Commissioner of Income-tax v. Dr. M. A. M. Ramaswamy (No. 1)
[Citation -2014-LL-1210-2]

Citation 2014-LL-1210-2
Appellant Name Commissioner of Income-tax
Respondent Name Dr. M. A. M. Ramaswamy (No. 1)
Court HIGH COURT OF MADRAS
Relevant Act Income-tax
Date of Order 10/12/2014
Judgment View Judgment
Keyword Tags carry forward and set off • winnings from betting • higher rate of tax • long-term capital • crossword puzzle • overriding title • business loss • other source • horse race • flat rate
Bot Summary: On the issue of Winnings from betting, the Assessing Officer noticed that the assessee has shown betting income of Rs. 31,24,28,980 and while computing the total income, the assessee has adjusted the losses suffered under the head Business against the income earned under other heads, including the betting income, and after setting off such losses, betting income of Rs. 28,52,18,347 was brought to tax by the assessee at the flat rate of 40 per cent. The Assessing Officer refused to accept the manner in which the betting income was computed by the assessee and held that the total winnings are to be taxed under section 115BB of the Act and losses cannot be set off against such income. The relevant section 115BB of the Income-tax Act, 1961, reads as under: '115BB. Where the total income of an assessee includes any income by way of winnings from any lottery or crossword puzzle or race including horse race or card game and other game of any sort or from gambling or betting of any form or nature whatsoever, the income-tax payable shall be the aggregate of- the amount of income-tax calculated on income by way of winnings from such lottery or crossword puzzle or race including horse race or card game and other game of any sort or from gambling or betting of any form or nature whatsoever, at the rate of thirty per cent. The contention of the Revenue is that section 115BB of the Act makes it clear that in respect of the total income of the assessee, including the income by way of winning from lottery or crossword puzzle or race including horse race or card game and other game of any sort or from gambling or betting in any form or nature whatsoever, income-tax is payable at the aggregate in the manner provided under clauses and of the said provision and not otherwise, and the Tribunal erred in confirming the order of the Commissioner of Income-tax directing levy of tax at the rate of 40 per cent. On the contrary, it is the plea of the learned counsel for the assessee that, while computing the total income as required under section 115BB of the Act, set off as prescribed by the provisions of sections 70 to 80 of the Act has to be given and only the balance income can be brought to tax at the rate stipulated under section 115BB of the Act. In the case of an assessee having income chargeable under the head'Income from other sources', no deduction in respect of any expenditure or allowance in connection with such income shall be allowed under any provision of this Act in computing the income by way of 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: See 1995 215 ITR 113. 115BB. Where the total income of an assessee includes any income by way of winnings from any lottery or crossword puzzle or race including horse race or card game and other game of any sort or from gambling or betting of any form or nature whatsoever, the income-tax payable shall be the aggregate of- the amount of income-tax calculated on income by way of winnings from such lottery or crossword puzzle or race including horse race or card game and other game of any sort or from gambling or betting of any form or nature whatsoever, at the rate of thirty per cent.


