2004-VIL-329-RAJ-DT

Equivalent Citation: [2005] 277 ITR 166, 191 CTR 303, 142 TAXMANN 130

RAJASTHAN HIGH COURT

Date: 10.09.2004

MAHAVEER KUMAR JAIN

Vs

COMMISSIONER OF INCOME-TAX.

BENCH

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 income, from business and property, at Jaipur, Rajasthan. He won the first prize of Rs. 20 lakhs in the 287th Bumper Draw of the Sikkim State lottery, held on February 20, 1986, at Gangtok by the Director, State lotteries, Govt. of Sikkim, Gangtok. After having deducted a sum of Rs. 2 lakhs on account of payment of agent/sellers commission, etc., and another sum of Rs. 1,79,088 on account of income-tax, as per the Sikkim State income-tax laws, the Director of Lotteries paid the balance of Rs. 16,20,912 to the assessee through two demand drafts which were encashed at Jaipur. The assessee declared the net income of Rs. 8,21,375 claiming deduction under section 80TT of the Income-tax Act, 1961 on Rs. 20,00,000, i.e., the gross amount of the prize money. The Income-tax Officer, however, allowed the deduction under section 80TT on Rs. 18 lakhs only.

On appeal, the Commissioner of Income-tax (Appeals) agreed with the Assessing Officer, and affirmed the assessment order in that regard.

Before the Tribunal, an additional ground was raised by the assessee which was permitted by the Tribunal that the "authorities below have grossly erred in law in treating lottery income of the Sikkim Government as taxable income under the Income-tax Act, 1961".

This contention had two aspects of the matter. Firstly, that Sikkim was not originally a part of India when the Income-tax Act, 1961 was enacted. Leaving aside the historical background, which does not have much bearing on the present controversy, by the 36th Constitutional Amendment Act, Sikkim was admitted into the Union of India as a State and special provisions were made under article 371F relating to the administration of territorial constituency of Sikkim.

It was contended that the combined reading of clauses (k) and (n) of article 371F has the effect that while as per clause (k) all laws which were in force immediately before the appointed day in the territories comprised in the State of Sikkim or any part thereof were to continue to be in force therein, until amended or repealed by a competent Legislature or other competent authority, as per clause (n) the President could by public notification extend with such restrictions or modifications as he thinks fit to the State of Sikkim any enactment which is in force in a State in India at the date of the notification.

On the anvil 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 or received in Sikkim in the previous year 1986-87 was beyond the charge of taxation under the Act of 1961.

The other aspect of the above contention is that since in the territory of Sikkim, the income-tax laws as were applicable to Sikkim before its becoming part of India, were continuing in force during the assessment year in question, by virtue of article 371F(k), the assessee had been subjected to tax on income from the winnings from lotteries under the Sikkim income-tax laws. The same income could not be subjected to tax under the Income-tax Act, 1961 in the hands of the same assessee as it would amount to double taxation on the same income accrued, arisen or received in India in the hands of the assessee.

The above controversy is the subject-matter of question No. 1 referred to us.

The other controversy which is referred to us vide question No. 2 is related to claim of the assessee to deduction under section 80TT on the winnings of lottery. The assessee claimed deduction on the entire amount of Rs. 20 lakhs. The Assessing Officer had allowed the deduction on the net amount of lottery after adjusting Rs. two lakhs paid by the Sikkim Government by way of commission to commission agents or other expenses before the amount was paid to the assessee.

Question No. 1:

The Tribunal did not accept the contention of the assessee regarding its claim to non-exigibility of the winnings from lottery announced by the Sikkim Government and received by the assessee on either ground, to income-tax under the Act of 1961.

The Tribunal had found on the facts that the assessee is an ordinary resident of India to whom the provisions of the Act of 1961 did unquestionably apply. Income from winnings from lotteries was received in Jaipur in India during the year under consideration as the two demand drafts were encashed at Jaipur, which is situated in the territory to which the Income-tax Act, 1961, extends. Such income is to be included in the computation of the total income for the assessment year under consideration as winnings from lottery were not exempted under Chapter VI-A of the Act and his case fell within the ambit of section 5(1)(a) of the Act of 1961 which, inter alia, provides that the total income of any previous year of a person, who is a resident, includes income from any source which has been received or deemed to have been received in India 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 was contended that the mere receipt at Jaipur outside the State of Sikkim would not make any difference. Any person whether residing in Indian State of Sikkim or Indian State of Rajas-than remains a citizen of India and the amount received by a resident of Sikkim is also received in India and by resident of India. The upshot of the Tribunal's order is that under section 5(1)(a) of the Income-tax Act, while the resident of India residing in Sikkim receiving income in India (at Sikkim) will not be subjected to tax, but a person like the assessee on receipt of the same income in India (outside Sikkim) will be subjected to income-tax, on the like basis, viz., receipt of income in India. The provisions of the Income-tax Act ought not to be interpreted to bring about such a discriminatory result.

