Income Tax

Mahaveer Kumar Jain Vs Commissioner Of Income Tax: Case Analysis

The Supreme Court of India ( Apex Court) pronounced a landmark judgement in the case titled Mahaveer Kumar Jain Vs Commissioner Of Income Tax dated 19^th April 2018, wherein the appeal was filed against the final judgment and order dated 10th September 2004 passed by the High Court of Judicature for Rajasthan, Bench at Jaipur in D.B.I.T. wherein the Division Bench of the High Court (HC)  dealt with the questions referred to u/s  256(1) of the Income Tax Act, 1961 (in short ‘the I.T. Act’) favouring the Revenue and against the appellant-assessee.

The issue was regarding the taxability of the income from the lottery, especially in the case the income being already taxed under the provisions of Sikkim State Income Tax Rules, 1948, and the deduction u/s Sec 80 TT of the IT Act to be allowed on gross income or on net income wherein,  the Apex Court held that the income of the assessee could not be taxed under the Income Tax Act after the payment of the income tax at source in the State of Sikkim according to the applicable law at the relevant time in Sikkim, and thereby holding the latter part of the issue regarding the deduction u/s Sec 80 TT of the IT Act to be irrelevant. The present article shall discuss the aspects of the case in detail to provide clarity on the same.  

Facts of the Case

• The appellant is a resident of Jaipur, Rajasthan,  deriving income from business and property. He won the first prize of Rs. 20 lakhs in the 287th Bumper Draw of the Sikkim State Lottery held on 20.02.1986 at Gangtok organized by the Director, State Lottery, Government of Sikkim, Gangtok.
• Out of Rs. 20 lakhs, Rs. 16,20,912/-  were received by him through two Demand Drafts for Rs. 8,10,000/- and Rs. 8,10,912/- each, after deduction of Rs. 2 lacs being agent’s/seller’s commission and Rs. 1,79,088/- being Income Tax under the Sikkim State Income Tax Rules, 1948.
• The income tax return (ITR) for the Assessment Year (AY) 1986-87  was filed by the appellant, where he disclosed the income from the lottery at Rs. 20 lakhs and deducted the agent/seller commission of Rs. 2 lakhs out of the same followed by claiming a deduction u/s  80 TT of the IT Act on Rs 20,00,000/- i.e. the prize’s gross amount of the prize money won in the lottery as per the provisions of the charging Section.
• Upon scrutiny, the deduction of Rs 18 lakhs instead of Rs. 20 lakhs was allowed by the Assessing Officer (AO), vide order dated 08.01.1988, under Section 80TT of the IT Act while holding that there has been a deduction of tax at source from the lottery amt.  of Rs. 18 lakhs by the government of Sikkim due to  Rs. 2 lakhs being paid to the agent directly. Simply put,  as per the relevant provisions of Section 80TT of the IT Act, the claim of deduction can be made on net income out of the lottery and not on gross income. There was the confirmation of the said order by the (CIT)(A), i.e. Commissioner of Income Tax, (Appeals),  Rajasthan-II, Jaipur, vide order dated 31.10.1988
• The appellant preferred an appeal before the Income Tax Appellate Tribunal (in short ‘the Tribunal’), Jaipur Bench upon being aggrieved by the said order, thereby challenging the calculation made by the Assessing Officer (AO) regarding the deduction under Section 80TT of the IT Act.
• Additional ground was raised by the appellant herein – the assessee before the Tribunal claiming that the authorities have grossly erred in law in the treatment of the lottery income of Sikkim Government as income under the IT Act. Despite the Tribunal allowing the appeal partly vide order dated 26.02.1993, it dismissed the objections raised by the appellant herein with regard to the legality of the assessment order holding that the lottery amt.  is taxable under the provisions of the IT Act.
• However, at the instance of the appellant/ assessee, certain questions were framed by the Tribunal under the IT Act, followed by referring the same to the High Court (HC) for opinion, considering them the questions of law fit for reference.
• A Division Bench of the HC, vide order and judgment dated 10th September 2004, dealt with the questions raised in the affirmative.
• Upon being aggrieved by the judgment and order dated 10.09.2004, the appellant-assessee has preferred this appeal through special leave before the Apex Court.

