Individual/ HUF are required to do TDS U/s 194B towards winning from games of any sort even if the business is newly started
SECTION 194B-WINNINGS FROM LOTTERY OR CROSSWORD PUZZLE
There is one provision where there may be non compliance by many taxpayers. It’s on Tax Deduction at Source (TDS) applicable on payment of winning from lottery, crossword puzzle or card game or game of any sort. TDS provision on such payment is incorporated in section 194B of the Income Tax Act – 1961.
It may be noted that the definition of “income” under section 2(24) now includes lottery winnings, specifically under cl. (ix) and treats such winnings on par with winnings from crossword puzzles, races including horse race, card games and other games of any sort or from gambling or betting of any form or nature whatsoever.
More importantly, it must be noted that the TDS provision is applicable on all PERSON whether Individual / HUF or Firm/AOP/ Trust or Company. Even in case of individual/HUF, the compliance is required even if the turnover is below Rs. 1 Crore. Surprised?
Let us first visit Section 194B which reads as under :-
The person responsible for paying to any person any income by way of winnings from any lottery or crossword puzzle or card game and other game of any sort in an amount exceeding ten thousand rupees shall, at the time of payment thereof, deduct income-tax thereon at the rates in force:
Provided that in a case where the winnings are wholly in kind or partly in cash and partly in kind but the part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of the winnings, the person responsible for paying shall, before releasing the winnings, ensure that tax has been paid in respect of the winnings.
The above provision incorporated ins section 194B absolutely makes it clear that
- That the TDS is required u/s 194B even if the individuals / HUF don’t have turnover exceeding Rs. 1 Crore. The immunity is specifically provided in the case of TDS u/s 194A towards Interest, U/s 194C towards contractual payment etc.
- Even if the individuals have started the new business then also the TDS compliance would be required in view of the provision of section 194B.
Let us have a look at few of the key feature of the provision:
- Section was inserted by Finance Act, 1972, w.e.f. 1st April, 1972. The Circular No. 85 Dt. 29th May, 1972 TC5S.1102 explains the scope of the provisions. By the Finance Act, 2001, in section 194B, after the words “crossword puzzle”, the words “or card game and other game of any sort” were inserted with effect from the 1st day of June, 2001. Originally, the threshold of Rs. 1000 was there which was thereafter enhanced to Rs. 5000 and then again to Rs. 10,000/- by the Finance Act, 2010 with effect from the 1st day of July, 2010.
- Income includes not only money payment but also the value of any benefit or perquisite, whether convertible into money or not. In K.C. Suresh vs. Ex-Officio Director of Lotteries & Ors. (1992) 103 CTR (Ker) 289 : TC5R.328, it was held that deduction of tax at source under section 194B out of value of car is also required.
- Lottery, whether authorized or not, would certainly be liable for TDS in respect of payments made on the winnings therefrom. Lotteries are governed by various State laws. Where it is not authorised, organising lottery may be punishable under section 294A of the Indian Penal Code but doesn’t give immunity from section 194B.
- Liability is not on due basis but on payment basis. Thus, if the price is declared and no one come to claim it, no TDS would be there. Its at the time of payment that the TDS would be attracted.
- Question arises as to the scope of section 194B. What exactly constitutes lottery or winning or games?
- In CIT vs. Patel Gruh Nirman Flat Yojna (2008) 303 ITR 479 (Guj), following CIT vs. Dy. Director of Small Savings (2004) 187 CTR (Mad) 562 : (2004) 266 ITR 27 (Mad), it has been held that lucky draw scheme is not lottery hence not liable to tax deduction at source under s. 194B.
- Organizing betting or gambling or lotteries, none of which involve any skill but is based upon mere chance may be business. Where skill is involved, there is no question of treatment of the prize of lottery so as to justify tax deduction at source under section 194B. Where it is based on mere chance, the prize may well attract tax and if it does tax deduction has necessarily to follow.
- Prizes are offered to customers as a puff to push up sales or to notify deposits is liable for TDS U/s 194B? In case it is not be feasible to offer prizes to all customers & so a few are chosen by lottery then it will be necessary to consider it as “lottery” by all means.
