance. Even Ext. P1 order, refer to the above, in different names. Furthermore, a clarification also has been issued by the Government. It can be described as commission or discount or an incentive or as a margin. The question is whether it is an income or earning, which it taxable at the hands of the assessee concerned, coming under the purview of s. 194G of the IT Act. If the face value of the ticket, for example, is Re. 1 notwithstanding the circumstance the petitioners receive it for 72 paise. The state, therefore, releases a ticket, receiving 72 paise. The petitioners may sell the ticket so obtained at any price of his choice. It is not the state’s business to enquire into the matter at all. Therefore, it is difficult to assume that the petitioners have in all cases made a margin of 28 paise by the mere purchase of the ticket. His case is that he resells it for 72.5 paise, and he derives a profit of half paisa per ticket. He may be right or that may be a misleading statement. But he has been able to obtain a ticket worth Re. 1 for 72 paise. His total input therefore, is 72 paise, and in that context it is difficult to describe the transaction as one whereby because of investment of 72 paise he has simultaneously made a profit of 28 paise. Several ‘ifs’ have to be employed, which do not exist in real life, for this Court to accept the case of the Department that by the factum of purchase he had already made a profit. Now I may briefly refer to the decisions which were cited at the Bar. The counsel for the petitioners relied on the decision in Hyderabad Industries Ltd. vs. ITO (1991) 95 CTR (Kar) 164 : (1991) 188 ITR 749 (Kar) : TC 5R.401. It appears that the observation of the Karnataka High Court might be relevant here : “It is not understandable as to why a benefit which will not be included in the total income of a person, should be considered as ‘income’ for the purpose of deduction of tax at source at all. The purpose of deduction of tax at source is not to collect a sum which is not a tax levied under the Act; it is to facilitate the collection of the tax lawfully leviable under the Act. The interpretation put on those provisions by the respondents would result in collection of certain amounts by the state which is not a tax qualitatively. Such an interpretation of the taxing statute is impermissible. According to the counsel, this applies to the situation at hand, and I am of the opinion that the observations are entitled due weight when the issue is considered. Also I note that the Madras Bench of the Tribunal in ITA No. 2713/96 and connected cases have almost on identical facts held that the discount, as now admissible to the lottery agents is not taxable under s. 194G of the Act. The decision reported in (1991) 21 CTR (MP) 171 : (1983) 139 ITR 827 (MP) : TC 18R.394 (supra) cited by the petitioners does not appear to be relevant to the facts of the present case. It was a case where the sole selling agency earned profit, in addition to commission, and the addition profits too was to be treated as additional commission. The facts have no application here. The decision of the Madras High Court reported in (1980) 16 CTR (Mad) 252 : (1980) 123 ITR 592 (Mad) : TC 18R.396 (supra), when it approved the decision Sri Ramalinga Choodambika Mills Ltd. vs. CIT (1955) 28 ITR 952 (Mad) : TC 39R.933, which stated that the mere fact that the goods were sold at a concessional rate to benefit the purchasers at the expense of the company, would not entitle the IT Department to assess the difference between the market price and the price paid by the purchasers as profit of the seller also did not lend support to the petitioners. It was a decision under s. 40A of the Act, and the issue was the profit of the seller and not the purchaser.

The counsel also had referred to Sanyasi Rao’s case (supra). Dealing with the constitutional validity of s. 44AC and s. 206C of the Act, which enabled the Revenue to estimate the profits on a presumptive basis, the constitutionality of the section had been upheld. It was competent for the Parliament to adopt the purchase price as a measure for determining the income-tax. The collection at source was relatable to the purchase price and not to the income component thereof. However, as pointed out by the petitioners, the scope of the above sections were clear and unambiguous, a presumption had been brought in and it could have been enforced by law.

The senior standing counsel had made relevance also on the above decision, but I am of the view that it does not come to his help. As pointed out by the Supreme Court, the said sections were machinery provisions and not charging sections and this formed the essential difference. Reference had also been made to the decision of the Bombay High Court in Harihar Cotton Pressing Factory vs. CIT (supra). The question was whether rebate granted to the partners of the firm was admissible deduction in computing profits. The Revenue had pointed out that it was commission, and therefore, it become assessable. Apart from a decision regarding the characteristics of “commission” and “rebate”, I find no guidelines that could be profitably accepted from the above decision for the purpose of deciding the present case. If it is a case of rebate to the individual partners the decision points out, it could not be treated as an income of the partnership.