Before coming to the core issue about the taxability of winning of Sikkim lottery announced in Sikkim under the Income-tax Act, 1961 which had accrued and arisen in Sikkim, where the Income-tax Act, 1961 was not extended, we may take other aspects of the first question, viz., whether the tax on winning of lottery is unsustainable on the principle of double taxation.

So far as the principle against double taxation is concerned, the issue 16 raised by the assessee is founded on an unsound premise. The principle is well-settled that where the tax is imposed by two different Legislatures under different enactments, the question of double taxation in stricto sensu does not arise. The question of double taxation may become of significance if under the same law, the same income is taxed twice in the hands of the same person through the same passage. There is no inherent anathema to double taxation if the law prescribes it.

The principle was stated clearly and unequivocally by the apex court in Sri Krishna Das v. Town Area Committee, Chirgaon [1990] 183 ITR 401. It was a case where the same goods were subjected to levy of tax under the U.P. Sales Tax Act as well as to fee under the Municipalities Act. The contention was raised challenging the levy on the ground that it amounts to double taxation on the same subject-matter. The contention was repelled by the Allahabad High Court. Affirming the judgment of the Allahabad High Court, the apex court said:

"To constitute double taxation, the two or more taxes must have been (1) levied on the same property or subject-matter, (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, rather survive after death. The only epitaph we may inscribe is: Rest in peace and don't be re-born! If, on the same subject-matter, the Legislature chooses to levy tax twice over, there is no inherent invalidity in the fiscal adventure save where other prohibitions exist."

The court approved the decision of the Bombay High Court in Cantonment Board v. Western India Theatres Ltd., AIR 1954 Bom 261.

The principle was accepted by the Supreme Court in fain Brothers v. Union of India [1970] 77 ITR 107 that there can be double taxation because the Legislature has distinctly enacted it. It is only when there are general words of taxation and they have to be interpreted that they cannot be so interpreted as to tax the subject twice over to the same tax. The Constitution does not contain any prohibition against double taxation.

The principle was accepted in H.H. Prince Azam Jha Bahadur v. Expenditure-tax Officer [1972] 83 ITR 92 (SC).

Again the principle was restated in Radhakisan Rathi v. Additional Collector [1995] 4 SCC 309. Referring to the aforesaid three cases, the court

said:

"It is now well-settled that the same subject-matter can be covered by taxation nets imposed by different competent taxing authorities, and there will be no double taxation involved in such case."

Since in the present case, winnings from lotteries are made subject to levy of income-tax in the territories of the State of Sikkim under the laws made by the erstwhile Sikkim State which continued to remain in force under article 371F(k) and the levy of income-tax on winning of lotteries is also made under the Income-tax Act, 1961, a law enacted by Parliament, a different legislative authority by applying it within the territories to which the Act of 1961 extends, the charge and levy is imposed under two different authorities competent to enact such law on the subject-matter in question, viz., "tax on income of a person". The operation of two enactments within their respective field of operation by itself is not inflicted with vice of double taxation, so long as nexus between the subject-matter or the subject of enactment and the territory to which such law extends is discernible.

Therefore, the question of double taxation as a ground to avoid taxation under either of them would not arise, if the same is otherwise exigible to tax under the charging provisions of the 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 by the assessee, viz., whether he maintains his accounts on mercantile basis, where income is accounted for as soon as it accrues to the assessee entitling him to receive it, though actual receipt may be later in time. The accounts may be maintained on cash basis also that is on the basis of actual receipt of income. However, in either case, the operation of the Explanation becomes operative only if earlier assessment has taken place under the Act of 1961, and later assessment is also sought to be made under the Act of 1961. But where the assessments proceed under different enactments which are otherwise operative in respective areas, the occasion for invoking Explanation 2 to section 5 does not arise.

The test for examining the exigibility to tax of any income, therefore, is not merely the factum of double taxation but the touchstone is the extent and reach of the law imposing tax to the subject-matter and/or the subject of taxation.

The core question, therefore, is whether in view of the non obstante article 371F, the provisions of the Income-tax Act, 1961 can reach the income

accrued or arisen or received in Sikkim, where the Act of 1961 was not extended during the relevant assessment year in question by virtue of the constitutional provisions.

The relevant provisions of the Constitution which need notice at this stage are as under:

"Article 245. Extent of laws made by Parliament and by the Legislatures of States.-(1) Subject to the provisions of this Constitution, Parliament may make laws for the whole or any part of the territory of India, and the Legislature of a State may make laws for the whole or any part of the State.