JUDGMENT judgment of court was delivered by R. Sudhakar J.-The Revenue has filed this appeal assailing order dated September 28, 2005, passed by Income-tax Appellate Tribunal, Madras "A" Bench, in ITA No. 1275/Mds/2001 and same was admitted on following question of law: "Whether, on facts and in circumstances of case, Tribunal was right in holding that loss sustained in business can be set off against betting and gambling income, and only net income is to be taxed under section 115BB of Income-tax Act?" 2.1. facts in nut-shell are as under: assessee is breeder and owner of race horses. For assessment year 1998-99, assessee filed return of income declaring total income of Rs. 28,01,55,597. return was processed under section 143(1)(a) of Income-tax Act on December 1, 1999. 2.2. Thereafter, notice under section 143(2) of Act was issued to assessee. details furnished by assessee and objections raised were considered by Assessing Officer. On issue of "Winnings from betting", Assessing Officer noticed that assessee has shown betting income of Rs. 31,24,28,980 and while computing total income, assessee has adjusted losses suffered under head "Business" against income earned under other heads, including betting income, and after setting off such losses, betting income of Rs. 28,52,18,347 was brought to tax by assessee at flat rate of 40 per cent. as prescribed under section 115BB of Act as against total betting income of Rs. 31,24,28,980. 2.3. Assessing Officer refused to accept manner in which betting income was computed by assessee and held that total winnings are to be taxed under section 115BB of Act and losses cannot be set off against such income. Accordingly, total winnings from betting were brought to tax at rate of 40 per cent. as envisaged under section 115BB of Act. 2.4. Aggrieved by said order, assessee appealed to Commissioner of Income-tax (Appeals). Commissioner of Income-tax (Appeals) observed that only net income of betting receipts, namely, after adjustment thereof against business loss, can be subjected to tax at rate of 40 per cent. as contemplated under section 115BB of Act and, accordingly, directed Assessing Officer to charge tax at rate of 40 per cent. on net betting receipts. 2.5. Calling in question said order, Revenue went on appeal before Tribunal. Tribunal, while confirming order passed by Commissioner of Income-tax (Appeals), held as follows: "12. last issue to be considered is one in ITA No. 1275 (Mds)/2001 for assessment year 1998-99 regarding quantification of income for purpose of tax on races including horse races. relevant section 115BB of Income-tax Act, 1961, reads as under: '115BB. Where total income of assessee includes any income by way of winnings from any lottery or crossword puzzle or race including horse race (not being income from activity of owning and maintaining race horses) or card game and other game of any sort or from gambling or betting of any form or nature whatsoever, income-tax payable shall be aggregate of- (i) amount of income-tax calculated on income by way of winnings from such lottery or crossword puzzle or race including horse race or card game and other game of any sort or from gambling or betting of any form or nature whatsoever, at rate of thirty per cent.; and (ii) amount of income-tax with which assessee would have been chargeable had his total income been reduced by amount of income referred to in clause (i). Explanation.-For purposes of this section'horse race' shall have same meaning as in section 74A.' 13. Section 58(4) with its proviso clause does not apply to assessee's case, assessee being owner of horses maintained by him for running in horse races. On consideration of rival submissions, we are of view that order of Commissioner (Appeals) is perfectly justified where the order of Commissioner (Appeals) is perfectly justified where assessee was allowed to adjust losses suffered under head'Business' against income earned under other heads including betting income. Central Board of Direct Taxes Circular No. 721, dated September 13, 1995, also supports case. combined reading of section 115BB and proviso to section 58(4) along with Central Board of Direct Taxes Circular No. 721, dated September 13, 1995, fortify action of Commissioner (Appeals) and we see no justification to interfere with orders of Commissioner (Appeals) on this issue. Therefore, we decide this ground against Revenue and in favour of assessee." 2.6. Challenging abovesaid order passed by Tribunal, Revenue is before this court by filing present appeal. Heard Mr. T. Ravikumar, learned senior standing counsel appearing for Revenue and Mr. S. Sridhar, learned counsel appearing for respondent- assessee. contention of Revenue is that section 115BB of Act makes it clear that in respect of total income of assessee, including income by way of winning from lottery or crossword puzzle or race including horse race or card game and other game of any sort or from gambling or betting in any form or nature whatsoever, income-tax is payable at aggregate in manner provided under clauses (i) and (ii) of said provision and not otherwise, and, therefore, Tribunal erred in confirming order of Commissioner of Income-tax (Appeals) directing levy of tax at rate of 40 per cent. on net betting receipts, as against total winnings from betting. On contrary, it is plea of learned counsel for assessee that, while computing "total income" as required under section 115BB of Act, set off as prescribed by provisions of sections 70 to 80 of Act has to be given and only balance income can be brought to tax at rate stipulated under section 115BB of Act. Before adverting to merits of matter, it would be useful to have look at provisions referred to by Tribunal and authorities below. For better clarity, said sections are extracted hereunder: "58. Amounts not deductible.