TMI Blog2004 (9) TMI 72X X X X Extracts X X X X X X X X Extracts X X X X ..... here the Income-tax Act, 1961, was in force notwithstanding that it had accrued or arisen to him at a place where the Act of 1961 was not in force even in respect of income accruing to him without taxable territory - Both questions are answered in affirmative - - - - - Dated:- 10-9-2004 - Judge(s) : RAJESH BALIA., SHASHI KANT SHARMA. JUDGMENT The judgment of the court was delivered by RAJESH BALIA J.- This reference is made under section 256(1) of the Income-tax Act, 1961, by the Income-tax Appellate Tribunal, Jaipur. It relates to the assessment year 1986-87. The following questions have been referred to this court for its decision: 1. Whether, on the facts and in the circumstances of the case, the hon'ble Tribunal was justified in holding that income from Sikkim State lottery is taxable under the Income-tax Act, 1961? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that deduction under section 80TT is applicable on the net winning amount received by the assessee and not on the gross amount of the winning prize? The facts found by the Tribunal are that the assessee is a resident Indian citizen earning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the aforesaid provisions, in the Constitution under article 371F, it was contended that when the lottery was announced and the prize money was distributed, the Income-tax Act, 1961 was not applicable, proprio vigore to the Sikkim State, which too was a part of India. Its operation in Sikkim needed that the President issue the notification in exercise of his power under clause (n) of article 371F. The notification extending the Income-tax Act, 1961 to the Sikkim State had been issued only on November 7, 1988 under article 371F(n) after the expiry of the assessment year in question. By another notification dated February 23, 1989, it was declared that the Income-tax Act, 1961, was to come into force in the State of Sikkim in relation to the previous year commencing on April 1, 1989, which made the provisions of the Income-tax Act, 1961, applicable to the State of Sikkim, with effect from the assessment year 1990-91. Thus, for the assessment year in question, i.e., 1986-87, the previous year relevant to which ended on March 31, 1986 during which the assessee had won the lottery, the Income-tax Act, 1961 was not extended to the State of Sikkim. Therefore, any income earned, accrued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a by or on behalf of such person. It held that under section 5(1) of the Income-tax Act, 1961, the charge of tax net is wide enough to include all income received or deemed to be received, accrued or arisen or deemed to have accrued or arisen to a person in India or outside India. In the written submission made by the assessee, it has been stated that the amount was remitted to the assessee at Jaipur by draft at the request of the assessee and it would not make any change that instead of paying cash, the amount has been remitted by drafts and that drafts had been encashed at Jaipur. Since the income in question had arisen in Sikkim, outside the operative field of the Income-tax Act, 1961, but within India, the income accruing or arising in India in the territory beyond the applicability of the Act of 1961, cannot be taxed on the basis of its place of accrual. In this connection, it was also contended in the written submission that had the amount been received by cheque or cash by the assessee and credited to his bank account at Gangtok and thereafter been brought to India, the receipts of winnings were to be considered in Sikkim-a non-taxable territory. Raising this poser, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tter, (2) by the same Government or authority, (3) during the same taxing period, and (4) for the same purpose. There is no double taxation, strictly speaking says Cooley, where '(a) the taxes are imposed by different States, (b) one of the impositions is not a tax, (c) one tax is against property and the other is not a property tax, or (d) the double taxation is indirect rather than direct. On this premise, the court further concluded: Where more than one legislative authority, such as the State Legislature and a local or municipal body, possess the power to levy a tax, there is nothing in the Constitution to prevent the same person or property being subject to both the State and municipal taxation or the same Legislature exercising its power twice for different purposes. In coming to this conclusion, the court referred to observations made in its earlier decision in Avinder Singh v. State of Punjab [1979] 1 SCR 845; AIR 1979 SC 321, holding that: there is nothing in article 265 of the Constitution from which one can spin out, the constitutional vice called double taxation (Bad economics may be good law and vice versa) .... Some undeserving contentions die hard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he respective enactment. The acceptance of the contentions of the assessee on the anvil of double 26 taxation would result in yielding to two different conclusions about the exigibility of income in question to tax, not on the basis of applicability of law, but on the anvil whether the income in question was taxable in Sikkim or not. If the winnings from lottery were not to be taxed in Sikkim State, on the principle of double taxation, the income will be exigible to tax under the Income-tax Act, 1961. This result destroys the premise that the Income-tax Act, 1961 cannot have extra territorial