DIRECTOR OF STATE LOTTERIES VS ASSISTANT COMMISSIONER OF INCOME-TAX, 2001 PTD-GAUHATI-HIGH-COURT-INDIA 43 (2001)

2001 P T D 43

[238 I T R 1]

[Gauhati High Court (India)]

Before Smt. M. Sharma, J

DIRECTOR OF STATE LOTTERIES

versus

ASSISTANT COMMISSIONER OF INCOME‑TAX and others

Civil Rules Nos. 405 and 2786 of 1994, decided‑on 12th March, 1999.

(a) Income‑tax‑‑‑

‑‑‑‑Income‑‑‑Lottery‑‑‑Agent in, lottery tickets‑‑‑Meaning of "lottery"‑‑ Lottery implies a right to participate in draw‑‑‑Agent in lottery tickets does not have right to participate in draw‑‑‑Income accruing to agent in respect of prizes on unsold unclaimed tickets in his possession‑‑‑Not income from lotteries‑‑‑Assessable as business income‑‑‑Indian Income Tax Act, 1961, Ss.2(24)(ix) & 28.

(b) Income‑tax‑‑‑

‑‑‑‑Deduction of tax at source‑‑‑Lottery‑‑‑Deduction of tax at source from winning from lottery‑‑‑Section 194B applies only in case of actual payment‑ Income accruing to agent in lottery tickets in respect of prizes on unsold/unclaimed tickets in his possession‑‑‑Petitioner not liable to deduct tax at source in respect of unsold/unclaimed prize‑winning tickets‑‑‑Indian Income Tax Act, 1961, S. 194B.

The term "income" has been defined under section 2(24) of the Income Tax Act, 1961. Sub‑clause (ix) of section 2(24) of the Act was inserted by the Finance Act, 1972, which brought winnings from lotteries within the purview of the Act. Three things must concur to establish a thing as a "lottery"; a prize or prizes; the award or distribution of the prize or prizes by chance; and the payment either directly, or indirectly by the participants of a consideration, for the right or privilege of participating. An agent or trader in lottery tickets is not entitled to participate in the draw and claim the prize in such a draw, whereas a participant is entitled to participate in a draw and claim the prize from such draw. The agent or trader does not participate in the lottery draw with an intention to win a prize, but derives income from selling lottery tickets. The gains or commission from the sale of lottery tickets is a business income assessable under section 28. The income accruing to an agent/trader in respect of prizes on unsold/unclaimed tickets in the possession of an organising agent is income from business and does not constitute winnings from lotteries, and, therefore, it cannot be brought within the meaning of section 2(24)(ix).

Under the provisions of section 194B for the purpose of deducting taxes at source in respect of winnings from lottery, the person responsible for paying to any person any payment thereof is obliged to deduct income‑tax thereon at the rates in force. So, it is clear that in respect of section 194B, it is only in cases where actual payment is made that a person is responsible for deducting income‑tax and not at a stage of credit, if any. In that view of the matter, under section 194B, no deduction of tax at source from the payment can be made in the absence of an actual payment. The petitioner is not liable to deduct tax in respect of unsold/unclaimed prize- winning tickets.

Commercial Corporation of India Ltd. v. ITO (1993) 201 ITR 348 (Bom.) fol.

Anraj (H.) v. Government of Tamil Nadu (1986) 61 STC 165 (SC); Buodge v. Pyne (Inspector of Taxes) (1970) 76 ITR 455 (Ch. D); City of Wink v. Griffith Amusement Co. 100 SW 2d 695. 129 Tex 40; Grimes v. State 178 So 69; 28 Ala App 4; McDowell & Co. Ltd. v. CTO (1985) 154 ITR 148; (1985) 59 STC 277 (SC); New Orleans v. Collins 27 So 532; 52 La Ann 973; Robb and Rowely United v. State Tex. Civ. App. 127 SW 2d 221; Southern Brick Works Ltd. v. CIT (1984) 146 ITR 479 (Mad.) and Sultan Brothers (Pvt.) Ltd. v. CIT (1964) 51 ITR 353 (SC) ref.

Dr. B.P. Todi, Government Advocate for Petitioner.