-... (4) In case of assessee having income chargeable under head'Income from other sources', no deduction in respect of any expenditure or allowance in connection with such income shall be allowed under any provision of this Act in computing income by way of 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: See [1995] 215 ITR (St.) 113. Provided that nothing contained in this sub- section shall apply in computing income of assessee, being owner of horses maintained by him for running in horse races, from activity of owning and maintaining such horses. 115BB. Where total income of assessee includes any income by way of winnings from any lottery or crossword puzzle or race including horse race (not being income from activity of owning and maintaining race horses) or card game and other game of any sort or from gambling or betting of any form or nature whatsoever, income-tax payable shall be aggregate of- (i) amount of income-tax calculated on income by way of winnings from such lottery or crossword puzzle or race including horse race or card game and other game of any sort or from gambling or betting of any form or nature whatsoever, at rate of thirty per cent.; and (ii) amount of income-tax with which assessee would have been chargeable had his total income been reduced by amount of income referred to in clause (i). Explanation.-For purposes of this section'horse race' shall have same meaning as in section 74A." Sub-section (4) of section 58 of Act was inserted by Finance Act, 1986, with effect from April 1, 1987, and purport of said amendment is to disallow any expenditure from 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 which are deemed as income for purposes of levy of income-tax under section 2(24)(ix) of Act. By Finance Act, 1986, with effect from April 1, 1987, Legislature while inserting section 115BB of Act, thought it fit to delete section 74A(1) and section 74A(2) of Act. scope and effect of these amendments was explained by Board in Circular No. 461, dated July 9, 1986. relevant portion of said circular reads as under: "Section 115BB of Act Provision of flat rate of tax on winnings from lotteries, crossword puzzles, races, including horse races, etc. 31.1. Under existing provisions, any income by way of winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting See [1986] 161 ITR (St.) 17, 36. of any form or nature whatsoever is chargeable to tax under head 'Income from other sources' along with other income of assessee. By inserting new section 115BB in Income- tax Act, it has been provided that any income of casual and non-recurring nature of type referred to above, shall be charged to income-tax at flat rate of 40 per cent. This provision will, however, not apply to income from activity of owning and maintaining race horses. For this purpose, new sub-section has been added to section 58 to provide that no deduction shall be allowed in respect of any expenditure or allowance in computing income from aforesaid sources. What has to be borne in mind is that apart from general exemption of Rs. 5,000 under section 10(3), no further allowances or deductions are admissible against gross winnings except in cases where there is diversion by overriding title as in case of certain lotteries where certain percentage has to be foregone to Government/agency conducting lotteries. Consequential amendment has also been made in section 197(1)(a) of Income-tax Act. 31.2. These amendments will apply in relation to assessment year 1987-88 and subsequent years. Section 74A(1) and section 74A(2) Modification of provisions relating to losses from certain specified sources falling under head'Income from other sources'. 32.1. As mentioned above, winnings from lotteries, crossword puzzles, races including horse races, card games, other games or from gambling or betting is chargeable to tax under head'Income from other sources'. Section 74A(1) provides that losses from aforesaid sources will be allowed to be set off only against income from same source and losses not so set off relating to these sources incurred during year are not allowed to be carried forward for set off against any income of subsequent year. Under provisions of section 74A(3) of Act, however, losses arising from activity of owning or maintaining race horses for running in horse races are entitled to be carried forward and set off against income from source including horse races, in subsequent year. benefit of carry forward and set off of such losses is allowed for four assessment years next following assessment year for which loss was first computed. In view of insertion of new section 115BB in Act levying flat rate of tax on winnings from lotteries, crossword puzzles, races including horse races, etc., sub-sections (1) and (2) of section 74A of Act have been deleted. Sub-section (3) has been amended to provide that in case of taxpayer, being owner of horses maintained by him for running in horse races amount of loss incurred in activity of owning or maintaining such race horses in any assessment year shall not be set off against income, if any, from any other source and shall be allowed to be carried forward to four assessment years next following assessment year for which such loss was first computed for being set off against income, if any, from same activity. 