operation in respect of income accruing or arising in Sikkim, leaving apart the taxability on the basis of receipt. The succour sought under Explanation 2 to section 5 in this regard has rightly been rejected by the Tribunal. Explanation 2 indicates that if an income has been taxed earlier on accrual basis in the hands of a person, the same person cannot be taxed again in respect of the same income on its receipt. In other words, a person can be taxed only once in respect of the income whether on accrual basis or on receipt basis. It has relevance with the method of accounting employed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n; ... Section 1(2) of the Income-tax Act, read with article 371F(k) and (n) has the effect that the Income-tax Act, 1961 enacted with effect from April 1, 1962, before Sikkim became a State of India, had territorial operation for whole of India. When Sikkim became a State of India with effect from April 26, 1975, to take care of special circumstances Emerging therefrom, article 371F was inserted in the Constitution of India vide the Constitution (Thirty-sixth Amendment) Act, 1975, with effect from April 26, 1975. The combined effect of clauses (h) and (n) was that laws in force in territories comprised in the State of Sikkim immediately before April 26, 1975, continued to remain in force in the said territory and until the President by the above-referred notifications issued under article 371F(n) extended the Income-tax Act, 1961 to Sikkim with effect from the assessment year 1990 relating to the previous year commencing from April 1, 1989, the Act of 1961 which was in force in all other States of India was not extended to the State of Sikkim. Thus, the effect of these provisions was that the Income-tax Act, 1961 an enactment by Parliament with effect from April 26, 1975, was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e scope of total income of any previous year vis-a-vis, three class of persons, (1) the resident; (2) a person not ordinarily resident in India; (3) a person who is a non-resident. The scope of total income in respect of all the three classified persons varies to some extent, (i) In the case of resident, who does not fall in the category of resident but not ordinarily resident of India as defined under sub-section (6) of section 6, the scope of total income is widest. In his case wherever the income accrues or arises to him, whether in India or outside India, as well as every income which is received or deemed to be received in India during the previous year is included in his total income to be computed for the purposes of tax in accordance with the provisions of the Act of 1961. In the case of a resident but not ordinary resident of India, while the income which accrues or arises to him in India as well as any income which is received or deemed to be received in India by him in such year or on his behalf such income, which is liable to be taxed, is included in the total income of such assessee in its entirety. However, in respect of income which accrues or arises to any, no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he reach of the Income-tax Act, 1961, extra-territorial both in respect of the subject-matter, i.e., total income to be taxed and the subject, i.e., person to be subjected to tax. It operates extra-territorially in respect of any income which accrues or arises outside the operative territorial limit of the Act as well as in respect of a person who resides outside the extent of the Act of 1961. Any income which accrues or arises to any person outside India, i.e., to say beyond the operative territory of the Act of 1961 is liable to be included within the total income to be computed for the purpose of levy without qualification in the case of a resident and with certain qualification in the case of not ordinarily resident irrespective of the fact whether it is received in the taxable territory or not. In the case of a non-resident also such income becomes taxable if it is received by him or on his behalf in India. Likewise, the non-resident who does not have a residential connection with India and lives beyond the territory of India, has still been made subject to charge in respect of such income which accrues or arises to him in India or which is received by him in India. Mere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in a foreign State, it can none the less, be enforced by the courts of the enacting State to the degree that is permissible with the machinery available to them. The law will not be regarded by such courts as invalid on the ground of such extra-territoriality or ineffectiveness. Further, stating the course in what manner, the court can give effect to such provisions and how such provisions operate, was succinctly stated thus: It will be noted that article 245(1) empowers Parliament to enact laws for the whole or any part of the territory of India. The provocation for the law must be found within India itself. Such a law may have extra-territorial operation in order to subserve the object and that object must be related to something in India. It is inconceivable that a law should be made by Parliament in India which has no relationship with anything in India. The only question then is whether the ingredients, in terms of the impugned provision, indicate a nexus. Along with the aforesaid principle, one significant point is to be noticed that article 245(1) makes it clear that law made by Parliament can be either for the whole of India or may be for part of the territory