R. P. Agarwalla and B.J. Talukdar for Respondents Nos. 1 to 3.

Dr. A.K. Saraf, P. Upadhaya, K.K. Gupta and R.K. Agarwal for Respondents Nos.4 and 5.

JUDGMENT

These writ petitions under Article 226 of the Constitution have been filed challenging the orders, dated January 25, 1994 and June 6, 1994, passed by the Assistant Commissioner of Income‑tax, Circle TDS, Panbazar, Guwahati, under section 20(1) of the Income Tax Act, 1961 (Annexure‑XIII to the C.R. No.405 of 1994 and Annexure‑VI to the C.R. No. 2786 of 1994), respectively. By the order, dated January 25, 1994, respondent No.1 asked the petitioner to deposit a sum of Rs.2,80,16,800 within three days from the date of receipt of the said notice of demand as the petitioner failed to deduct tax at source in respect of the lottery draws held during the period from November 16, 1993 to December 31, 1993. In C.R. No.2786 of 1994 by the impugned order, dated June 6, 1994, respondent No.1 raised a demand of Rs.7,92,06,400 on the petitioner on account of alleged short deduction of tax at source under section 194B of the Income‑tax Act in respect of 1494 Nos. of lottery draws held during the period from February 6, 1992 to December 12, 1992.

As the civil rules involve common questions of law and facts I propose to dispose of these two writ petitions by a common judgment and order.

Pursuant to the powers conferred on the States under Article 298 of the Constitution of India the State of Assam has been carrying on the business of State organised lottery through its organising agents, after executing the agreements between the parties. Lotteries are run under various names. The petitioner appointed MS Associates as an organising agent. The petitioner is responsible for making payments of the prize money to the prize winners in terms of the agreement made with the organising agent. The liability for deduction of income‑tax at source under section 194B of the Income Tax Act, 1961 (for short "the Act"), rests with the petitioner and the petitioner is to deduct tax at source while making payments towards prizes, provided the payments exceed Rs.5,000. The petitioner is also responsible for making payments to the organising agents in respect of prize winning tickets which either remained unsold or unclaimed.

The Income‑tax Authorities (respondent No.1) found that the petitioner did not deduct at source in respect of 1454 draws held from February 6, 1992 to December 15, 1992, demanded a sum of Rs.7,92,06,400 and a sum of Rs.2,80,16,800 in respect of the draws held during the period November, 16, 1993 to December 31, 1993. According to the petitioner, the impugned orders demanding payment of huge amounts are prima facie arbitrary, violative of the mandatory provisions contained under section 194B of the Act. Hence, the petitioner has challenged the legality and validity of the orders so passed by respondent No.1. According to the petitioner, unclaimed and/or undisbursed prize money is not a winning from lottery and, as such, the provisions of section 194B for deduction of income‑tax at source is not applicable in respect thereof. As such, according to the petitioner, the claim of the respondent/authority is not tenable in law and it is violative of the mandatory provisions contained under section 194B of the Act.

An affidavit‑in‑opposition has been filed by respondent No.1 on behalf of respondents Nos.1, 2 and 3. According to these respondents, the petitioner who is responsible for deduction of tax at source has not deducted tax amounting to Rs.7,92,06,400 in 1454 draws held from February 6, 1992 to December 15, 1992, and Rs.2,80,16,800 in respect of the draws held during the period from November 16, 1993 to December 31, 1993. It has been alleged that the Central Government as well as the Government of Assam have lost a very substantial revenue on the failure of the petitioner to deduct tax at source on earlier occasions also. Moreover, as per clause 24 of the agreement arrived at between the Government of Assam and MS Associates the organising agent (respondent No.5/4), the organising agent is solely responsible for the sale of the entire lot of tickets printed for a draw and the petitioner is not liable for any loss caused to the agent on account of the lottery tickets remaining unsold. As per clause 10(a) of the agreement, the organiser had to deposit the entire taxable prize amount (prize exceeding Rs.5,000 won by the winner ticket) with the Government of Assam at least two days ahead of the scheduled date of each draw. However, this clause was substituted by an agreement dated August 7, 1992, providing for one time deposit of Rs.10 lakhs towards disbursement of taxable prize money. In case the taxable prize remained unclaimed or was among the unsold tickets of the organiser, the said onetime deposit with the Government was to be carried over to the next draw as prize money deposit, hence, the organiser was allowed credit to that extent. From the above clause it is clear that all prizes from unsold tickets and all unclaimed prizes shall be the property of the organising agent and he shall be entitled to claim the same.

