TC/450/2000 of Vs on 15 December 2003

:JUDGMENT

(The Judgment of the Court was delivered by R.Jayasimha Babu,J.)The question raised by the Revenue in this appeal is as to whether theTribunal was right in holding that distribution of prizes under the DistrictLevel Gift Linked Savings Mobilisation Scheme did not constitute 'lottery' andthe provisions of Section 194-B of the Income Tax Act are not applicable andif applicable, as to whether the Tribunal was right in cancelling the penaltyimposed.

2. In order to encourage thrift as also to mobilise funds for thedevelopmental works, Saving Schemes are operated by the Government. Under thegift linked scheme, a prize coupon is given to the investor when theinvestment made is in excess of Rs.1,000/-. The investor does not pay anyprice for those coupons. Prizes are awarded to the holder of the luckycoupon, which is chosen by lot. The prizes given are consumer goods, such as,fan, colour television, moped etc. During the accounting year ended31-3-1998, the assessment year being 1998-99, the respondent released prizes worth Rs.72,94,480/-. According to the Revenue, before distributing thoseprizes, the assessee ought to have deducted tax at source in a sum ofRs.29,17,792/-.

3. As no tax had been deducted at source, the assessing officer,invoking the provisions of Section 201, issued notice to the respondenttreating him as the assessee in default. Additional sum of Rs.2,39,919/- wasalso demanded as interest under Section 201(1-A) of the Act. Subsequently,penalty in a sum of Rs.29,17,792/- equal to the amount of tax that hadallegedly required to be, but not with-held, was also levied.

4. The appeals filed by the respondent against those orders having proved unsuccessful, the respondent thereafter carried the matter to theTribunal, which agreed with the assessee and held that the assessee was notliable to deduct tax at source and therefore, all the proceedings takenagainst the respondent were without jurisdiction.

5. Section 194-B of the Act, which was inserted with effect from 1-4-1972, asit stood at the relevant year, is captioned " Winnings from lottery orcrossword puzzle". It reads thus:

"194-B: The person responsible for paying to any person any income by way ofwinnings from any lottery or crossword puzzle in an amount exceeding Rupeesfive thousand, shall, at the time of payment thereof, deduct income-taxthereon at the rates in force.

Provided that no deduction shall be made under this section from any paymentmade before the 1st day of June, 1972.Provided further that in a case where the winnings are wholly in kind orpartly in cash and partly in kind but the part in cash is not sufficient tomeet the liability of deduction of tax in respect of whole of the winnings,the person responsible for paying shall, before releasing the winnings, ensurethat tax has been paid in respect of the winnings."

6. By the Finance Act, 1972, which introduced Section 194-B, a newsub-clause (ix) was introduced in the definition of 'income' in Section 2(24)of the Act, which reads thus:"2(24) ....

(ix) any winnings from lotteries, crossword puzzles, races including horseraces, card games and other games of any sort or from gambling or betting ofany form or nature whatsoever "

The winnings from lotteries on and after 1.4.1972 were included within thescope of the definition of 'income' and the person responsible for paying toany person any income in excess of Rupees five thousand by way of winningsfrom lottery, was required to deduct income tax on the amount so paid at therates in force. 7. Prior to 1.4.200 2, the Act did not contain a definitionof 'lottery'. In the Finance Act, 2001, an Explanation was added belowSection 2(24)(ix), which Explanation reads thus:

"Explanation:-- For the purposes of this sub-clause, --

(i) "lottery" includes winnings from prizes awarded to any person by draw oflots or by chance or in any other manner whatsoever, under any scheme orarrangement by whatever name called;

(ii) "card game and other game of any sort" includes any game show, anentertainment programme on television or electronic mode, in which peoplecompete to win prizes or any other similar game; "

In this case, lottery is required to be construed without the aid of theExplanation that was subsequently added on 1-4-2002, as that Explanation is not one to which retrospective effect has been given, nor can that explanationbe regarded as merely clarificatory.

8. Lottery is defined in "The New Oxford Dictionary of English" as 'a means of raising money by selling numbered tickets and giving prizes to theholders of numbers drawn at random.'

9. The Words and Phrases, Permanent Edition, in Volume 25, sets outthe definitions of 'lottery', one of which reads thus:

"A 'lottery' may be defined to be a game by which a person paying moneybecomes entitled to money or other thing of value on certain contingencies,determinable by lot cast in a particular way by the manager of the game."

10. Halsbury's Laws of England, Fourth Edition Reissue, Volume 4(I)at paragraph 7, which deals with 'lotteries', reads thus:at paragraph 7, which deals with 'lotteries', reads thus:

"There is no statutory definition of a lottery. However, it has been saidthat: 'A lottery is the distribution of prizes by chance where the personstaking part in the operation, or a substantial number of them, make a paymentor consideration in return for obtaining their chance of a prize. There arereally three points one must look for in deciding whether a lottery has beenestablished: first of all, the distribution of prizes; secondly, the factthat this was to be done by means of a chance; and thirdly, that there must besome actual contribution made by the participants in return for theirobtaining a chance to take part in the lottery' ."

In paragraph 151 of the same volume, titled "Payment or consideration fromparticipants", it is stated thus:

"There is no lottery unless the persons taking part, or a substantial numberof them, make a payment or consideration in return for obtaining their chanceof a prize. Any form of contribution, whether money or any other valuableconsideration, will suffice to render a lottery scheme prima facie unlawful.It is not, however, an essential characteristic of a lottery that prizes in alottery should be paid for from participants' contributions, and a lotterywill exist if participants pay to take part in a competition in which prizeshave been donated by a third party.