(2) No law made by Parliament shall be deemed to be invalid on the ground that it would have extra-territorial operation.

Article 371F. Special provisions with respect to the State of Sikkim.- Notwithstanding anything in this Constitution, - ...

(k) all laws in force immediately before the appointed day in the territories comprised in the State of Sikkim or any part thereof shall continue to be in force therein until amended or repealed by a competent Legislature or other competent authority; ...

(n) the President may, by public notification, extend with such restrictions or modifications as he thinks fit to the State of Sikkim any enactment which is in force in a State in India at the date of the notification; ..."

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 in force only in a part of India and not in the whole of India, because every law made by any Legislature is subject to the provisions of the Constitution. We shall consider presently the operation of the Act of 1961, at the very inception had been extended to persons, things and acts outside its territory which has nexus within the taxable territory.

Under section 1(2) the Act of 1961, which came into effect with effect from April 1, 1962, save as provided otherwise in the Act, has its operative territory, the whole of the Union Territory of India. Section 4 is the charging section and provides for levy of income-tax for any assessment year in respect of the total income of the previous year relevant thereto of every person.

The object of the enactment is the levy of an income-tax, the subject matter of such levy is the "total income" of the previous year and the subject of such levy is every person to whom such income belongs.

What constitutes the "total income" has been defined under section 2(45) of the Act to mean the total amount of income referred to in section 5 computed in the manner laid down in the Act.

Section 5 of the Act of 1961 which is captioned as "Scope of total income" during the relevant period reads "subject to the provisions of the Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived" which is:

"(a) received or deemed to be received in India in such year by or on behalf of such person or;

(b) accrues or arises or is deemed to have accrued or arisen in India during such year; or

(c) accrues or arises or is deemed to have accrued or arisen to him outside India during such year:

Provided that in the case of a person, 'not ordinarily resident' of India, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India."

Sub-section (2) of section 5 further provides that the total income of any previous year of "a person who is a non-resident" includes all income from whatever source derived which is received or is deemed to be received in India during such year by him or on behalf of such person, or (b) accrues or arises or is deemed to have accrued or arisen to him in India during such year.

Bereft of other details, section 5 qualifies the 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, not ordinarily resident of India, it is includible in his total income only, if it is derived from business controlled from or profession set up in India.

Thus, unlike ordinary resident of India, a not ordinary resident of India, he is not required to include the entire income which accrues or arises to him outside India unqualifiedly but only such part of income which accrues or arises to him from a business controlled or profession set up in India.

However, if such income is received in India where the Income-tax Act extends, such income is still includible in income to be taxed under section

Lastly, in the case of non-resident, the income accruing or arising to him outside India, from whatever source, is not includible in his total income unless the same is received or deemed to be received by him or on his behalf in India under section 5(1)(a). So far as income accruing or arising or deemed to be accruing or arising in India is concerned, he is equally liable for its inclusion in the total income to be computed for taxable purposes under the Act.

In other words, income received or deemed to be received in India whether it accrues in India or outside India, is within the domain of the Act of 1961 to be included in the total income, if otherwise it is an income in the case of any person, whether (i) resident or (ii) ordinary resident but not ordinarily or (iii) the non-resident. Likewise, any income from any source which accrues or arises or is deemed to accrue or arise to him in India is to be included in the total income irrespective of whether it is received in India or not. But in the cases where income accrues or arises to any person outside India, whether it is to be included in the total income, depends on the status of the person to whom such income accrues or arises.

Section 6 deals with the criterion for determining the status of a person resident but not ordinarily resident in India for any previous year for which income is to be assessed. Non-resident has been defined in section 2(30) to mean a person who is not a resident and for the purposes of sections 92, 93 and 168 include a person who is not ordinarily resident within the meaning of clause (6) of section 6.

These provisions relating to scope of total income which is the subject-matter of tax and the "status of person" in respect of whose income, tax is to be levied, make the 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.

Merely because the provisions of the Act operate on such subject-matter beyond its territorial operative field, it does not go beyond its reach nor is rendered ineffective. A provision which has extra-territorial operation by itself is neither invalid nor ineffective.

In British Columbia Electric Railway Co. Ltd. v. The King [1946] AC 527 the Privy Council on appeal from the Supreme Court of Canada said:

"A Legislature which passes a law having extra-territorial operation may find that what it has enacted cannot be directly enforced, but the Act is not invalid on that account, and the courts of its country must enforce the law with the machinery available to them."