According to these respondents all tickets printed for a particular draw, whether sold or unsold, participated in the draw for prize and prizes won on sold or unsold tickets constitute income from "winnings from lottery". Since the prizes won by unsold tickets remaining with the organiser and the unclaimed prizes on winning tickets are the property of the organiser which shall be refunded to him such prizes attract the provisions of section 194B of the Act. As the petitioner is responsible for making the payment or adjusting towards the one‑time deposit, it amounts to payment to the organiser by the petitioner, therefore, the petitioner is responsible to deduct tax at source from such prizes under section 194B of the Act.

Respondent No.5/4‑‑‑MS Associates, has filed an affidavit‑in -opposition stating that the dispute in these writ petitions relates to deduction of tax at source and respondent No.5 is not connected at all. According to the agreement arrived at between the State Government and respondent No.5, respondent. 5 is only an organising agent on behalf of the State Government and the organising agents cannot become the, purchaser of the tickets. Moreover, the prizes won by the unsold lottery tickets do not constitute income from winnings from lotteries and thereby such prizes do not attract the provisions of section 194B of the Act.

I heard learned counsel for the parties at length.

Learned counsel for the petitioner, Dr.B.P. Todi, has submitted that unsold and unclaimed prize winning tickets in the possession of an organizing agent do not constitute income from winnings from lotteries as mentioned in section 2(24)(ix) of the Income‑tax Act, in other words, the provisions of section 194B of the Act are not at all applicable in the facts and circumstances of the case, It has been further argued that the respondents/authority demanded payment of huge tax from the petitioner on an erroneous view that income‑tax at source is deductible in respect of unsold/unclaimed prize winning tickets and it is patently against the provisions of section 194B which says that tax is to be deducted at the time of making payment of the income from winnings of lottery. In that view of the matter, the impugned orders demanding payment of huge tax are not tenable in the eye of law and are liable to be quashed.

Mr. Agarwala, learned counsel for the Revenue, has submitted that the petition is not maintainable as the petitioner has not availed of alternative remedy available to them under the Act, as section 246(1) of the Act provides for statutory appeals against the orders impugned in the writ proceedings before the Commissioner of Income‑tax (Appeals), and the petitioner having failed to avail of the aforesaid statutory alternative remedy, these petitions are liable to be dismissed. Mr. Agarwala further submitted that the petitioner is otherwise also not aggrieved by the impugned orders inasmuch as the ultimate burden of the demand falls on the organising agent and not on the petitioner.

Dr. A.K. Saraf, learned counsel for respondent No.5/4, MS Associates, supported the contention of the petitioner, Dr. Saraf further submitted that the petitioner is responsible for making payment of the prize money to the prize winners in terms of the agreement made with the organising agents, and thereby, as per section 194E of the Act the petitioner is responsible for deduction of tax at source, if required, and this respondent 4o is an organising agent of the State lotteries is not at all connected with the matter of deducting tax at source. Further, it has been submitted that the unsold and unclaimed prize winning tickets might have presented in the draws but because of the said facts, liability for deduction of tax at source on such tickets is not attracted inasmuch as unsold lottery tickets remaining in the possession of the organising agent cannot be deemed to have been sold to the organising agents. As per the agreement between the State of Assam and the organising agent, this respondent has to organise the lotteries on behalf of the State Government, therefore, this respondent, who is an organising agent cannot become the purchaser of the tickets. From the various clauses of the agreement it is clear that there is no relationship of seller and purchaser between the State of Assam and the organising agent. From the agreement it is clear that there was no sale of tickets to the organising agents or in the alternative he purchased lottery tickets from the State. The prizes won by the unsold lottery tickets do not constitute income from winnings from lotteries and thereby such prizes do not attract the provisions of section 194B of the Income‑tax Act. It has also been stated that the organising agents are authorised by the State Government only to settle the claims of prize winning tickets up to Rs.5,000 which are not subject to tax liability at source. In view of the above, the impugned notices issued by the respondent/authority treating the unsold lottery tickets to be a sale are not tenable in law and liable to be set aside and quashed.