Where a person buys two items for one price it is impossible to say that hepaid for only one of them and not for the other. The fact that he could havebought one of the things at the same price that he paid for both isimmaterial, and accordingly if one of the items so bought is a chance toparticipate in a lottery the price paid will be treated as a contribution tothe lottery. Where, however, a promoter sets up a scheme by whichparticipants are given genuinely free chances to win a prize, the scheme willnot be treated as an unlawful lottery merely because it encourages someparticipants to purchase the promoter's goods and thereby increases hisprofits, even if the prizes are paid for out of those profits."

11. In "The Law Lexicon" by P.Ramanatha Aiyar, 'lottery' is defined "as a hazard in which sums are ventured for a chance of obtaining a greatervalue .... A lottery is a species of gaming, which may be defined as a schemefor the distribution of prizes by chance among persons who have paid, oragreed to pay, a valuable consideration for the chance to obtain a prize."12. Thus, before the scheme can be regarded as a lottery, there mustbe the element of distribution of prizes which should be by chance or lot andsuch distribution be among those who had paid a price for participating in thescheme. Mere gratuitous distribution without any price having been paid by the participants for acquiring the chance and receiving a prize that isultimately distributed, would not amount to a lottery. That appears to be thereason why the Explanation was added under Section 2(24)(ix) of the Act witheffect from 1.4.2002 to bring within the purview of Section 194-B, winningsfrom prizes awarded to any person by a draw of lots under any scheme orarrangement, whether or not the persons taking part in that arrangement, hadpaid a price for acquiring the chance of winning the prize. The Explanationlays emphasis on the winnings awarded by a draw of lots or chance.13. The assessing officer, as also the Commissioner, had placed strongreliance on an old decision of this Court in the case of Sesha Ayyar vs.Krishna Ayyar (AIR 1936 Madres 225), in which the majority had held that achit scheme under which Rupees three per ticket was to be paid for fiftymonths by 625 persons and to the holder of one lucky ticket to be drawn eachmonth Rs.150/- was to be paid with the recipient no longer being liable to paythe monthly subscription for the remaining period, amounted to a scheme oflottery. Varadhachriar, J, who formed part of that majority, observed thatthe scheme may fairly be regarded as a lottery if it is clear that whateverother 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 haveentered into his calculation.

14. The decision of this Court with regard to kuris in AIR 1 936 Madras 225was rendered after considering earlier English decisions, and by following thesame. Subsequent decisions of the English Courts by the Court of Appeal inthe case of Readers' Digest Association Ltd. vs. Williams, (1976) 3 All E.R.757 and the one by the House of Lords in the case of Imperial Tobacco Ltd.vs. Attorney General (1980) 1 All E.R. 866 set out the current state of thelaw with regard to lotteries in England.

15. In the case of the Readers' Digest, it was held that to establish that aprize constitues a 'lottery' within S.41 of the Betting, Gaming and LotteriesAct, 1963 it must be shown, in addition to the distribution of prize bychance, the participants must have made some contribution in return forobtaining the chance of a prize, and that where a significant number ofparticip ants have made no such contribution the prize draw is not a lottery.In that case in an advertisement campaign to promote the sales of the magazineletters were sent to 4.7 million persons. Each letter carried a differentnumber. Persons who did not accept to the sale offer also could, by sendingtheir negative reply became eligible for one of 2103 prizes for the luckynumbers drawn by lot. While about 8.5 lakh recipients accepted the offer 15lakh recipients rejected it but were nevertheless eligible for the prizes.16. In the case of Imperial Tobacco, in a campaign to promote the sale ofcigarettes 260 million cards were inserted in as many pockets sold at theregular price, which enabled the buyer of the pack with the lucky card onwhich amount of the prize was printed, to receive the prize, without having topay anything extra for the card in the cigarette pack. The Court held thatthe payment made by the buyer was payment for the pack of Cigarettes as alsofor the card and that the card was not free. It was observed in that judgmentthat " what is essential is that there is a distribution of prizes by lot orchance, and that the chances should be secured by some payment or contributionby those who take part."

17. While the reported English cases dealt with the advertisement campaignsto promote the sale of goods, in the Kuri case decided by this Court the scheme was held to be a lottery on the ground that there was no furtherobligation on the part of the winner at the monthly draw to pay futuresubscriptions.18. The scheme here is not one for the promotion of sale of anygoods. The investor is not offered interest payable on a larger sum, evenwhen a smaller sum is invested. When the investment is made the full amountis payable and interest is paid thereon for the specified period, theinvestment as also the interest being eligible for concessions/exemptionsunder the Income-tax Act. The chance given to the investor to win a prize isa free chance, and is not a chance given in return for a price or contributionpaid. The scheme is not a lottery.19. The appeals are dismissed with costs in the sum of Rs.5 ,000/- (Rupeesfive thousand only).20. The question regarding penalty does not require furtherconsideration, as no penalty can possibly be imposed once it is found thatthere has been no violation of the law.

cs

To

1. The Assistant Registrar,Income Tax Appellate Tribunal,Rajaji Bhavan,III Floor, Besant Nagar,Madras-90. (with records)( 5 copies)

2. The Secretary,Central Board of Revenue, New Delhi. (3 copies)

3. The Commissioner of Income Tax,(Tamil Nadu-I), Madras.

4. The Commissioner of Income Tax,(Appeals) (XI), Madras.

5. The Income Tax Officer, T.D.S. VIII, Madras.