Failure to deduct TDS u/s 194B  in respect of winning which are wholly in kind, can be deemed to be assessee in default u/s 201.

Issue : Whether the assessee fails to deduct TDS u/s 194 B in respect of winnings which are wholly in kind , can be deemed to be assessee in default under sec 201?

Sec 194 B : Every person responsible for paying to any person , whether resident and non resident ,any income by way of winnings from lottery or crossword puzzle or card game is required to deduct TDS @ 30% if the amount exceeds Rs 10000.

In case the winnings are wholly in kind or partly in kind than before realizing the winnings he should ensure that tax has been paid in respect of the winnings. The Karnataka High Court in case of Hindustan Lever Ltd (2014) held that where the winnings are in kind, the person realizing the winnings should ensure that TDS is paid before realizing the winnings, if the assessee fails to ensure than penalty equivalent to tax not paid u/s 271C , However High Court held that sec 201 i.es assessee in default cannot be initated against the assessee.

Enclosed : Copy of Karnataka High Court Judgment

 HIGH COURT OF KARNATAKA

DILIP B BHOSALE & B MANOHAR, JJ.

ITA NO. 144/2007 C/W ITA NO. 142/2007

30th October, 2013

(2013) 86 CCH 0203 KarHC

(2014) 264 CTR 0093 (Kar) : (2013) 95 DTR 0399 (Kar) : (2014) 361 ITR 0001 (Karn) : (2014) 220 TAXMAN 0177 (Karnataka)

Legislation Referred to

Section 194B, 201(1)

Case pertains to

Asst. Year 2001-02 and 2002-03

Decision in favour of:

Assessee

TDS—Consequences of failure to deduct or pay—Jurisdiction of AO to initiate proceeding u/s 201—Assessee-respondent was Company engaged in business of manufacture and sale of various consumer goods/products—During previous years, relevant to A.Ys. 2001-02 and 2002-03, it had conducted certain sales promotion schemes—Respondent advertised schemes wherein coupons were inserted in packs/containers of their products—Some of those coupons indicated that on purchase of packs/containers, they would get prizes, as indicated in coupons—Prizes that were offered were cars, gold chains ,coins, and tables, Silver Coins, Emblems etc., total amount of prizes distributed valued Rs.6,51,238/- for assessment A.Y. 2001-02 and Rs.54,73,643/- for A.Y. 2002-03—AO conducted survey of assessee’s business premises under Rule 133A and passed order u/ss 201(1) and 201(A) for both A.Ys. and held that respondent-assessee had failed either to deduct tax at source or to ensure that tax had been paid before releasing winnings as contemplated by Section 194B—Accordingly AO treated respondent-assessee as assessee in default and raised demand of Rs.3,78,550/- for A.Y. 2001-02 and Rs.17,73,902/- for A.Y. 2002-03—CIT(A) confirmed order of AO—Tribunal allowed both appeals filed by respondent holding that schemes conducted by assessee were not lottery as said expression was understood up-to A.Y. 2001-02 and concluded that although there was element of chance, but as no consideration or payment was made by customers for purpose of participation in lottery with object of winning prizes, schemes conducted by respondent would not fall within ambit of Section 194B—Tribunal, further held that having regard to Circular No.390 dated 8.8.1984, there was no obligation on assessee to deduct tax at source in respect of prizes paid in kind and in absence of any such obligation no proceedings u/s 201 could be taken against assessee—Held, conjoint reading of Section 201 and Section 194B would show that person responsible to deduct tax at source, if he either fails to deduct or after deducting, fails to pay, is deemed to be assessee in default, in respect of tax—However, where payment of winnings is wholly in kind and not in cash at all, question of deduction does not arise and in that eventuality, only responsibility, as casts u/s 194B, is to ensure that lax is paid by winner of prize before prize/winnings is released in his favour—Thus, initiation of proceedings u/s. 201 against assessee, was without jurisdiction—Hence, question answered in favour of assessee and against revenue—Revenue’s appeal dismissed.