For proper appreciation of the question involved in this case it is apposite to look into some of the provisions of the Act:

Section 194B of the Act runs thus:

"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:

Provided that no deduction shall be made under this section from any payment made before the 1st day of June, 1972. "

From the above it is clear that for the purpose of deducting taxes at source in respect of winnings from lottery, the person responsible for paying to any person any income at the time of payment thereof is obliged to deduct income‑tax thereon at the rates in force But, in the instant case, the main contention of the petitioner is that unsold and unclaimed prize winning tickets in the possession of the organising agent do not constitute income from winning from lotteries and, therefore, the provisions of section 194B of the Act is not applicable in the instant case.

The term "income" has been defined under section 2(24) of the Income‑tax Act. Sub‑clause (ix) of section 2(24) of the Act was inserted by the Finance Act, 1972, which brought the winnings from lotteries within the purview of the Act. Section 2(24)(ix) runs thus:

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

On the basis of the rival contentions of the parties the questions for determination are: (i) Whether the petitioner is liable to deduct tax at source under section 194B of the Act in respect of unsold/unclaimed prize winning tickets, and (ii) Whether the payment to organising agent in respect of unsold or unclaimed prize winning tickets by the petitioner calls for deduction under section 194B of the Act.

Apparently, the stand of the Revenue is that the provisions contained in section 194B of the Act read with the terms and conditions of the agreement, dated December 2, 1991‑, arrived at between the petitioner and the organising agent affirms that the petitioner is bound to deduct tax at source in respect of prize winning tickets which remained unsold or unclaimed. Counsel for the Revenue in support of his contention pointedly referred to some of the clauses of the agreement, which are reproduced below:

Clause 10(a) of the agreement runs thus:

"10(a). Organising agent (O/A) shall deposit entire taxable prize amount at least two days ahead of the schedule date of each draw."

Clause 10(b) runs thus:

"10(b). No draw shall be held unless the prize money is deposited by the Organising Agent (O/A)."

Learned counsel for the Revenue further submitted that clause 1 which remained in force till August 6, 1992, was substituted and the terms contained in clause 5 of the agreement also confirmed the stand of the Revenue. In support of his submission, counsel for the Revenue referred to other relevant terms and conditions contained in clauses 9(b), 12, 24 of the agreement, dated December 2, 1991, and reiterated that the provisions contained in section 194B of the Act and the terms and conditions of the agreement show that prize winning tickets which remained unsold and unclaimed are not excluded from the purview of section 194B of the Act. Further, learned counsel for the Revenue submitted that the decision of the Bombay High Court in Commercial Corporation of India Ltd. v. ITO (1993) 201 ITR 348, is not applicable in this instant case. In this case it has been held that since the unsold ticket does not participate in the draw, therefore, there is no sale of lottery tickets by the State to the organising agent (company) and, therefore, the prizes on unsold tickets are not winnings from lottery. According to learned counsel for the Revenue, the conclusion in this case is not applicable as here the entire tickets printed by the organising agent shows sale and, therefore, it is the responsibility of the organising agent to participate in the draw otherwise the numbers printed on unsold tickets would not have come up in the draw. Hence, it cannot be said that unsold tickets do not participate in the draw.

Learned counsel for the Revenue placed reliance on the following decisions:

McDowell & Co. Ltd. v. CTO (1985) 154 ITR 148 (SC) and the Madras High Court's decision in Southern Brick Works Ltd. v. CIT (1984) 146 ITR 479.

It has been further argued that substitution of clause 10 of the agreement, dated December 2, 1991 by clause 5 of the agreement, dated August 7, 1992, was nothing but an attempt to escape from the ambit of section 194B of the Act;, that in substance there is no material difference between the old and the substituted clause in clause 5 of the agreement, dated August 7, 1992, as payments of prize money of unclaimed/unsold winning tickets had to be made through book adjustment by the petitioner and the organising agent. It has been further submitted that clause 24 of the agreement, dated December 2, 1991, made it clear that the entire lot of tickets printed for draw are deemed to be sold out and participate in the draw and that otherwise the question of any unsold ticket winning a prize cannot arise. According to learned counsel for the Revenue, the petitioner is liable to pay as per the demand notice, dated January 25, 1994 and April 17, 1994. Even if the relationship of the petitioner and respondent No.4/5 (organising agent) is that of principal and agent, it does not alter the position as the principal is obliged under the Act to make appropriate deduction of tax at source.