32.2. These amendments will apply in relation to assessment year 1987-88 and subsequent years." (emphasis supplied) bare reading of above circular and provisions makes it clear that section 115BB of Act envisages taxation at flat rate of 40 per cent. on total amount of winnings from betting, etc., and losses from same source also cannot be set off against such income. above view is fortified by Board Circular No. 14 of 2001, dated December 12, 2001, explaining intent of Legislature in amending section 115BB of Act by reducing rate of tax from 40 per cent. to 30 per cent. with effect from April 1, 2001, as amended by Finance Act, 2001, dated April 1, 2002. "Tax on winnings from lottery, crossword puzzle, etc. 60.1. Under existing provisions of clause (i) of section 115BB, any income by way of winnings from any lottery or crossword puzzle or race including horse race (not being income from activity of owning and maintaining race horses) or card game and other game of any sort or from gambling or betting of any form or nature whatsoever, is chargeable to tax at rate of 40 per cent. 60.2. As measure of rationalisation, Act has reduced rate of tax on such winnings from forty per cent. to thirty per cent. 60.3. amendment will take effect from 1st April, 2002, and will, accordingly, apply in relation to assessment year 2002-03 and subsequent years." (emphasis1 supplied) From above, it is clear that intent of Legislature, as measure of rationalisation, was to reduce rate of tax on such winnings from 40 per cent. to 30 per cent., with effect from April 1, 2002. Even though said amendment is not applicable to case of hand, what can be deduced from same is fact that higher rate of tax as applicable to winnings from betting, etc., has been brought down to 30 per cent., on See [2001] 252 ITR (St.) 65, 111. par with rate applicable for other incomes as measure of rationalisation. Therefore, intent of Legislature to levy tax at rate of 40 per cent. for relevant assessment year on winnings from betting, etc., is apparent as otherwise, very existence of said provision in Act would be meaningless. said provision in Act would be meaningless. On careful perusal of above provisions of law and legislative intent, this court is not inclined to accept view as propounded by Tribunal and Commissioner (Appeals), as section 115BB of Act is standalone special provision, which makes it clear that income of assessee, not being income from activity of owning and maintaining race horses, would fall under section 115BB of Act. In view of specific provision contained in section 115BB of Act under Chapter XII of Act, which provides for determination of tax in certain special cases, special rate of tax is applicable for entire income of winnings from horse racing and should be subject to tax at special rate provided therein. It is not case of assessee that income being brought to tax is earned from owning and maintaining horses. Therefore, in our considered opinion, provisions of section 58(4) of Act will not come into play. methodology of computing tax on long-term capital gains vis-a-vis section 112 of Act for which assessee relied on Central Board of Direct Taxes Circular No. 721, dated September 13, 1995, though found favour with Commissioner of Income-tax (Appeals), this court is not inclined to accept same for simple reason that whenever tax is levied based on special provisions envisaged under Act, method of calculating tax has to be strictly in accordance with such provisions and not otherwise. If circular relied on by assessee is taken into consideration, then what is envisaged by statute would be given go-by and purport and intent of Parliament in enacting that special provision in statute would become futile exercise. Therefore, reliance placed on said circular by Commissioner of Income-tax (Appeals) as also by Tribunal is misconceived and does not stand legal scrutiny. Further, it is curious to note that Tribunal, in penultimate paragraph of its order, while observing that "section 58(4) with its proviso clause does not apply to assessee's case, assessee being owner of horses maintained by him for running in horse races", has held that "A combined reading of section 115BB and proviso to section 58(4) along with Central Board of Direct Taxes Circular No. 721, dated September 13, 1995, fortify action of Commissioner of Income-tax (Appeals) and we see no justification to interfere with orders of See [1995] 215 ITR (St.) 113. Commissioner (Appeals) on this issue". We are at loss to understand as to how Tribunal concurred with decision of Commissioner of Income-tax (Appeals), while making diametrically opposite observation that section 58(4) of Act is not applicable. We are, therefore, of considered view that total winnings from betting of assessee should be brought to tax at rate of 40 per cent. as contemplated under section 115BB of Act. order passed by Tribunal, which affirmed order of Commissioner of Income-tax (Appeals), is liable to be set aside. Accordingly, order passed by Tribunal is set aside. For foregoing reasons, this appeal is allowed answering question of law in favour of Revenue and against assessee. However, there shall be no order as to costs. *** Commissioner of Income-tax v. Dr. M. A. M. Ramaswamy (No. 1)
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