Held :

Conjoint reading of Section 201 and Section 194B would show that person responsible to deduct tax at source, if he either fails to deduct or after deducting, fails to pay, is deemed to be assessee in default, in respect of tax. However, where payment of winnings is wholly in kind and not in cash at all, question of deduction does not arise and in that eventuality, only responsibility, as casts u/s. 194B, is to ensure that lax is paid by winner of prize before prize/winnings is released in his favour. Thus, initiation of proceedings u/s. 201 against assessee, was without jurisdiction. Authorities under the Act in such situation would not render remediless against such person who fails to ensure that tax is paid before the winnings is released in favour of its winner. In the Act, there are two provisions, namely Sections 271C and 276B. Section 271C empowers the Joint Commissioner to levy any penalty where an assessee fails to deduct the whole or any part of the tax as required by or under the provisions of Chapter XVII-B or fails to discharge the obligation under the second proviso to Section 194-B. Similarly, Section 276B makes it an offence against the person who fails to pay to the credit of the Central Government the tax deducted at source as required by or under the provisions of Chapter XVII-B or the tax payable as required by or under the second proviso to Section 194B. Section 271C and Section 270B make reference to the second proviso to Section 194-B, i.e., the proviso as it stands today. The 1st proviso was deleted by the Finance Act, 1999, with effect from 01.04.2000. It is against this backdrop, in present case proceedings against the person under u/s. 201, such as the assessee in the present case, who fails to ensure payment of tax, as contemplated by proviso to Section 194B, before releasing the winnings, is not maintainable or the proceedings against such person is without jurisdiction.Hence, question answered in favour of assessee and against revenue. Revenue’s appeal dismissed.

Conclusion :

Proceedings against person under u/s 201, such as assessee in present case, who fails to ensure payment of tax, as contemplated by proviso to Section 194B, before releasing winnings, is not maintainable or proceedings against such person is without jurisdiction.

In favour of :

Assessee

Counsel appeared:

K V Aravind, Kamaladhar, Adv. for the Petitioner.: Percy Pardiwala, T Suryanarayana, Adv. for the Respondent

DILIP B. BHOSALE, J.

1. These appeals arise from common order dated 7.3.2006 rendered by the Income Tax Appellate Tribunal (for short the ‘Tribunal’), Bangalore Bench ‘A’, in ITA Nos.1290 and 1291/Bang/2002 whereby both the appeals preferred by the respondent-assessee were allowed. The appeals before the Tribunal were directed against the order of Commissioner of Income Tax-V (for short the ‘Appellate Authority’ or ‘AA’), Bangalore, dated 21.6.2002 for the Assessment years 2001-02 and 2002-03.

1.1. The appeals before the AA were against the order passed by the Income-Tax Officer (TDS) (for short the ‘Assessing Officer’ or ‘AO’) under Sections 201(1) and 201(1A) of the Income Tax Act, 1961 (for short ‘the Act’). By that order, the AO, held that the respondent-assessee had failed either to deduct the tax at source or to ensure that the tax had been paid before releasing the winnings as contemplated by Section 194B of the Act.

1.2. In ITA 144/02, the AO treated the respondent-assessee as an assessee in default and raised a demand of Rs.3,78,550/- for the assessment year 2001-02and Rs.17,73,902/- for the assessment year 2002-03in ITA 142/07. The orders of the AOs, in both the cases are dated 3.1.2002 and 28.3.2002 respectively.

2. The facts leading to this appeal, in brief, are as under:

2.1 The respondent is a Company engaged in the business of manufacture and sale of various consumer goods/products. During the previous years, relevant to the assessment years 2001-02 and 2002-03, it had conducted certain sales promotion Schemes. The respondent advertised the Schemes wherein coupons were inserted in packs/containers of their products. Some of those coupons indicated that on purchase of the packs/containers, they would get prizes, as indicated in coupons. The prizes that were offered were Santro Car, Maruthi Car, Gold chains, Gold Coins, Gold Tables, Silver Coins, Emblems etc., The total amount of prizes distributed valued Rs.6,51,238/- for the assessment year 2001-02 and Rs.54,73,643/- for the Assessment Year 2002-03.

2.2. The AO, having received the information about the Schemes, sought clarification and also conducted survey of the assessee’s business premises under Rule 133A of the Act. The AO, thereafter, passed an order dated 3.1.2002 under Sections 201(1) and 201(A) of the Act for the Assessment Year 2001-02 and treated the respondent as an assessee-in-default of its obligation in terms of Section 194B of the Act. Similar order was passed for the Assessment year 2002-03. According to the AO, the respondent was obliged to ensure that the tax in respect of the winnings, wholly in kind, was remitted before the winnings were released. Having failed to do so, the proceedings under Section 201(1) of the Act were initiated. The AO held that although the customers did not pay anything extra to receive the prize, nevertheless they had participated in the scheme by purchasing the products advertised to take a chance at winning the prize. It was further held that what has been paid as prize in kind in various schemes conducted by the respondent is a lottery on which the tax was deductible under Section 194B of the Act and as the respondent neither deducted the tax nor ensured payment thereof before the winnings were released, treated the respondent as an assessee in default. He passed similar order dated 28.3.2002 for the Assessment Year 2002-03. The computation of tax made by the AO in both these matters read thus:

In ITA 142/2007

Computation of tax:

A.Y.2002-03

Total amount of prize given away Rs.54,73,643

Tax on the same @ 30% Rs. 16,42,093

Add: Surcharge @ 2% Rs. 32,843

Rs. 16,74,936

Add: Int. u/s. 201(1A)

Rs. 98.966

Rs. 17.73.902

In ITA 144/2007

Computation of tax:

A.Y.2001-02

Total amount of prize given away

Rs.6,51,238

Tax on the same @ 40% Rs.2,60,495

Add: Surcharge @ 12% Ps. 31,259

Rs.2,91,754 Add: Int. u/s. 201(1A)

Rs. 86.796

Rs.3.78.550

2.3. Feeling aggrieved and dissatisfied with the order passed by the AO, the respondent filed two appeals bearing Appeal Nos.ITA 47/2002-03 & ITA 93/2001-02. Both the appeals were dismissed by the Common order dated 21.6.2002. The appellate authority affirmed the view taken by the AO.

3. The respondent, thereafter preferred two appeals under Section 253 of the Act before the Tribunal bearing Nos.1290 & 1291/Bang/2002. The Tribunal allowed both the appeals filed by the respondent holding that the schemes conducted by the respondent were not a lottery as the said expression was understood upto the Assessment Year 2001-02. The Tribunal found, as a matter of fact, that the customers did not pay any excess amount for getting coupons indicating winnings in the packs/containers of products they purchased, and therefore, nothing was paid by them for participating in the Scheme. Accordingly, the Tribunal concluded that although there was an element of chance, but as no consideration or payment was made by the customers for the purpose of participation in the lottery with the object of winning the prizes, the schemes conducted by the respondent would not fall within the ambit of Section 194B. The Tribunal, further held that having regard to the insertion of the explanation below Section 2(24)(ix) of the Act, the scheme conducted by the respondent would be a lottery for the Assessment Year 2002-03 but, nevertheless, they accepted the respondent’s alternate contention that having regard to the Circular No.390 dated 8.8.1984 (erroneously referred to as circular No.956 in the order), there was no obligation on the respondent to deduct tax at source in respect of prizes paid in kind and in absence of any such obligation no proceedings under Section 201 could be taken against the respondent.
4. Feeling aggrieved by the order passed by the Tribunal, the revenue filed present appeals. The substantial question of law on which both the appeals were Admitted by this Court are similar. We, therefore, quote the question of law framed in ITA No,142/2007, which reads thus:

“Whether the Tribunal was correct in holding that no TDS need be deducted in respect of a sum of Rs.54,73,643/- where gifts like car, gold, silver etc., were distributed to 3rd parties under price scheme without taking into consideration proviso to Section 194B and Section 2(24)(ix) of the Act and erroneously relying on a non-existent C3DT Circular No. 956.?”

5. We have heard learned counsel for the parties at considerable length and after having heard them, we have framed the following substantial questions of law, which also cover the question of law as framed in the memo of appeal. We make it clear that in the course of hearing, by consent of learned counsel for the parties, we formulated the following questions and heard them on these questions at considerable length. The questions of law which, in our opinion, fall for our consideration in the present appeals are as follows:

“i. Whether the assessee failed to discharge its obligation under Section 194B of the IT Act, while conducting the Schemes that tantamount to lottery?”

2. Whether the amendment made by the Finance Act, 2001, inserting an explanation to Section 2(24)(ix) has a retrospective effect?
3. In the facts of this case whether proceedings under Section 201 can be taken against ar, assessee for a failure to discharge its obligation under the proviso to Section 194B, merely because the assessee did not ensure that tux had been paid in respect of winnings, wholly in kind, before releasing the winnings, in favour of the winner-customers?
4. Having regard to the questions framed by usand the arguments advanced by learned counsel for theparties, we would like to deal with the third question first.We have framed the third question in view of challenge tothe jurisdiction of the AO to initiate proceedings underSection 201. If we hold that the proceedings under Section201 against the assessee and the orders passed by the AOand the AA are without jurisdiction, the first two questions need not be addressed.
5. We have heard learned counsel for the parties at considerable length. We are of the opinion that the third question of law will have to be answered in favour of the assessee and against the revenue. We, therefore, proceed to make brief reference to the arguments advanced by learned counsel for the parties on this question and record reasons for the same.