Replying to the preliminary object of maintainability of the writ 'petition, Dr.A.K. Saraf, learned counsel for respondent No.5/4 (organising agent), submitted that the question raised in these writ petitions is a pure question of law and the facts are not in dispute, i.e., whether the State Government is liable to deduct tax at source in respect of prize money on unsold tickets which are in the possession of the organising agent; that both the petitioner and respondent No.5(O/A) are carrying on business of sale of lotteries and the income received by the State, and respondent No.5 is business income and, therefore, assessable under section 28 of the Act; that any amount credited by way of book entry or otherwise in respect of prizes announced in respect of unsold tickets, the same would partake of the character of business income, if any, that these book entries cannot be classified as income from winnings from lotteries as the organising agent does not participate in the draw with an intent to win prizes in lottery tickets and that if any income arises, it is interconnected with carrying on the business and would be assessable as business income.

As discussed above, the agreement executed between the State Government and respondent No.5 in 1977 which was amended time to time, is an agreement in respect of the terms, conditions and procedures for conducting the State organised lottery. As per the agreement, the State Government is entitled to retain a fixed amount of money as royalty on "per draw" basis after giving its approval to the scheme and the names of the lottery.

Dr. Saraf in support of his contention has referred to the provisions of sections 2(24)(ix), 2(51), 2(45) and 4(1) of the Act. Apparently, Mr. Saraf has been insisting to show that the impugned notice under section 194B is misconceived as unsold/unclaimed prize winning tickets in the possession of an organising agent do not constitute income from winnings from lotteries as mentioned in section 2(24)(ix) of the Act: Therefore, it is submitted that in such case, if this income is taxable under any particular section, i.e. section 22 or 28, then it cannot be taxed under section 56 of the Act. In support of this contention Dr. Saraf has placed reliance on a decision of the apex Court in Saltan Brothers (Pvt.) Ltd. v. CIT (1964) 51 ITR 353, wherein it has been held that if an income cannot be charged to Income‑tax under any of the heads mentioned in clauses (A) to (E) of section 14, the same shall then only be chargeable to income‑tax under a residuary head, i.e., income from other sources.

In view of the back drop of the facts and circumstances now the point for consideration is whether the income of the assesssee has been derived on account of his carrying on trade/business or any activity incidental to his business or unconnected with his business or the like. In the light of the argument of learned counsel for respondent No.5, it is to be seen whether an agent who deals and sells lottery tickets is winner of a lottery and whether a seller/trader of lottery tickets can be treated as a winner of a lottery in a similarly situated way/class. Dr. Saraf referring to a decision of the apex Court in H. Anraj v. Government of Tamil Nadu (1986) 61 STC 165, has submitted that the decision of this case squarely covers the case of the petitioner.

In H. Anraj v. Government of tanul Nadu (1986) 61 STC 165 (SC), lottery tickets became taxable in the State of Tamil Nadu at the point of first sale in the State, in view of the insertion of Entry 163 in the First Schedule to the Tamil Nadu General Sales Tax Act, 1959. Under the raffle scheme promulgated by the State Government the first sale of lottery tickets issued thereunder was by the State Government to various licensed agents, wholesalers, stockists etc., and the State Government became liable to pay sales tax as the first dealer. With a, view to reducing the burden of tax on Tamil Nadu raffles, the State Government issued notification, dated March 31, 1984, bringing into force an arrangement whereby while retaining the sale price of the ticket at its face value, the tax was not to be passed on to the licensed dealer or to the purchaser. In effect, the notification resulted in exemption from sales tax as far as lottery tickets of the Tamil Nadu raffles were concerned, whereas when lottery tickets issued by other States were sold within the Tamil Nadu State there was no such exemption. In this case, the apex Court held and observed thus (page 178):