- On meaning of Lottery, it may be relevant to refer to few dictionary on the issue:
a) According to Chambers English Dictionary, lottery is “an agreement for distribution of prizes by lot; a matter of chance….”
b) Webster’s II New Riverside University Dictionary would describe lottery either as “a contest in which tokens are distributed or sold, the winning token or tokens being secretly predetermined or ultimately selected in a chance drawing ” or “an event or activity regarded as having an outcome depending on chance.”
c) The Shorter Oxford English Dictionary, 1936 Vol. I would describe lottery : “an agreement for distribution of prizes by chance among persons purchasing tickets. Slips or lots bearing the same number as the ticket, and representing either prizes or blanks are drawn from a wheel”. This word, according to this dictionary also means “issue of events as determined by change”.
d) Compact Edition of the Oxford English Dictionary, 1972 word “lottery” means “an arrangement for the distribution of prizes by chance among persons purchasing tickets”. (Suresh Kumar Bahri & Anr. vs. State 1978 All L.J. 976).
e) Mitra’s Legal and Commercial Dictionary, Fourth Edition would define “lottery” in the following words : “The lottery has been compendiously defined as a scheme for the distribution of money by chance. It usually, if not always, takes the form of the creation of a fund by the participants in the lottery, who buy tickets or pay subscriptions in consideration of an offer by the promoters to award them a prize on some contingency, the happing whereof depends on chance. (Barnes vs. Strathern (1929) SC(J) 41).”
The Bombay High Court in the case of State of Bombay vs. R.M.D. Chamarbaughwalia AIR 1956 Bom 1 very commonly referred to as RMDC case had considered all the English cases. In this case, the Court was concerned with heavy prizes awarded for winners on solving crossword puzzle set by the organisers, the winners being judged with reference to the pre-set answers framed by the organisers themselves. Answers were more than one for most of the clues resulting in large number of possible answers in view of the various permutations and combinations. The views of the English Courts was generally found acceptable in this case. The Court held that it would not be content merely to look at the face of the scheme but consider the real scheme as to whether it was really a matter of chance and not a matter of solving clues as they purported to be. After examining the scheme, the Court found that it was not a game based on intelligence but one which was intelligible to the discerning mind as having a “sinister feature” and tendencies for exploitation of a vast number of persons of slender means. Since the solutions had to be accompanied by payments, it was found that the promoters of the scheme always stood to gain, the contributors stood to lose always by way of heavy interest even when the payments were returned. It was basically a scheme depending on chance. If one were to see through the facade, they have an anti-social impact and therefore, should be treated as barred by law.
In a landmark judgment by Madras HC in CIT vs. G.R. Karthikeyan (1980) 17 CTR (Mad) 301 : (1980) 124 ITR 85 (Mad), the Madras High Court was concerned with prize won in a motor rally as to whether the prize amounted to a windfall or could be taxed as lottery winning. The High Court found that the assessee participated in an All-India Highway Motor Rally and won a prize in a motor race, which involved skill in performance of driving a motor vehicle with least number of penalty points. Since it involves skill and effort, there was no element of chance inherent in a lottery.
- In the case of CIT vs. Friends Enterprises (1987) 66 CTR (AP) 143 : (1988) 171 ITR 269 (AP) the Andhra Pradesh High Court had occasion to deal with the issue in the case of betting in horse racing where five persons joined together for investment in jackpot etc. The issue involved was, no doubt, as to whether they could be jointly assessed as Association of Persons or Body of Individuals. It is in this context that the High Court found that the activity involved was betting and gambling and that it was a regular course of activity on an organised basis. It, therefore, justified the inference that joint assessment was valid in law. In this context it referred to an earlier decision in Shaik Ibrahim vs. CIT (1968) 69 ITR 117 (AP) where the issue involved was whether the regular receipt of income from gambling or betting or game of chance could be treated as business. The High Court took the view that betting on Newyork cotton did not depend upon any skill or enterprise as it was a case of gambling or guess work. The fact that he was periodically receiving income could not justify the treatment of such income as from business. Under the then law the amount was not even taxable.
