SUMMARY OF CASE LAW
Merely because other clubs follow the very same accounting policy, it cannot be said to be beyond scrutiny or verification as to the correctness and completeness of the accounting practice followed, and there is any deficiency in such accounting practice or policy, it can very well be tinkered with howsoever universally followed such policy is; there is no proposition in law to force the revenue to accept the accounting system, merely because it is followed by other clubs, more so, when it is proved to be not disclosing the true and correct picture of the state of affairs of the assessee so as to enable the Assessing Officer to deduce the correct income of the assessee.
34. We have considered the rival submissions in the light of the material available on record and plethora of decisions relied upon by both the parties before us. Admitted facts of the case are that the assessee is engaged in the business of conducting horse races for over four decades. On account of inherent nature of its business, it receives amounts from innumerable customers who are public at large by way of bettings in respect of each racing event, and immediately on completion of each event/race, it is required to make winnings payments on the wining tickets. All the transactions, whether receipts in the form of bettings or payments in the form of winnings are by way of cash. Assessee claims to be following from the beginning, a consistent accounting policy, in consonance with such policy by other race clubs all over the country, by which-it credits to the Profit & Loss Account only the net collections and not gross collections, viz. collections exclusive of winnings payments and Betting Tax payable to the State Government, which alone according to it is its income by way of commission. This accounting policy consistently followed by the assessee all along has been accepted by the Revenue in the earlier years. In support of this accounting policy, assessee claims itself to be only an agent whose income is only commission and’not all the receipts. According to the assessee, it is only for the first time that the book results of the assessee have been rejected, and” additions have been made primarily by making an ad-hoc dis allowance out of winnings payments of less than. Rs.2,500 each on the ground of unverifiable nature of such expenditure, and dis allowance under S.40A(3) in respect of winnings payments exceeding ‘Rs.20,000″ each”. It Is;”””basically these” two dis allowances that call for our adjudication in these appeals.
35. Before going into the. merits of the above dis allowances made by the assessing officer, the moot question that requires to be considered is whether the Department is justified in disturbing the consistent accounting policy followed by the assessee from the beginning, in consonance with such policy followed by other race clubs in the country, though such policy was accepted by the Department itself in assessee’s own cases in earlier years. The learned Authorized Representative firstly questioned the action of the Revenue authorities in disturbing the book results-on the ground that a uniform accounting policy is being followed for the last several years and the same has never been disturbed by the Department even in earlier years. We do not find much force in this argument of the learned Authorized Representative. It is settled position of law that every assessment year is separate and need to be freshly examined and the principles of res judicata have no application to the proceedings under Income-tax Act. Further, as contended by the learned* Departmental Representative, the assessee has not produced any copy of the order of the Department, where the method of accounting and issue of income and expenditure of the club have been discussed and decided specifically. That being so, in the year under appeal, the revenue has specifically examined this issue with reference to the method of accounting followed by the assessee and found certain inherent deficiencies therein, on account of the assessee crediting, only the net receipts, viz. commission, and not gross receipts, to the Profit & Loss Account, on account of which according to him, correct income of the assessee cannot be deduced and therefore, certain dis allowances out of payments are warranted to arrive at the taxable income under the provisions of Income Tax Act. The contention of the Learned Authorized Representative that the uniform nature of accounting principles and principles of consistency, scrutiny assessments accepted over a period of time can be ignored for any year, only if some deviation is found and on account of the same the real taxable profits can not be arrived, cannot be accepted in this case because, as pointed out by the learned Departmental Representative, method of accounting and issue of income and expenditure of the assessee club have never been specifically examined, discussed and decided in any or the earlier years, and the same has been done for the first time in the year under appeal. For this very reason, the case-law relied upon by the learned. Authorized Representative, including the decision of Hon’ble Supreme Court in the case of Radhasoami Satsang Vs CIT [193 ITR 321] and in the case of CIT V/s Leader Valves Ltd [295 ITR 273] and Hon’ble Delhi High Court CIT V/s. IMeo Poly Pack P Ltd [245 ITR 492] are distinguishable and have no application to the facts of the present case. Similarly, even the contention of the assessee that its accounting practice is in consonance with similar practice followed by ail the other Race Clubs In the country, is no valid ground because the other Race Clubs are beyond the jurisdiction of the assessing officer and in any event, the assessing officer is empowered to and is duty bound to independently examine the correctness of the method of accounting followed by the assessee so as to arrive at the correct income assessable to tax.