"It cannot be disputed that in every raffle scheme based on the sale of lottery tickets, similar to the schemes sponsored by each of the two States in this case, every participant is required to purchase a lottery ticket by paying a price therefor (the face value of the ticket) and such purchase entitles him not merely to receive or claim a price in the draw, if successful but before that also to participate in such draw. In other words, a sale of a lottery ticket confers on the purchaser thereof two rights (a) a right to participate in the draw, and (b) a right to claim a prize contingent upon his being successful in the draw. ",

It has also been further observed thus (page 179):

"That when a purchaser purchases a lottery ticket he pays consideration (price) not merely for the right to claim in future a prize in the draw but also for the right in praesenti to participate in the draw will be clear from certain passages based on decided cases annotated in Words and Phrases, Permanent Edition, Volume 25A, which we would like to extract:

' 'Lottery', in accordance with public usage, is a scheme or plan for distribution of prizes by chance among those paying or agreeing to pay consideration for right of participation.' (City of Wink v. Griffth Amusement Co., 100 SW 2d 695, 698, 699, 700, 701; 129 Tex 40) (at page 460).

' A 'lottery' or scheme in the nature of a lottery is a plan in which a prize is set up and awarded by chance, for the right to participate in which a consideration is paid.' (Grimes v. State 178 So 69, 71, 72, 28 Ala App 4) (at page 466).

'A lottery is a scheme for the distribution of property by chance or lot among persons who have paid or agreed to pay a valuable consideration for the privilege of participating in such scheme'. (New Orleans v. Collins 27 So 532, 536, 52 La Ann 973) (at page 468).

'Three things must concur to establish a thing as a 'lottery' : A prize or prizes; the award or distribution of the prize or prizes by chance; and the payment either directly or indirectly by the participants of a consideration for the right or privilege of participating'. (Robb and Rowely United v State Tex Civ App 127 SW 2d, 221, 222) (at page 470)."

In his concurring judgment Mr. Justice Sabyasachi Mukharji held and observed, thus (page 188):

"Under the Rules; the promoter is not able to participate in the draw or claim a prize in such a draw. Therefore, the right that is transferred to the purchaser of the lottery ticket is not the same right which was existing in the grantor, in this case the promoter. By the sale by the promoter and purchase by the grantee of the ticket, there is no transfer of the same property, namely, the property which existed in the grantor, namely, disability from participating in the draw which is granted to the purchaser or the grantee of the lottery ticket..."

Apparently, there is a distinction between the rights and status of the participants and that of the trader in respect of his participation in the draw. The agent is not entitled to participate in the draw and claim a prize in such a draw whereas a participant is entitled to participate in a draw and claim a prize from such draw. ,

Relying on this view of the apex Court Dr. Saraf has submitted that, it is only the income of the participant in respect of winnings from lotteries which can be taken as "winnings from lotteries and taxable as income from winnings under section 2(24)(ix) of the Act', and. therefore, could only be assessed under the residuary bead of income from other sources. Further, insisting on this submission, Dr. Saraf submitted that mere accrual of income in respect of a trade by book entries being in respect of unsold/unclaimed tickets cannot mean income from winnings from lotteries and any income derived in that respect is business income. Marshalling his point, Dr. Saraf submitted that the income of respondent No.5 (organising agent) is income from the business and assessable as such.

In the case of Burdge v. Pyne (Inspector of Taxes) (1970) 76 ITR 455, the Chancery Division dealt with a similar issue. The question in that case was whether gains from winnings from playing cards by the owner of the club providing the facilities was taxable alongwith the income of the club. The stand of the taxpayer in this case was that his winnings as such were not taxable. It was held that such winning was taxable alongwith the income of the club as the receipt from playing cards was a part of the activities of the club.