Issue

Whether income from lottery earned is taxable under the IT Act, especially in the case the income has already been taxed under the provisions of Sikkim State Income Tax Rules, 1948. If the answer to it is yes, Will the deduction being allowed on such income under Sec 80 TT of the IT Act ¹ is on ‘gross income’ or on the ‘net income’?

Contention of the Parties

The contentions of the parties are discussed below-

Appellant / Assessee

• Learned counsel of the appellant contended that the High Court has grossly erred, upholding the applicability of the provisions of the IT Act 1968  to the present case due to the provisions of the said Act being extended to the State of Sikkim only wef 01.04.1989 and, therefore,  not charging to tax, the income accrued in the State of Sikkim prior to this date under the IT Act and was taxable under the Sikkim State Income Tax Rules, 1948.
• It was further contended by the Ld Counsel that the order in question pronounced by the HC isn’t lawful due to the provisions of Article 371F of the Indian Constitution, particularly clauses (k) and (n) thereof, operating in connection with all the laws prevalent in the territories of Sikkim thereby preventing the application of the IT Act 1961  in the State of Sikkim up till 31st March 1989.
• Another contention of the Ld. Counsel was that the order passed by the HC wasn’t just and lawful as the imposition of taxes on the same income both by the Union of India (UOI) and the State of Sikkim is contrary to the principle of double taxation.
• Further, the HC  grossly erred in holding the deduction under Section 80TT of the IT Act being applicable on the net winning amount received by the assessee subsequent to the deduction of the agent/seller commission and not on the gross amt.  of the winning prize.

Respondent

• On the contrary, the learned senior counsel of the Respondent made a submission that the High Court was right in holding that Tribunal was correct in holding that income from winning lotteries from Sikkim during the AY  in question must be included in the hands of the assessee as a resident of India within the State of Rajasthan where IT Act was in force notwithstanding that the same had accrued or arisen to him at a place wherein the  IT Act 1961, wasn’t in force even regarding income accruing to him outside the taxable territory.
• Ld. senior counsel further submitted that regarding the question “of the tribunal being justified in holding that deduction u/s 80 TT of the IT Act to be applicable on the net winning amount received by the assessee rather than the gross amt.  of the winning prize”, the  HC answered the same in the affirmative favouring the Revenue and against the appellant herein – the assessee observing that deduction u/s 80 TT of the IT Act isn’t referable to gross total income but is referable to net income.

Observations and Ruling of the Court

Before dealing with the case, the court discussed the position of Sikkim under the Indian Constitution prior to 26.04.1975, wherein the court stated that Sikkim wasn’t considered to be a part of India. Any income being accrued or arising there from would be treated as income accrued or arising in any foreign country. However, by the 36th Amendment to the Indian Constitution in 1975, Sikkim became part of the Indian Union.

This amendment was effected by the introduction of Article 371F in the Constitution. The court discussed the backdrop of the brief history that led to Article 371F being inserted in the Constitution of India wef April 26, 1975,

The court observed that upon the plain reading of this provision, it became clear that all laws which were in force before April 26, 1975, in the territories now falling within the State of Sikkim or any part thereof was intended to continue to be in force until it is altered or repealed.

Therefore, the law in force before the merger continued to be applicable. The court also observed that the IT Act was made applicable only by Notification made in 1989, and the first AY would be 1990-91, and by the application of this Act, the Sikkim State Income Tax Manual, 1948 was repealed.

 However, in the current case, the court was concerned with the AY 1986-87, and, during this time, the IT Act hadn’t been made applicable to the territories of Sikkim. The law corresponding to the IT Act, which was immediately in force in the relevant State, was Sikkim State Income Tax Rules, 1948.

 Hence, there can be two scenarios, first is that the person was a resident of Sikkim during the time period of 1975-1990, and the income accrued and received by him there only. In that case, the question of the applicability of the IT Act doesn’t arise. However, the problem arises in cases where the income accrues to a person from the State of Sikkim who wasn’t a resident of Sikkim but from some other part of India.

 The question that arises is with regards to the applicability of the provisions of IT Act 1961 to such income and whether the same attracts tax under the said Act, especially with reference to the fact that the income has already attracted tax under the Sikkim State Income Tax Rules, 1948.