36. The next aspect that requires to be considered is whether method of accounting followed by the assessee reflects the true income of the. Assessee and whether, the assessing officer is justified In disturbing the same on account of inherent deficiencies pointed out by him on account of crediting of net receipts and not gross receipts to the Profit & Loss Account.
37. First contention of the assessee in this behalf is that it is only an agent and commission alone, viz. net receipts, exclusive of winnings payments to the punters and Betting Tax payable to the Government, constitutes- its income and not the gross receipts. We do not find force in this contention of the assessee. The major income of any race club business is income from bettings and major expenditure is winning payments. All the punters are the customers of the assessee, from whom the assessee derives income from gate collections, royalty etc., which shows the nature of the business of the assessee. The theory of ‘fixed commission’ is not based on factual evidence, as in the case of the assessee, the net collection is the resultant surplus after netting the gross receipts with expenditure and this net collection is not fixed as claimed by the assessee, on account of various factors like unclaimed winning amounts, in this view of the matter, we find that the activities carried on by the assessee clearly reveal the assessee as a ‘complete business man’ and not as an ‘agent’. Further, the dub itself determines the commission to be retained out of the collections made in respect of different kinds of races and there is no agency relationship between the club and the punters. Amounts collected from the punters can not treated as amount received-on behalf of any principal. For such an argument as to the existence of agency relationship, there should be some third party in the arrangement so that we can say that element of agency, involved in these transaction. There is no third party in the whole arrangement There are only two parties, viz. punters and the assessee- club. Further, once, the race is over the payments arc made to. punters based on winning tickets, which is in tire nature of expenditure incurred by the assessee club. Ail the payments made by the club towards winning tickets attracted TDS provisions. In the case 6f Agency arrangements, payments made by the agent to the principal and payments made by the principal to the agent will not attract any. TDS provisions except in the case of agency commission, whereas the agency commission is treated as expenditure in the hand of payer. For all these reasons, the plea of the assessee that it is only an agent and that it is only net income, i.e. commission, that has to be taken to the Profit & Loss Account deserves to be rejected.
38. One more contention, more emphatically canvassed in support of crediting of only net income, viz. gross income exclusive of winnings payments to the punters and Betting Tax to the State Government, to the Profit & Loss Account is that winnings payments payable to punters and Betting Tax payable to the State Government have overriding title on the gross receipts of the assessee, and consequently, it is only the net receipts, which alone constitutes the income of the assessee has to be taken to the Profit & Loss Account. It is the contention of the assessee that the punters have overriding title over the winnings amounts, and so also the State Government has the overriding title over the Betting Tax, and as such these two items cannot form part of the income of the assessee, and consequently, there is no infirmity in the accounting- practice of crediting only the commission income, viz. the balancing figure out of gross receipts, after elimination of Betting Tax and Winning Payments from the gross receipts. This contention has a clinching effect and bearing not only on the action of the assessing officer in rejecting of the books of account maintained by the. assessee, and also on the decision of the Revenue authorities in treating the receipts from the punters which constitutes gross receipts, as the income of the assessee creditable to the Profit & Loss Account and the winnings payments to the punters as the expenditure of the assessee, and consequently on the dis allowances out of such winnings payments made by the assessing officer.