Now coming to the question involved in this case, the main contention of respondent No.5 the organising, agent, is that the agreement arrived at between the State Government and the organising agent is an agreement for organising and conducting lotteries for and on behalf of the State Government as an agent of the State Government and it cannot be said that under the agreement the organising agent purchases the lottery tickets from the State Government. It is also seen that the organising agent does not participate in the draw with an intent to win a prize and is not a winner of a prize in lottery tickets. So, in the view of the above position, it can be said that the prize winning unsold tickets which were in the possession of the organising agent (respondent No.5) were a part of its business activities as an organising agent and the receipts/gains from this is a part of his business income. In my opinion, the gains or commission from the sale of lottery tickets is a business income assessable under section 28 of the Act. In view of the above position, I hold that in the context of various clauses of the agreement, there are no "winnings from the lotteries" as the organising agent has not participated in the draw intending for a prize. I find merit in the submission of Dr. Saraf that any income which is incidental to the business activities carried on by the assessee is a business income and cannot be treated as income from other sources as one of the necessary ingredients of lottery is that the winner should be a participant in the lottery, and that the organising agent does not participate in lottery draw with an intention to win prize, but derives income from selling lottery tickets.

In view of the above reasons, I agree with the decision of the Bombay High Court in Commercial Corporation of India Ltd. v. ITO (1993) 201 ITR 348. In this case the Bombay High Court held that prizes on unsold tickets cannot be considered as winnings from lotteries. Two issues were raised in this case for decision, i:e., (a) whether the money credited by the State Government to the account of the petitioner‑company is income from the winnings from lotteries which are unsold and lying with the Government; and (b) whether on a true construction of the agreement, the company is an agent in relation to its principal, i.e., the State of Goa, and can the company be said to have purchased the unsold tickets. On these issues the Bombay High Court held that expending money for printing lottery tickets and on publicity, etc., is no ground to hold that some amounts have been paid towards purchase price. The High Court while holding that the agreement to be an agreement of agency, inter alia, held thus (page 376):

"We, therefore, conclude that the agreement, dated December 21, 1989, is an agreement of agency and the State of Goa is the principal and petitioner‑company is its agent. No transaction of sale can be read into the agreement. "

In the facts and circumstances of the case in hand and in view of the issues involved in the case of Commercial Corporation of India Ltd. v. ITO (1993) 201 ITR 348 (Bom.), in my view, the issues involved in these cases are same and similar and the views and the decision of the Bombay High Court in Commercial Corporation of India Ltd. v. ITO (1993) 201 ITR 348 are squarely applicable in this case also.

The Bombay High Court in the above case held that such company does not participate in the draw, the amounts credited, if any, would no constitute winnings from lotteries from unsold tickets and, hence, would nor attract the provisions of section 1948 of the Income Tax Act. It is held thus (page 376):

"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 an3 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 o 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 ."

In view of the above discussions, I hold that the income accrued to an agent/trader/stockists in respect of prize on unsold/unclaimed tickets in the possession of an organising agent is income from business and does not constitute winnings from lotteries, and, therefore, it cannot be brought within the meaning of section 2(24)(ix) of the Act. .

Now coming to the point of applicability of the provisions of section 1948 it is seen that for the purpose .of deducting taxes at source in respect of winnings from lottery, the person responsible for paying any person any income at the time of payment thereof (emphasis supplied) is obliged to deduct income‑tax thereon at the rates in force. So, it is clear that in respect of section 194B, it is only in cases where actual payment is made. that a person is responsible for deducting income‑tax‑ and not at a stage of credit, if any. In that view of the matter, under section 1948, no deduction of tax at source from the payment can be made in the absence of an actual payment. It is an. admitted fact that in the present case there is no actual payment. In that view of the matter and consequent to the position as discussed above, the provisions of this section 1948 of the Act are not applicable in the instant case and the petitioner is not liable to deduct tax at source under section 1948 of the Act in respect of unsold/unclaimed prize winning tickets. Section 1948 imposes an obligation to deduct tax at source at the time of payment and‑not at the time of credit, unless there is actual payment, either in cash or in kind at the time of making payment the impugned notices are liable to be set aside and quashed, which I do accordingly. It is always open to the Revenue Authority to assess the income accrued to a distributor, agent, etc., in respect of unsold/unclaimed lottery tickets in the possession of such orgniser/stockist/agent, etc., which is income from business of lottery as discussed hereinabove.

In the result the petitions are allowed. In the facts and circumstances of the case the parties shall bear their own costs.

M.B.A./64/FC

Petition allowed.