The court observed that the case of the assessee was that irrespective of the place of residence, income which is accrued or arising in Sikkim wouldn’t be taxable in India, as per clause (k) of Article 371F of the Constitution and is taxable only under the Sikkim State Income Tax Rules, 1948.

The court considered the contention to be based on an erroneous assumption, and the simple answer to the said contention is that despite the non-applicability of the IT Act to various other countries, the income which is accrued or arisen in foreign countries can be taxable only upon the assessee being the resident and ordinarily resident and further the income received or accrued in any territory which is considered as a part of India is within the ambit of IT Act.

The appellant, being a resident of Rajasthan, received the income arising from winning lotteries from Sikkim during the AY in question and must have been included in the hands of the Assessee as a resident of India within the State of Rajasthan where the IT Act was in force despite the fact that the same had accrued or arisen to him at a place wherein the IT Act 1961  wasnt in force even regarding the income accruing to him without taxable territory.

 The court made reference to sec-  5 of the Act to provide clarity on the same. The court observed that the wording of Section 5 of the IT Act showcases that it casts a very wide net, and all incomes being accrued anywhere in the world would be brought within its ambit. A combined reading of both clauses provides the clarity that any income received or accrued in India will be included in his total income for the purpose of taxation under the IT Act.

However, in the current case, the court found that the appellant-assessee had earned the amount in the State of Sikkim, and the amount of the lottery prize was sent by the Government of Sikkim to Jaipur upon the request made by the appellant.

 As a result of the same, despite Section 5 of the IT Act not being applicable, the existing Sikkim State Income Tax Rules, 1948, would apply as per the court.

Thus, on the income, it would seem that Income-tax would be paid in accordance with the Sikkim State Income Tax Rules, 1948 and not under the IT Act 1961. Due to Sikkim being a part of India for the accounting year, there would seem to be, on the same income, two types of income taxes that cannot be applied.

 The court referred to the decision of this Court in the case of Laxmipat Singhania vs Commissioner of Income Tax, U.P. (1969), wherein the Apex Court has held  that “It is a fundamental rule of law of taxation that, unless otherwise expressly provided, income cannot be taxed twice.”

 The court also made reference to the decision of the Court in Jain Brothers and Ors vs Union of India and Ors  (1970), which dealt with a similar issue wherein it was also held that the income could not be taxed twice. 

It was clear from the above-referred cases that there isn’t any prohibition as such on double taxation if the legislature contains a special provision in respect of the same.

The only question which was left to be decided was whether, in fact, there existed any specific provision for the inclusion of the income earned from the Sikkim lottery ticket before  1st April 1990 and after 1975 in the income-tax return or not.

After due consideration of the relevant provisions, the court observed that there wasn’t any such provision in the IT Act 1961  wherein the legislature had made any specific provision for including such an income by an assessee from a lottery ticket. Due to the absence of any such provision, the appellant/  assessee in the present case can’t be subjected to double taxation.

Furthermore, it was held that a taxing Statute shouldn’t be interpreted in such a manner that its effect casts a burden twice over for the payment of tax on the assessee unless the language of the Statute is so compelling that there isn’t any alternative with the court than to accept it. If there exists a reasonable doubt, the construction most beneficial to the assessee must be adopted.

Therefore it was clear enough that the income in the current case is taxable only under 1 law by virtue of clause (k) to Article 371F of the Constitution, which starts with a non-obstante clause; it was clear that only the Sikkim Regulations on Income-tax would be applicable in the present case. Therefore, the income cannot be brought to tax any further through the application of the rates of the IT Act.

Conclusion

 Finally, as per the discussions, the court was of the opinion that upon the payment of the income tax at source in Sikkim according to the applicable law at the relevant time in Sikkim by the assessee once,  the same income was not taxable under the IT Act, 1961.  Hence, the other issue, i.e. the permission of a deduction under section 80 TT of the IT Act is on ‘Net Income’ or ‘Gross Income’, becomes academic and therefore, the court allowed the appeal of the appellant.

Read our Article:Analysis of the Scrutiny Assessment under the Income Tax Act 1961

1. https://incometaxindia.gov.in/Pages/tools/deduction-under-section-80tta.aspx