39. On careful consideration of the rival contentions on this aspect, we find no merit in the plea of the assessee with regard to overriding title. We agree with the Revenue authorities that so as to apply the concept of overriding title, charge over the income should arise before it reaches the coffers of the assessee. The principle of over-riding title has been explained by the Hon’ble Supreme Court in the case of CIT V/s. Sitaldas Tirathdas (supra), wherein it has been held in the penultimate para of the said decision on pages 374 and 375 of the Reports (41 ITR) as under-
” In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his -income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it- reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an Obligation to pay another a portion of one’s own income, which has been received and is since applied. The first is a case in which^ the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable”
40. , Similarly, in the case of Vazir Sultan Tobacco Co. Ltd. (supra), Hon’ble Andhra Pradesh High Court, rejected similar contention of the assessee based on overriding title in relation to Surtax under the Companies(Profits) Surtax Act, applying the principles laid down by the Apex Court in the case of CIT V/s. Sitaldas Tirathdas (supra) and following the decisions of Calcutta High Court in Molins of India Ltd. V/s. CIT(1983) 144 ITR 317(Cal), and Karnataka High Court in the case of CIT V/s. International Instruments (P) Ltd. (1983) 144 ITR 936, with the following observations at page 39 of the Reports (169 ITR)
“The contention that the doctrine of overriding title in favor of the State comes into play is, in our view, not tenable. The doctrine presupposes pre- existing liability. It is true that under the Companies (Profits) Surtax Act, 1964, the assessee is liable to tax in respect of chargeable profits in addition to the income-tax to which be is liable. Chargeable profits were not diverted in favour of the State even before they reached the hands of the assessee. In a larger sense it can be said that the interest of the State in collecting taxes overrides the interest of the assessee, but that is different from saying that the taxes are diverted to the State even before the profits on which the taxes are levied reached the hands of the assessee. The assumption regarding the applicability of the doctrine of overriding title of the State is totally unrealistic and factually incorrect. The liability to pay tax under the Companies (Profits) Surtax Act, 1964, would arise only after the computation of the total income was done under the Income-tax Act. The doctrine is applicable to cases where the assessee has alienated or assigned the sources of income, so that it is no longer his (vide Kanga and Palkhivala’s ” The Law and Practice of Income-tax “, Vol. I, Seventh edn., pp. 99-100)”
41. We may state at this juncture, that there is no quarrel with regard to the legal principles relating to the concept .of overriding title, but the question that remains to be answered is whether, there is an overriding charge for the winnings payments due to be paid to the successful punters and Betting Tax payable to the State Government. We find that in the instant case, the liability towards Betting Tax in the instant case is akin to the liability to surtax considered by the jurisdictional High Court in the case of Vazir Sultan Tobacco. Co. Ltd. (supra), and it arises only after the receipt of betting amounts from the printers. Similarly, the liability to pay the winnings amounts to the punters arises only after the results of the event are known. As such, no liability either towards winnings payments or betting tax arises prior to receipt of the bettings from the punters, and as principle of overriding title does not hold good in respect of these payments made by the assessee. Consequently, in the case on hand, it is the gross t receipts by way of betting that constitutes the income of the assessee, and the winnings payments and Betting Tax payments merely arise out of the obligations that are undertaken by the assessee in the course of its business, and the payments made in the discharge of those obligations merely amount to application of income, viz. gross receipts. We accordingly reject the contention of the assessee, based on the concept of overriding title, with regard to exclusion of the winning payments and Betting Tax from the gross income.
42. The next contention of the assessee is that the accounting practice followed by it has the sanction of the Accounting Standards enunciated by the Institute of Chartered Accountants of India. We find that as per the accounting standards notified by the Central Government to be followed by all the assesses following the mercantile system of accounting prescribes that accounting policies adopted by an assessee should be such that so as to represent a true and fair view of the state of affairs of the business, profession or vocation in the financial, statements prepared and presented on the basis of such accounting policies. In particular, the accounting treatment and presentation in financial statements of transactions and events should be governed by their substance and not merely by the legal form. Financial statements should disclose all material items, the knowledge of which might influence the decisions of the user of the financial statements. In the Case under consideration, the gross receipts of the club are shown in the annual report and not in the financial statements. Hence, one of the user of financial statement [income tax department] can not find all the material items in the financial statements, the knowledge which might influence the decisions of the department in the financial statement. The contention of the learned Authorized Representative that gross receipts are disclosed in the annual report, does not satisfy the user of the financial statements. Material items must be disclosed in the financial statements and not in the Annual Reports. The contention of the learned Authorized Representative that the revenue did not reject the books of accounts of the club and not disturbed the income shown by the club is not correct as the Department, effectively rejected the books and the accounting practice followed by it, by treating the gross receipts/collection s as receipts of the club and payments to the punters as expenditure. There is no warrant for any further rejection of books of accounts and disruption in the declared profit of the club.