- Similar view was taken by the Madras High Court in Janab A. Syed Jalal Sahib vs. CIT (1960) 39 ITR 660 (Mad) where betting in races was held to be in the nature of gambling and the fact that he indulges in it habitually cannot constitute business. The nature of the receipt cannot be judged merely with reference to the fact whether substantial income has been earned or otherwise. Such activities, whether taken for pleasure or profit, can never be treated as business, the result of such betting is “wholly irrational about its results.” Merely because it is so, gambling does not mean that it can never be organised on a commercial basis and can never constitute a business.
- In CIT vs. Dy. Director of Small Savings (2004) 187 CTR (Mad) 562 : (2004) 266 ITR 27 (Mad) it has been held that Distribution of prizes under the District Level Gift Linked Savings Mobilization Scheme did not constitute “lottery” and the provisions of s. 194B were not applicable to it prior to insertion of Explanation under s. 2(24)(ix) w.e.f. 1st April, 2002, as the chance given to the investor to win a prize was a free chance.
- In Sampanna Kuries (P) Ltd. vs. ITO & Ors. (2005) 193 CTR (Ker) 413 : (2005) 272 ITR 534 (Ker) it was held that the essential elements that go to constitute a lottery are: (1) a prize or some advantage in the nature of a prize, (2) distribution thereof by chance, and (3) consideration paid or promised for purchasing the chance. Thus, unless all the three elements are satisfied, the prize scheme cannot be considered as a lottery. The chance of a person getting the prize cannot be treated as part of the bargain unless independent consideration is there with respect to the prize awarded applying Sesha Ayyar vs. Krishna Ayyar AIR 1936 Mad 225 and H. Anraj vs. Government of Tamil Nadu (1986) 61 STC 165 (SC). It is the duty of the assessing authority concerned to consider in each case as to whether a prize scheme introduced by the assessee satisfied the three elements of a lottery. For the said purpose it is necessary for the assessing authority to go into the prize scheme of the respective assessees. In this instant case, so far as the kuri companies are concerned, if as a matter of fact, the prize scheme is introduced only for the limited purpose of ensuring the due payment of kuri instalments and if it is made available only to those subscribers who promptly remit the kuri instalments, it cannot be said that there is any consideration for the draw. It other words, even de hors the scheme there is an obligation cast on the subscribers to remit the kuri instalments promptly failing which other consequences are provided in the variola of the respective kuries. Thus in so far as kuri transactions and the prize schemes there under are concerned, unless there is independent materials to show that a separate consideration other than the installment payments is provided in the scheme, there is no question of treating the kuries conducted by the petitioners herein as lotteries to attract the provisions of section 194B. However, this is a matter, which has to be considered by the authorities concerned in appropriate proceedings with reference to the prize schemes of the respective petitioners. So far as the prize schemes of the petitioners, who are dealers in consumer goods, also it is a matter for the authority to consider the question of applicability of section 194B with reference to the prize scheme introduced by the petitioners. The petitioners are directed to file detailed objections to the notices issued by the ITO (TDS) and the said authority will consider the matter and pass orders in the light of the principles discussed and summarized in this judgment and also the observations made hereinafter affording an opportunity of being heard to the petitioners.
- In K.C. Suresh vs. Ex Officio Director of Lotteries & Ors. (1992) 103 CTR (Ker) 289 : TC5R.328 the petitioner was a lucky winner to get the first prize which carried rupees five Lakhs and a new maruti car. The deduction made by the IT Department in respect of the new maruti car treating it as income was upheld. According to the High Court, the definition of income includes not only payment but also the value of any benefit of perquisite, whether convertible into money or not.
- Winnings payable to residents of the State of Sikkim are however not liable for tax deduction at source, the draw of which is held in pursuance of any agreement entered into on before 28th Feb., 1989, between the State Government of Sikkim and the organising agents to such lottery. [Circular No. 536, dt. 6th July, 1989 [(1989) 78 CTR (St) 2 : (1989) 178 ITR (St) 621].