Pooja Marketing Vs. Pr. CIT (ITAT Mumbai)
In the present case before us, the assessee had offered its entire income including income by way of winnings from lotteries on unsold lottery tickets, as income chargeable under the head ―Profits and gains of business or profession“. However, the ld PCIT had sought to treat the income by way of winnings from lotteries as separately assessable under the head “Income from Other Sources”. We find that the net profit for the year is Rs 94,38,441/- was arrived at by the assessee after considering the prizes from unsold lottery tickets amounting to Rs 41,86,55,718/-. If these winnings are to be assessed as ―Income from Other Sources” u/s 56(2)(ib) of the Act, then the net result of the business of distributing lottery tickets would be a net loss of Rs 40,86,75,277/- as worked out elsewhere in this order.
We find lot of force in the argument advanced by the ld AR on the point that there is no bar on set-off of loss provided in section 115BB of the Act as stated supra. Section 115BB of the Act talks only about taxability of such winnings at a special rate of 30%. Hence only the net winnings is taxable at 30%. The net winnings is to be determined after setting off the business loss of Rs 40.86 crores as worked out above with the income from other sources. We find that the ld AR had not disputed the rate of taxability of winning from lotteries in terms of section 115BB of the Act. We find that even if the prize winnings from unsold lottery tickets is sought to be taxed under the head “Income from Other Sources” as pointed out by the ld PCIT in his section 263 order, the business loss of Rs 40.86 crores is still required to be set off with the prize winnings from unsold lottery tickets u/s 71 of the Act and the net income thereon would be liable for tax at special rate of 30% in terms of section 115BB of the Act. As long as the tax rate under normal provisions of the Act and tax rate prescribed u/s 115BB of the Act are same, the entire issue becomes revenue and tax neutral. Hence there could be no prejudice that could be caused to the interest of the revenue for the Asst Year 2014-15 even if the order of the ld AO is found to be erroneous. We find that the Hon‘ble Supreme Court in the case of Malabar Industrial Co. Ltd reported in 243 ITR 83 (SC) had categorically held that for the ld PCIT to invoke revision jurisdiction u/s 263 of the Act, the twin conditions should be cumulatively satisfied i.e. the order passed by the ld AO should be erroneous and it should be prejudicial to the interest of the revenue. In the instant case, since the entire issue is revenue and tax neutral, the twin conditions stipulated in section 263 of the Act are not satisfied and hence the section 263 order passed by the ld PCIT is eligible to be quashed thereon.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
PER M. BALAGANESH (A.M):
This appeal in ITA No.2596/Mum/2019 for A.Y.2014-15 preferred by the order against the revision order of Pr. Commissioner of Income Tax-31, Mumbai u/s.263 of the Act dated 30/03/2019 for the A.Y.2014-15.
2. We find that though the assessee had raised several grounds of appeal before us, the core issues to be decided are as under:-
a) Whether the ld PCIT was justified in invoking revisionary jurisdiction u/s 263 of the Act in the facts and circumstances of the case.
b) Whether the ld PCIT was justified in directing the ld AO to compute the winnings from lottery not as business income but as income within the meaning of section 115BB of the Act in the facts and circumstances of the case. The interconnected issue involved therein is as to whether the assessee firm is entitled for set off of business loss with the income determined u/s 115BB of the Act in the facts and circumstances of the case.
c) Whether the ld PCIT was justified in directing the ld AO to examine the allowability of expenses within the meaning of section 58(4) of the Act in the facts and circumstances of the case.
3. We have heard the rival submissions and perused the materials available on record. At the outset, we would like to place on record, the elaborate arguments advanced by the counsels of both the sides with regard to the impugned issues in dispute. This Bench deems it fit to appreciate the enormous efforts taken by the counsels for better representation of the issues in dispute before us by appraising the business model and placing all the facts before us. It would be relevant to discuss the business model in which the assessee is operating which sets out the primary facts of the appeal also. We find that the assessee is carrying on the business as a “Sole State Level Distributor” for distributing lottery tickets in the State of Maharashtra since 20.11.2012. The assessee is considered as a “promoter” in the State of Maharashtra, in respect of the lottery tickets organised by the State of Sikkim, the State of Mizoram and the State of Nagaland and accordingly, is registered under the Maharashtra Tax on Lotteries Act, 2006.
3.1. The Organising States organize lotteries in accordance with the Lotteries (Regulations) Act, 1998 read with the Lotteries (Regulations) Rules, 2010. The lotteries and its draws are wholly under the control of the Organizing State. In respect of each lottery, the Organising State is required to announce, amongst other things, the following details in advance, by way of a notification in the Official Gazette:
a. The name of lottery;
b. Prices of the lottery tickets;
c. Gross value of the tickets printed;
d. Names of the distributors or selling agents with their addresses and contact information;
e. Prize structure;
f. Amount offered as prize money;.,
All the informations are printed in ticket itself.
3.2. The draws of lottery and prize monies in the lottery scheme, are fixed by the Organising State. Legislations mandate a minimum percentage of entire draw should be distributed as a prize money to the winner of lottery tickets and is pre-decided. Generally the prize money offered in a lottery scheme is 65% of size of the lottery scheme. In certain schemes, this prize money can also be 50% of size of the lottery scheme.
3.3. The amount collected on sale of lottery tickets has two components: (i) Contribution towards Prize Fund (“CPF”) and (ii) Cost for Right of Participation in the Draw (“CPD”). The prize monies in respect of winning lottery tickets is paid out of the CPF. CPD represents the cost of organising the lottery and margin of the Organising State and Main distributor.
3.4. In order to sell lottery tickets to the end customer, the Organising State enters into an agreement with the “Main Distributor” who acts as National Distributor for sale of lotteries in entire India. The Organising State distributes the lottery tickets to the Main distributor, at an agreed price rate. As discussed above, the sale price to Main distributor would comprise of CPF and CPD. The Main Distributor then appoints “Area Distributors” who is responsible for sale of lottery tickets in a designated area. The area distributor is governed by the terms and conditions agreed by and between the Organizing State and the Main Distributors. The Area Distributor purchases lottery tickets from the Main Distributor for sale / distribution, in their designated area.
3.5. Generally, the unsold lottery tickets purchased by the Area Distributor like the assessee, are not taken back by the Main Distributor. In other words, in the event of lottery tickets remaining unsold with the Area Distributor, these unsold lottery tickets are not taken back by the Main Distributor. In such circumstances, the purchase price paid by the Area Distributor to the extent of unsold lottery tickets, is a loss. However, the losses of Area distributor are mitigated by prize monies attributed to prize winning tickets out of unsold lottery tickets lying with it.
3.6. The Area Distributor then appoints “Stockists” who further sell lottery tickets to the “Retailers”. Lastly, the Retailers sell lottery tickets to the public who participate in the draws of lottery. At all levels, the portion of price towards CPF would remain the same and only the CPD portion changes.
3.7. The above business model can be further understood through the following example:-