8 Mr.Aravind, learned counsel for the revenue, at the outset, invited our attention to the relevant provisionsin the Act and submitted that having regard to theexplanation inserted vide Finance Act, 2001 with effectfrom 1.4.2002 the AO was justified in initiatingproceedings under Section 201 of the Act. He submittedthat though the amendment to Section 2(24)(ix) wasbrought in force with effect from 1.4.2002, it beingclarificatory in nature, the word, “lottery” as it appears inSection 194B will have to be read to mean as explained inClause(ix). He submitted that the Scheme conducted by the respondent-assessee was a lottery and, therefore, the proceedings under Section 201 are maintainable. He submitted that the reliance placed upon the Circular No.390 dated 8.8.1984 is misplaced arid the said circular has no connection with the proviso to Section 194B. He submitted that the proviso was inserted for the first time by Finance Act, 1997 with effect from 1.6.97 whereas the circular was issued in 1984. He further submitted that even the responsibility imposed in the proviso to Section194B to ensure payment of tax before releasing thewinnings will have to be read to mean the responsibility to deduct the tax at source. In other words, he submitted that the AC had rightly initiated the proceedings under Section 201 against the assessee, who failed to ensure payment of tax before release of the winnings.

9. On the other hand, Mr.PercyPardiwala, learned Senior Advocate for the respondent-assessee, at the outset, submitted that the Schemes conducted by the respondent cannot be regarded as lottery as there was no price paid by the customer for participating in the chance to win a prize. In short, he submitted that prior to insertion of the definition of “Lottery” in the Act the Schemes that were conducted by the respondent would not qualify to be regarded as a lottery for the purpose of the Act. Mr.Pardiwala further submitted that the substantive part of Section 194B provides for an obligation to deduct tax from a payment of winnings in cash. If the prize in kind is to be paid, he submitted that the question of deducting any amount cannot arise as the term deduction postulates a reduction of an amount from a gross sum and payment of the net amount thereafter. It is for this reason, he submitted that the Central Board of Direct Taxes (for short the ‘CBDT’) in Circular No.390 dated 8.8.1984 had clarified that there is no obligation to deduct tax at source in the substantive provisions of Section 194B where the prize is given only in kind. It was then submitted that having regard to the plain language used in the proviso to Section 194B, the person who conducts the Scheme and distribute prizes in kind is not obliged to deduct tax at source. The obligation is only 10 see to it that recipient of the prize in kind pays the tax on his winning before the prize is released. In short, Mr.Pardiwala, submitted the initiation of proceedings under Sections 201 and 201(1A) of the Act was without jurisdiction and hence the orders passed by the AO and of AA have rightly been set aside by the Tribunal.
10. It is in this backdrop, we now proceed to examine the third question first and the submission that in any case there was no obligation to deduct tax at source since the prize given was wholly in kind. In other words, the person who conducts the Scheme, where winnings are wholly in kind, is not obliged to deduct any tax at source but is only obliged to ensure that the tax has been paid in respect of the winnings, before releasing the winnings.
11. We would like to have a close look at Section 194B and Section 201 of the Act. Section 201 has undergone changes from time to time and, for our purpose the provisions contained in this Section as it stood on 1.4.2002 is relevant. Before we deal with Section 201, it would be advantageous to reproduce Section 194C, as was in force during the Assessment Years 2001-02 and 2002-03, which reads thus:

“Winnings from lottery or crossword puzzle.

194B, 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.”

11.1. From bare perusal of this Section, it is clear that the person responsible for paying to any person any income by way of winnings from any lottery in an amount exceeding ten thousand rupees shall, at the time of payment thereof is obliged to deduct income-tax thereon at the rates in force. Proviso to this Section clarifies that in case where the winnings are wholly in kind or partly in cash or 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. From plain reading of the proviso, it is clear that it does not provide for deduction of tax at source where the winnings are wholly in kind and it simply puts a responsibility to ensure payment of tax, where winnings is wholly in kind. In the present case, admittedly, the winnings was wholly in kind.

12. We are concerned with Section 201 as it stood before its amendment by Finance Act, 2008, which reads thus:

Consequences of failure to deduct or pay.

