TMI Blog2008 (9) TMI 1024X X X X Extracts X X X X X X X X Extracts X X X X ..... of assessment, the assessing officer noted that the gross receipts of the assessee-club were Rs. 129.54 crores. Out of this Rs. 12.72 crores was paid towards betting tax and Rs. 129.54 crores was paid towards winnings on Horse Races, and it was only the balance receipts of Rs. 29.40 crores that were credited to the Profit Loss Account as Club's commission. The assessing officer further noticed that payments towards winnings are made in cash. Since even payments exceeding Rs. 20,000 each were also made by way of cash, the assessing officer noted that such payments, aggregating to Rs. 2,33,04,992, were made in contravention of the provisions of Section 40A(3) of the Income tax Act, 1961(the Act). The assessing officer accordingly issued a show-cause notice to the assessee. 4. In response, assessee made elaborate submissions contending inter-alia- (a) That the assessee conducts Horse Races under the provisions of Andhra Pradesh Gaming Act, 1974, under which the Club collects, solicits the bets and distributes the winnings, with government permission on a day on which the horse race is to be run; (b) That a race is completed in all respects only after completing the proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill last race is completed, cheque payments would not be accepted and to this extent, it is to be treated as if no banking facilities are available to the Punters at that point of time. (iv) Object of Section 40A(3) was to check tax avoidance. Since there is no tax avoidance in the instant case, the provisions of Section 40A(3) are not applicable. (v) Summing up these reasons, it was submitted that if business expediency and other relevant factors are taken into account, provisions of Section 40A(3) cannot be invoked. 6. The assessing officer rejected the plea of the assessee against splitting of the game, etc., against the provisions of the Gaming Act, etc. observing that provisions of Income tax Act, 1961 are as much applicable to the assessee-club as the provisions of the Gaming Act, 1974. He also rejected the contention of the assessee that receipts and payments do not form income and expenditure of the Club, holding that the receipts and payments are directly related to the computation of income of the Club. Consequently, he also held that when the payments are directly related to the computation of total income of the party, provisions of Section 40A(3) automatically ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A) while restricting the disallowance out of winnings of less than Rs. 2,500 aggregating to Rs. 120.30 crores, to 10% as against 15% made by the assessing officer, sustained disallowance of Rs. 12.03 crores on account of unverifiable expenditure. He however, confirmed the other two disallowances of Rs. 46,60,998 made in terms of Section 40A(3) and disallowance on account of excess depreciation amounting to Rs. 16,362 made by the assessing officer. 10. Aggrieved by the relief granted by the learned CIT(A) out of the ad-hoc disallowance made by the assessing officer, Revenue preferred its appeal ITA No. 972/Hyd/08, assessee preferred its appeal ITA No. 212/Hyd/08 aggrieved by. the additions sustained by the CIT(A). 11. Though assessee has raised elaborate grounds of appeal, numbering 23 and running into four typed pages, as against sole effective ground raised by the Revenue, the issues that arise for our consideration in these appeals fall under a narrow compass. The first and foremost issue that arises for consideration in this appeal is whether it is the gross collections of the assessee that should have been taken by the assessee to the Profit Loss Account and that sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hra Pradesh. Thus, the payment of winning tickets which arises out of the collections made from the punters are interlinked with a substantial nexus and thus the winning tickets are a direct charge against the collections. Thus, there is an overriding title against collection. No part of the receipts or the payments for winning tickets are either income or expenditure of the assessee-club. The winning tickets are paid on the same day without any delay which are certified and audited by a Chartered Accountant. Thus, it is the claim of the Authorised Representative that except for the commission, no other receipts arising out of the aforesaid transactions are the income of the assessee-club. Apart from the above source of income to the club, some royalty received from other centers for Hyderabad races, members' subscriptions and other receipts also constitute the income of the assessee. Thus, right from 1963 till date, the assessee-club maintained the same method of accounting, which is followed consistently. Explaining the detailed method of accounting entries followed by the assessee-club, it is submitted that all collection are credited in ledgers, pool-wise, separately and wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stency, in support of these contentions, the learned Authorised Representative placed reliance on the following decisions- (a) DIT (International Taxation) v. Ravva Oil (Singapore) P. Ltd. (b) CWT v. Allied Finance P. Ltd. (c) DIT v. Lovely Bal Shiksha Parishad (d) DIT (Exemptions) v. Escorts Cardiac Diseases Hospital Society (e) CIT v. Lagan Kala Upvan (f) Samaj Kalyan Parishad v. ITO (g) ITO v. Tejmalbhai and Co. (h) CIT v. Bilahari Investments P. Ltd. 15. As for the ad-hoc disallowance made out of payments of winnings on racing of less than Rs. 2,500, the learned Authorised Representative submitted that actually, total payments of winnings of amounts of less than Rs. 2,500 on various events is Rs. 120.30 crores. An ad-hoc disallowance has been made @ 15% of Rs. 120.30 crores, which worked out to Rs. 18,04,50,000, on the ground that the data submitted is beyond scope of verification. Though the CIT(A) sustained disallowance to the extent of 10% giving relief of 5% to the assessee, the very disallowance made by the assessing officer is not at all