of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would have been subject to tax under the Income-tax Act, 1961 in the hands of the concerned person. It is also not in dispute that winnings from lotteries in such event in its entirety would have been included in the computation of total income in the hands of a resident in India or in the hands of any other person if the same were received in India. The question then arises whether Sikkim becoming part of Indian territory had brought about any change in the situation and takes away the income accrued or arisen in Sikkim but not received in the territorial extent of the Income-tax Act, 1961, out of the reach of the Income-tax Act, 1961 even in the case of a person who is otherwise subject to income-tax, is a resident in the taxable territory. When Sikkim became part of the Indian territory because of clause (k) of non obstante article 371F inserted in the Constitution, the laws operative in the State of Sikkim were to remain in force in territories constituting the State of Sikkim until repealed or amended by any competent Legislature. Laws or enactments, which were in force in any other State in India, could be extended to the territory of Sikkim by notification issued in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in accordance with the provisions of the Act whether it accrued or arose beyond the territory to which it was extending. This would be irrespective of the fact whether he receives such income within the taxable territories after it had accrued or arisen to him. If the income is received in India at a place to which the Act of 1961 is in force still it would be included in the total income of the recipient person, irrespective of his resident status. The difference may arise in the case of income accruing or arising in the territory of Sikkim State where the Act of 1961 was not in force, in the case of a resident but not ordinarily resident or a non-resident. Where the subject-matter and subject both are beyond the territory where the Act extends, it cannot be enforced. Since we are not concerned here with the person who is either not ordinarily resident or a non-resident, but undisputably is a resident and ordinary resident in India, at a place where the Act of 1961 was in force, the question has to be decided on that touchstone. There being no dispute that winning of lotteries is otherwise an income which is liable to be included in the total income of the assessee and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xtra-territorial operation, a provision defining the extent of its operation in terms of the territorial operation refers to taxable territories within which the extra-territorial provisions are enforceable. In the context of the specific provisions made under article 371F, which has to be read together with the existing provisions of the Act of 1961 brings about the same result making the Act inapplicable to the State of Sikkim, until notification under clause (n) of article 371F was issued. In the context the expressions accrued or arising in India or received or deemed to be received in India have to be construed vis- -vis the income arising in the territory of India to which the Act is applicable and to any area to which the Act does not extend, the extra-territorial operation of the Act brings about the same result. That being the position, we have no hesitation in coming to the conclusion that the Tribunal was right in holding that income from winnings of lotteries declared by the State of Sikkim during the assessment year in question was liable to be included in the hands of the assessee as resident of India within the State of Rajasthan where the Income-tax Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AIR 1994 SC 2342, to hold that the Income-tax Manual, 1948 in force in Sikkim was a law in force in the territories of Sikkim immediately before the appointed date as per article 371F(k) and was to remain in force until repealed or modified by the competent Legislature. By virtue of clause (n), an Indian Act or enactment specified in the President's notification extends to Sikkim, superseding the constitutional law even without any repeal of that Sikkim law. So far as the question of the Income-tax Act, 1961 being extended to the State of Sikkim only from the assessment year 1990-91 (previous year 1989-90) only, there may not be any difficulty. However, it appears that attention of the hon'ble court was not invited to the provisions of sections 4, 5 and 6 of the Income-tax Act laying down the scope of total income liable to be taxed under section 4 of the Act of 1961 in the hands of any person, which gives the Act extra-territorial operation, and which in our opinion, has vital bearing on the decision of the question referred to. We have noticed above that the Indian Income-tax Act, 1922 as well as the Income-tax Act, 1961 are legislations that have extra-territori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome-tax Act, 1961, it was provided that income received or deemed to be received in the taxable territory shall be included in the total income of any person from whichever source it is derived. The assessee has contended that since the cheques were delivered to the assessee in Oudh, the income was received in Oudh, where the cheques were delivered to him. The Assessing Officer had taxed the same on the basis of its receipt in Bombay where the cheques were actually encashed. The High Court held against the assessee though it held that if the assessee had requested