“201. (1) If any such person [referred to in section 200] and in the cases referred to in Section 194, the principal officer and the company of which he is the principal officer does not deduct [the whole or any part of the tax] or after deducting fails to pay the tax as required by or under this Act, he or it shall, without prejudice to any other consequences which he or it may incur, be deemed to be an assessee in default in respect of the tax:

Provided that no penalty shall be charged under Section 221 from such person, principal officer or company unless the [Assessing] Officer is satisfied that such person or principal officer or company,, as the case may be has [without good and sufficient reasons] failed to deduct and pay the tax.”

12.1 A plain reading of Section 201 shows that if the person referred to therein does not deduct the whole or any part of the tax or after deducting, fails to pay the tax as required by or under the Act, he shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default in respect of the tax. The proviso to this Section states that no penalty shall be charged under Section 221 of the Act, unless the AO is satisfied that such person has without good or sufficient reasons failed to deduct and pay the tax.

13. We have already perused Section 194-B, in particular, the proviso thereto, it is clear that there could be winnings wholly in kind and in which case, the duty casts on the person responsible for paying is to ensure that tax has been paid in respect of the winnings before releasing it to the winner. The proviso makes it further clear that no duty of deduction of tax in respect of the winnings is cast on the person who is responsible for paying, where the winnings is wholly in kind. Undoubtedly, in that eventuality such person should ensure that the tax has been paid in respect of the winnings before releasing it to the winner. The combined reading of Section 194B and Section 201 would show that if any such person fails to “deduct” the whole or any part of the tax or after deducting, fails to pay the tax or required by or under this Act, without prejudice to any other consequences, which he may incur, be deemed to be an assessee in default in respect of the tax. In other words, the provisions contained in these sections do not cast any duty/responsibility to deduct the tax at source where the winnings is wholly in kind. If the winnings is wholly in kind, as a matter of fact, there cannot be any deduction of tax at source.
14. The word/term deduction, employed in this provisions, postulates a reduction or subtraction of an amount from a gross sum to be paid and payment of the net amount thereafter. Where the winnings is wholly in kind subtraction/reduction of any sum therefrom does not arise. The legislature, therefore, has cast duty/responsibility on such person to ensure that the tax is paid before the winnings is released. Thus, it is mandatory for the person who is responsible for paying any income by way of winnings wholly in kind, to ensure that tax has been paid in respect of the winnings, before it is released to the winner.
15. In short, the conjoint reading of Section 201 and Section 194B would show that the person responsible to deduct tax at source, if he either fails to deduct or after deducting, fails to pay, is deemed to be an assessee in default, in respect of the tax. However, where the payment of the winnings is wholly in kind and not in cash at all, the question of deduction does not arise and in that eventuality, the only responsibility, as casts under Section 194B, is to ensure that lax is paid by the winner of prize before the prize/winnings is released in his favour.
16. Having so observed, in our opinion, initiation of the proceedings under Section 201 against the assessee, was without jurisdiction. We observe, that the authorities under the Act in such situation would not render remediless against such person who fails to ensure that tax is paid before the winnings is released in favour of its winner. In the Act, there are two provisions, namely Sections 271C and 276B. Section 271C empowers the Joint Commissioner to levy any penalty where an assessee fails to deduct the whole or any part of the tax as required by or under the provisions of Chapter XVII-B or fails to discharge the obligation under the second proviso toSection 194-B. Similarly, Section 276B makes it an offence against the person who fails to pay to the credit of the Central Government the tax deducted at source as required by or under the provisions of Chapter XVII-B or the tax payable as required by or under the second proviso to Section 194B. Section 271C and Section 270B make reference to the second proviso to Section 194-B, i.e., the proviso as it stands today. The 1st proviso was deleted by the Finance Act, 1999, with effect from 01.04.2000. It is against this backdrop, we have no hesitation to hold thatthe proceedings against the person under section 201,such as the assessee in the present case, who fails to ensure payment of tax, as contemplated by proviso to Section 194B, before releasing the winnings, is not maintainable or the proceedings against such person is without jurisdiction.
17. In the circumstances, the third question is answered in favour of the assessee and against the revenue. In view of the answer to the third question, we refrain from addressing the 1st& 2nd question formulated by us and keep them open to be considered in appropriate case, as prayed for by learned counsel appearing for the parties

In the result, appeals filed by the revenue fail and dismissed as such.