43. In the circumstances, our considered view is that it is only the gross receipts/collection s have to be considered in the audited financial statements in computing the net income of the assessee. When the club collects the amount on account of sale of tickets, the same is in the nature of revenue receipts in the hands of club which is conducting the race. As per Accounting Standard 9 titled ‘Revenue Recognition’ notified by the Institute of Chartered Accountants of India, The meaning of the term ‘Revenue’ is defined as ‘the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of ah enterprise from the sate of goods, from the rendering of services, and from the use by others of enterprise resources yielding interest, royalties and dividends. Revenue is measured by the charges made to customers or clients for goods supplied and services rendered to them and by the charges and rewards arising from the use of resources by them. In an agency relationship, the revenue is the amount of commission and not the gross inflow of cash, receivables or other consideration. ‘ Thus, it is clear from the above definition that it is the gross inflow of cash that needs to be taken as the income of an assessee, except in the case of agency relationship. Since we have already held above that there is no agency relationship between the punters and the club, the entire betting amounts received by the assessee from the punters, which is the gross inflow of cash which needs to be treated as the income of the assessee.
44. As per the Accounting Standard 1 notified by the Institute of Chartered Accountants of India, titled–
“Disclosure of Accounting Policies’ is significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed. The disclosure of the significant accounting policies as such should be form part of the financial statements and the significant accounting policies should normally’ be disclosed in one place. In the 33rd Annual report submitted by the Hyderabad Race Glub for the year 2003-04, we could not find the disclosure of this significant accounting policy in respect of revenue recognition of the club. Even Revenue Recognition is not explained anywhere in the audited financial statements.
45. We-do-not find any merit in the contention of the learned Authorized Representative that all the eight race clubs in the country follows the same system of accounting the receipts. Merely because other clubs follow the very same accounting policy, it cannot be said to be beyond scrutiny or verification as to the correctness and completeness of the accounting practice followed, and there is any deficiency in such accounting practice or policy, it can very well be tinkered with how so far universally followed such policy is. There is no proposition in law to force the revenue to accept the accounting system, merely because it is followed by others clubs, more so, when it is proved to be not disclosing the true and correct picture of the state of t affairs of the assessee so as to enable the assessing officer to deduce the correct income of the assessee.
46. As per S.194BB, the club is responsible, before paying to any person any income by way of winnings from any horse race in an amount exceeding Rs.2500 shall, at the time of payment thereof, to deduct income tax thereon at the rates in force; In the case under consideration, the undisputed fact is that the assessee deducted the income tax [TDS] from the winning payments exceeding Rs.2500. By doing so, the assessee has admitted the winnings payments as its expenditure. Hence, the assessee is required to show all these payments In their financial statements. When the payments are to be shown in the financial statements, obviously, the gross receipts needs to be taken as the income of the assessee and then deduct the winning payments and taxes, other expenditure and net resultant figure shall be the net Income of the assessee.
47. For the foregoing reasons, we have no hesitation in holding that the gross collections made by the club on account of conducting the races have to be considered as revenue receipts against which the actual payments made to the punters and the betting tax have to be considered as expenditure. The undisputed fact is that the gross collections and winning payments are not reflected in the audited income and expenditure account. That being so, the assessing officer is justified in rejecting the book results, while making the assessment.