the Government to remit the payment, posting of cheques at Delhi would have been deemed to be delivery of cheques to the assessee at Delhi. However, the High Court held that there is no finding by the Tribunal on the point whether the assessee had ever requested the Government to send the cheques by post. The Supreme Court observed on the question of law that: there can be no doubt that as between the sender and the addressee, it is the request of the addressee that the cheque be sent by post, that makes the post office the agent of the addressee, ... if there be no such request express or implied; then the deliver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eipt is complete but the place of delivery of cheque or draft is the place where the income embedded in, is received by the recipient. Where cheques or drafts are sent by post or courier it depends on the facts of the case whether the cheques or drafts were delivered to the post office as an agent of the sender or as an agent of the recipient. There is no dispute that the drafts in the present case, were sent to the assessee from Sikkim to Jaipur and the same were delivered to him at Jaipur. In ordinary course delivery of drafts in Jaipur would constitute receipt of the same by the assessee. The fact whether the drafts were delivered to the post office depends on the fact whether the assessee had made a request to remit the payments by post or other method. The burden to prove whether there exists a contract to that effect expressed or implied is on him who asserts such fact. No presumption can be drawn in the absence of any such case put forward and material on record brought before the concerned authority about existence of such contract. Ordinarily the presumption, though rebuttable, is on the person who claims such fact to exist. As a result of the aforesaid discussion, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... find out the answer to the question raised. The assessee's contention that the entire winnings from the lottery was ₹ 20 lakhs which was included in his gross total income as per section 5 of the Income-tax Act 1961. Any deduction made therefrom to find out net taxable income of the assessee cannot be taken into consideration, for the purpose of determining the deduction under section 80TT. Since expenses incurred for earning the income from lotteries, which include the commission paid to agents, are to be deducted from the gross total income for finding taxable income, after the income is so computed in accordance with the provision of the Income-tax Act, it remains a net income. Deduction under section 80TT is not referable to net income, but is referable to gross total income. However, the contention omits to notice the provisions of sections 80B and 80AB which are clear in this regard and read as under: 80B. Definitions.- In this Chapter- ... (5) 'gross total income' means the total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter. 80AB. Deductions to be made with reference to the inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Sikkim Government is considered as part of its expenses for running the lottery of the Sikkim Government, reducing the amount which is actually won by the lottery winner or is considered to be expenses incurred by the Sikkim Government on behalf of the assessee. Such amount in the case of the assessee, as winning from lottery will remain the same. It is considered that rupees two lakhs were the expenses incurred by the Sikkim Government before making the payment of lottery amount to the assessee, the assessee's winning from lottery will only be ₹ 18 lakhs. If the amount of ₹ 2 lakhs is considered as an expense incurred by the assessee for carrying income from winning of lottery, and/was to be allowed as deduction under section 37, the amount included in the gross total income for the purposes of section 80TT read with section 80AB makes a little difference so far as the amount included in his gross total income of the assessee by way of winning from lottery is concerned. We are fortified in our aforesaid conclusion by a Bench decision of this court in CIT v. Chokshi Contacts P. Ltd. [2001] 251 ITR 587. The Division Bench of this court in CIT v. Chokshi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been raised before us in respect of like expression in section 80TT where gross total income of an assessee ... includes income from winning from lotteries , the court said: What is included in the gross total income in such a case is a particular quantum of income belonging to the specified category. Therefore, the words 'such income by way of dividends' must be referable not only to the category of income included in the gross total income, but also to the quantum of the income so included. It is obvious as a matter of plain grammar, that the words 'such income by way of dividends' must have reference to the income by way of dividends mentioned earlier and that would be income by way of dividends from a domestic company which is included in the gross total income. Consequently, in order to determine what is 'such income by way of dividends', we have to ask the question: what is the income by way of dividends from a domestic company included in the gross total income and that would obviously be the income by way of dividends computed in accordance with the provisions of the Act .... Otherwise we would not be giving to the word 'such' its ful ..... X X X X Extracts X X X X X X X X Extracts X X X X
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