justified. Explaining the entire computerized activity relating to issue of computerized tickets, computerise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... winner and the balancing figure is not the winning tickets payments as understood by the Revenue. On the contrary, he explained the accounting procedure in the following manner- (a) First receipts from Punters arising from Sale of Race Tickets are collected; (b) Payment of Winning Tickets; (c) Earning of Commission to the assessee-club and Betting Tax; (d) Payment of Betting Tax by the assessee-club. Since the receipts which give rise to payment of winning tickets above Rs. 20,000 are never the income of the assessee, and since it is a collection made for payment to winners and the balance represents the commission of the assessee-club and amounts of betting tax payable to State Government, according to the learned Authorised Representative, the provisions of Section 40A(3) are not applicable. 18. The learned Authorised Representative also submitted that any disallowance in terms of Section 40A(3) in the case of the assessee would give rise to an anomalous situation. Explaining the matter further, he submitted that while the assessee has already deducted TDS at 33.66%, if the Revenue again disallows the payment to punters under Section 40A(3) in the hands of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer was not justified in disturbing the books of account maintained by the assessee maintained by the assessee in accordance with the principles of accounting consistently and uniformly followed by the assessees in this line of business across the country, over the years, without pointing any specific defects relevant for the years under appeal, in the case of the assessee, and making ad-hoc disallowance out of winnings payments of less than Rs. 2,500 on the grounds of unverifiable nature of the same, and further disallowance in terms of Section 40A(3) in respect of winnings payments to punters exceeding Rs. 20,000 each. 21. The learned Departmental Representative on the other hand, strongly supporting the orders of the Revenue authorities, submitted that the major income of any race club business is income from 'bettings' and major expenditure is 'winning payments'. However, the assessee has been showing only net of receipts, viz. after considering 'winnings' and 'tax', as commission income. The assessee should have taken into consideration the entire receipts, viz. gross receipts as the starting point in the computation of income. Consistency ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the perpetual commission of the same mistake year after year because it was to his advantage. In any event, every assessment year is unique and need to be examined afresh and the principles of res judicata have no application to the income tax proceedings. 24. At this juncture, he submitted that 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. In this year, the assessing officer specifically examined these questions especially with regard to the method of accounting followed by the assessee and found the same to be inappropriate, as it would not be possible to deduce the correct income of the assessee from the same. Responding to contention of the assessee that the assessee has maintained records meticulously in-respect of all receipts and payments and no specific defects in the books of account maintained for the years under appeal, as per the system of accounting consistently followed by the assessee have been pointed out, the learned Departmental Representative submitted that the assessing officer submitted that the assessing offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... more than the commission income worked out on tickets sales because it includes gate collections, unclaimed prizes, royalty etc. Thus, the gross collections made by the assessee club on account of conduct of races have to be considered as revenue receipts chargeable to tax, against which actual payments made to be punters have to be considered as expenditure. In support of these contentions, reliance is placed on the following decisions- (a) Chowringhee Sales Bureau (b) Bijli Cotton Mills (P) Ltd. (c) Bazpur Cooperative Sugar Factory (d) Karam Chand Thapar and Ors. (e) Food Specialities Ltd. 54 ITD 352 (Del) (f) Harshvardhan Chemicals and Minerals 101 ITD 66 (Jodh) 27. With regard to the contention of the assessee as to the overriding charge of the payments due to punters, over the collections made, the learned Departmental Representative pleaded that the said contention is devoid of merit and has no legal basis. The concept of diversion of income by overriding title applies, according to him, only in a case where the income does not reach an assessee on account of some overriding legal charge/obligation and is diverted at source. In support of these contentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the exception provided under Rule 6DD(h) is basically for places which are not served by banks. Moreover, he pleaded, no urgency has been established by the assessee for the payments made to the punters on account of which the payments were required to be made in cash and the assessee also could not establish in any manner that the conditions prescribed in any of the present Clauses of Rule 6DD are fulfilled so as to take the payments made by the assessee outside the purview of Section 40A(3) of the Act. In support of these contentions with regard to disallowance under Section 40A(3), the learned Departmental Representative placed reliance on the following decisions- (a) S. Venkata Subba Rao v. CIT (b) Attar Singh Gurmukh Singh v. ITO (c) R.S. Nayyar v. JCIT (d) Jai Talkies v. ITO Our attention in this behalf, is also invited to pages 3811-12 of Vol. 2 of Commentary on Income-tax, by Sampath Iyengar (10th Edition), copies of which are filed at pages 103 to 104 of the Department's paper-book. 30. He further submitted that the present provisions of Section 40A(3) effective from 1.4.1996 are radically different from the earlier provisions contained in Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tances of payments and inherent problems connected with the nature of business of the assessee, learned Departmental Representative submitted that even though the number of prize winning tickets may be big, number of winners may not be high and the club could have certainly devised a mechanism to obtain details of payees regarding the payments actually made, and maintained proper evidence, which would establish the payments, viz. expenditure, actually having been made. Inviting our attention to page-4 of the assessment order for assessment year 2004-05, it was submitted that maintenance of details regarding cash transactions at different counters was found unsubstantiated as per mention in the daily report of 14.2.2004. Thus, he pointed out, the system of receipts and accounts followed by the assessee was definitely not perfect and reliable and it suffered from deficiencies. In view of this, he submitted, possibility of winners not taking payments in many cases and not reflecting the same in the system would always be there, and this would have impact on the overall profit of the club. In addition, there is a definite element of unverifiable nature of the payments claimed. Hence, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epted by the Department itself in assessee's own cases in earlier years. The learned Authorised 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 Authorised 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overnment, 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 club 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... creditable to the Profit Loss Account and the winnings payments to the punters as the expenditure of the assessee, and consequently on the disallowances 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 punters. 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 such the principle of overriding title does not hold good in respect of these payments made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vely rejected the books and the accounting practice followed by it, by treating the gross receipts/collections 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/collections 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 an enterprise from the sale 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . that it has been incurred wholly and exclusively for the purposes of the business or profession. For this purpose, assessee has to produce necessary evidence, in the form of bills and vouchers, to the satisfaction of the assessing officer. 51. Admittedly, the assessee is maintaining the entire activity is computerized environment. The entire computerized activity relating to issue of computerized tickets, computerized winning tickets and the computerized financial entries is explained in the page 37 to 39 of the paper book furnished by the learned Authorised Representative for the assessee before us. As soon as a punter purchases a racing ticket, window terminal printout, the ticket and ticket details are transmitted to the betting server. At the end of the day, after winning amounts are paid, the entire data gets copied into a floppy, for uploading the same into the accounting server. From the accounting server, the main cash book is generated. At the end of each race day, cash register report is certified by the independent Chartered Accountant and from this, the main cash book is generated. 52. The above procedure consistently followed by the assessee appears to be a foo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce, having regard to the nature of the transactions and the manner in which they had been effected, there was no necessity whatsoever for the assessee to have maintained the details of the payee below Rs. 2500. The failure to maintain the same cannot be regarded as a circumstance giving a rise to a suspicion with regard to the genuineness of the transactions. 54. Therefore, it cannot be said that by not maintaining the names of the payee, etc, the assessee has violated the provisions of the income tax, since it was practically impossible on his part to do so. While the assessee has compared its business with the businesses of a cinema theatre and restaurant, which also deal with multitudes of the members of the public who are their customers, the Department has distinguished the business of the assessee from the businesses of cinema theatre, and restaurant, observing that in those businesses no payments are made by the assessee's in those businesses to their customers. This distinguishing feature brought out by the Department rather comes to the aid of the assessee inasmuch as the assessee not only receives innumerable amounts from the multitude of its customers before each ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the assessing officer was not empowered to make any ad-hoc disallowance without pointing out defects in vouchers produced by the assessee. Hence, ad-hoc disallowance made by the assessing officer was deleted by the Tribunal. In the instant case, the assessee having satisfied all the four conditions laid down under Section 37(1) of the Act, by establishing the foolproof nature of the accounting procedure followed by it for recording its receipts and payments, the assessing officer was not justified in making any no disallowance. 59. In the case of CIT v. Transport Corporation of India limited (supra) relied upon by the learned Departmental Representative, the assessee has not proved the commercial exigency that warranted the payments. In that case the payment itself was not established, and the department took a stand that the vouchers signed only by the employees of the assessee could not be accepted as genuine, as any number of such vouchers could be produced by the assessee to defraud the department. Since in the case under consideration, the entire payment was through computerized system, duly audited by the independent Chartered Accountant at the end of each racing day, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of Section 40A(3) are not applicable to its payments, as banking facilities are not available at the tote points and on most of the racing days which are generally Sundays and public holidays. It is also the contention of the assessee that there is no tax avoidance in the hands of punters, who received wining amounts above Rs. 20,000 since TDS at highest rate was made on such payments. Not finding merit in these contentions, and holding that the provisions of Section 40A(3) are mandatory, the assessing officer has made the disallowance under Section 40A(3), which was upheld by the learned CIT(A). 