According to me, the transaction which the petitioners have entered into do not appear to be one in the contemplation of s. 194G. The sub-headings of the section is commission, etc. on sale of lottery tickets. The liability is for deduction at source, under Chapter XVII. The general provisions by s. 190 prescribes for deduction, collection at source or advance payment. It is not disputed that if at all the first alone is applicable here. Sec. 192 concerns salary. Deduction at the time of payment is compulsory. Sec. 193 refers to the deductions made at the time of payment of interest, and s. 194 concerns with dividends payable by a company. Likewise s. 194A concerns payments of certain types of interest, s. 194B deals with winnings from lottery or crossword puzzle, s.194C deals with payment to contractors, s. 194D deals with similar payments arising as is similar commission. Sec. 194 H,I,J,K,L also refers to deduction of income-tax on payments under the respective heads. Only 194G deals with a situation of a slightly different category. The responsibility for deduction of tax is on any person responsible for paying to any person any income by way of commission, remuneration or prize, who purchases or sells or stocks lottery tickets, on such tickets, here in this case, the State Government. The deduction is to be at the time of credit of such income to the account of the payee or at the time of payment of such income. Therefore, the demand of tax is to be shown as one on the income of the person concerned. There is neither payment of cash or by cheque, and the Government never credit any income to the account of the persons like the petitioners. When the deduction is contemplated at the time of payment to the person concerned, and when it is shown that there is no payment to the agent at the time of purchase of the ticket, the section automatically becomes inapplicable. If any prize or remuneration is payable by the Government, to any person, deduction at source, as envisaged under the section, may arise. But when no payment is made in view of the mandate of the section, no deduction is envisaged. That the ticket is given on a discount of 28 per cent, can by no imagination be pressed into service for an interpretation that, nonetheless, 10 per cent of 28 paise is deductible as tax. Perhaps the intention might have been to bring the agents within the tax net, but the section as it stands, according to me, is not authority for taxation at source, as is envisaged by Ext. P4.

21. The standing counsel next had cited the decision in Khyerbari Tea Co. Ltd. vs. State of Assam AIR 1964 SC 925 and particularly the observation in p. 935 which reads as follows : “It is hardly necessary to emphasise the entries in the three lists in the Seventh Schedule which confer legislative competence on the respective legislatures to deal with the topics covered by them must receive the widest possible interpretation; and so it would be unreasonable to read in the entry any limitation of the kind which Mr. Pathak’s argument seems to postulate. Besides, it is well settled that when a power is conferred on the legislature to levy a tax, that power itself must be widely construed; it must include the power to impose a tax and select the articles or commodities for the exercise of such power; it must likewise include the power to fix the rate and prescribe that machinery for the recovery of the tax. This power also gives jurisdiction to the legislature to make such provisions as, it its opinion, would be necessary to prevent the evasion of the tax. In imposing taxes, the legislature can also appoint authorities for collecting taxes and may prescribe the procedure for determining the amount of taxes payable by any individual; all these provisions are subsidiary to the main power to levy a tax.” However, as pointed out by the Supreme Court of India in CIT vs. K.M. Spring Co. case (1960) 40 ITR 189 (SC) : TC 38R.494, this also is a case where the Act could have resorted to some fiction which might conceivably have met the case, but it has failed to do so. The provision has failed to achieve the underlying objective. Reliance on 219 ITR 300 (supra) that would could be converted to income can reasonably be regarded as giving rise to income, though a salutary principle, can have no application to the facts of the present case. Reference had been made to Finance, Act, 1992, as seen published in (1992) 195 ITR (St) 214 at p. 255. Sub-ss. (2) and (3) were added to s. 194G but in view of my finding that Ext. P4 cannot be issued on the authority of s. 194G, nothing more turns round on that.

From a consideration of the relevant aspects, the view possible, according to me, is that Ext. P4 has proceeded on an erroneous assumption, and the petitioners were not liable to be covered under s. 194G of the IT Act. Ext. P4 is, therefore, set aside and the original petition stands allowed.

[Citation : 249 ITR 186 ]

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