63. Before going into the above contentions of the assessee on the applicability of the provisions of Section 40A(3) to its case, we may note in the first place, the provisions of Section 40A(3) applicable for the year under consideration. 40A. Expenses or payments not deductible in certain circumstances. (1).... (3) Where the assessee incurs any expenditure in respect of which payment is made, after such date (not being later than the 31st day of March, 1969) as may be specified in this behalf by the Central Government by notification in the Official Gazette, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 40A(3) are specifically prescribed under Rule 6DD of the Income Tax Rules, it is only the cases that fall under Rule 6DD which go out of the clutches of Section 40A(3) of the Act, and the scope of Rule 6DD cannot be extended to cover any circumstance not specified therein, however justified the rigorous the circumstance may be or however harsher in the given case, the provisions of Section 40A(3) may be. 66. Prior to 25.7.1995, Clause (j) of Rule 6DD of the Income-tax Rules read as follows: 6DD.... (j) in any other case, where the assessee satisfies the Assessing Officer that the payment could not be made by a crossed cheque drawn on a bank or by a crossed bank draft- (1) due to exceptional or unavoidable circumstances, or (2) because payment in the manner aforesaid was not practicable, or would have caused genuine difficulty to the payee, having regard to the nature of the transaction and the necessity for expeditious settlement thereof, and also furnishes evidence to the satisfaction of the Assessing Officer as to the genuineness of the payment and the identity of the payee. The above Clause (j) of Rule 6DD has been omitted by the Income-tax (Fourteent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of Sub-clauses (1) and (2) of Rule 6DD(j) is only a step forward in the achievement of the avowed object envisaged under Section 40A(3) of the Act. 67. Had the above Clause (j), as it stood prior to 25.7.1995, remained effective for the years under consideration, on the statute book, there could have been some justification for us to examine whether the payments mode by the assessee in the instant case in violation of provisions of Section 40A(3) were saved by the Clause (j) of the Income Tax Rules. 68. In the circumstance, the only exception that is available to the assessee in terms of Rule 6DD, as it was on the statute book during the years under appeal, is the one prescribed under Clause (j) which replaced the earlier one extracted above with effect from 25.7.1995, i.e. 'where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike'. We do not find merit in the contention of the learned Departmental Representative that nowadays many banks are operating even on holidays at places where substantial collections/payments are involved does not hold force because the Rule 6DD[j] is very clear and categorical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are saved by the second proviso to Section 40A(3), on account of the payments having been made in the circumstances prescribed under Rule 6DD. In view of the amendment to the provisions of Rule 6DD, by virtue of omission of Clause (j) with effect from 25.7.1995, there is no scope for examining either the inherent features of the assessee's business or the peculiar circumstances in which the assessee had to make the cash payments. 74. In this context, we have also apprehensions as to whether the payments made to punters could be termed as expenditure so as to come within the scope of the provisions of Section 40A(3), because the obligation on the part of the assessee to make such payments arises out of a wagering contract and not a business contract, and the provisions of Section 40A(3) apply only in respect of payments for supply of goods, services or facilities, that arise out of contractual obligations undertaken by the assessee in the normal course of business. We observe that the payments made to punters represent merely money laid out or paid out, by way of an obligation under a wagering contract, which is distinct from a business contract. It is merely a distribution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a result, appeals filed by the revenue are dismissed. Appeals filed by the assessee are partly allowed. Assessee's Appeal: ITA No. 710/Hyd/08 Revenue's Appeal: ITA No. 973/Hyd/08: Assessment year 2005-06 77. As already noted, above, facts of the case and issues involved, besides contentions of the parties are identical with those considered by us while deciding the cross-appeals for the assessment year 2004-05 hereinabove. 78. With regard to ad-hoc disallowance out of winnings payments of less than Rs. 2,500 each, for the detailed reasons discussed in paras 49 to 60 above, for the assessment year 2005-06 as well we delete the entire ad-hoc disallowance of Rs. 20,71,65,000 as against the disallowance of Rs. 13,81,10,000 sustained by the learned CIT(A). 79. Similarly, as for the disallowance in terms of Section 40A(3) made by the assessing officer and sustained by the learned CIT(A), for the detailed reasons discussed in paras 61 to 75 above, while discussing the corresponding issue for the assessment year 2004-05, we set aside the orders of the Revenue authorities on this issue and restore the matter to the file of the assessing officer to examine th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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