Delineating the legislative powers of Union and State, the Constitution of India envisaged under article 245(1), that Parliament can make laws for the whole or any part of India. Thus, law made by Parliament may not necessarily extend to the whole of India, but may be operative in some parts of India only. In such event, a law made for a part of India, if it affects any person or act outside its territorial field, in another part of India and the provisions of such law reach it, it becomes a case of extra-territorial operation of law made by Parliament.

Article 245(2) declares that no law made by Parliament shall be deemed to be invalid on the ground that it would have extra-territorial operation.

Therefore, under the scheme of the Constitution, a Parliamentary statute having extra-territorial operation cannot be ruled out from contemplation. The operation of law can extend to persons, things and acts outside the territory of India. The general principle suffering from the sovereignty of States is that laws made by one State can have no operation in another State. The position emanating from article 245(2) is that while it has not affected the legislative competency of making such law, it made certain difficulties in its enforcement.

The Privy Council in British Columbia Electric Railway Co. Ltd. [1946] AC 527, considering such difficulty had enunciated that it is enforceable within the territory in which it operates through machinery set up for such enforcement.

The principle was approved by the Supreme Court in Electronics Corporation of India Ltd. v. CIT [1990] 183 ITR 43. The court said approving the aforesaid ratio that while the enforcement of the law cannot be contemplated 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 India, meaning thereby that any enactment made by Parliament does not require to be extended necessarily to every part of the Union Territory of India. At the same time, the law made by any part of India with reference to the subject-matter or subject can have by such enactment extra-territorial nexus beyond the operation of field of the Act, which may be falling within the operative territorial field.

If in the aforesaid light, we consider the extent of the provisions of the Income-tax Act, 1961 which like any other enactments made by the Legislature in India, is subject to the provisions of the Constitution including article 371F. Article 371F of the Constitution of India was inserted in our Constitution making a special provision with a non obstante clause as a consequence of Sikkim, an erstwhile independent nation, became a State of India.

We have noticed that the Income-tax Act, 1961 came into effect from April 1, 1962, and extended to the whole of India. At the time of its promulgation, Sikkim was not a part of India and the provisions of the Income-tax Act, 1961, were not enforceable in Sikkim. Yet, in respect of any income which accrued or arose in Sikkim was, liable to be taxed under the Act of 1961 if either the subject or subject-matter of the Act had nexus with territories where the Act of 1961 was in force, namely, if the person, to whom such income had accrued or arisen in Sikkim was a resident in any State of India where the Act of 1961 was in force. Then, notwithstanding the income having arisen or accrued outside the territorial operation of the Act, it could be taxed in the hands of a resident Indian whether received in India or not received in India. Likewise, if the income which had arisen in Sikkim to any person who may not be a resident of any State in India, but if such income is received in any State in India by him or on his behalf, it could be taxed as the subject-matter, viz., the income when received or deemed to be received in India as envisaged under section 5(1)(a) a nexus with taxable territory where the Act could be enforced was established. Such income becomes taxable in the hands of any person whether resident or non-resident or ordinary resident.

There is no dispute that before Sikkim became a State of the Union of India, the income in question which had accrued or arisen in Sikkim in the aforesaid circumstances, 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 this behalf by the President.

Article 371F is a non obstante clause which operates in spite of other provisions of the Constitution of India that may be contrary to it. Therefore, the laws made by the erstwhile independent Sikkim, which were in force in the territory comprised in the State of Sikkim, notwithstanding that it may be repugnant to any Central legislation, or operating in a field occupied by law made by Parliament or contrary to any other provision of the Constitution, remained effective in the territory comprised in the State of Sikkim until amended or repealed by a competent Legislature or other competent laws. Likewise, the operation of existing enactments which were in force in other States were not automatically extended to the State of Sikkim unless the same were extended in terms of clause (n) of article 371F. Clause (n) envisages extension of any enactment which is "in force in a State in India" at the date of notification issued by the President.

If the expression "in force in a State in India" is confined to the laws made by the State Legislature in any particular State in India, then the Acts made by Parliament which were operative in the whole of India stood extended to Sikkim also without any reservation on its becoming part of India. If it is viewed that all enactments including enactments made by Parliament which were in force in all the States or in some States, depending upon their extent of operation, the Act of 1961 did not automatically stand extended to the State of Sikkim unless notification in terms of the provisions of article 371F was issued. The existing enactment operating in the whole of India remained operative in the territory of all the States of India excluding the State of Sikkim. So far as the State of Sikkim was concerned, the Act of 1961 continued to have extra-territorial operation which could be enforced in the existing territories when it was in force in regard to the persons, things or acts within such States of India where the Act extended. In either case, the result would be the same.

So far as income accruing or arising to any person, resident within such State of India where the Act of 1961 was in force, his total income was liable to be computed in terms of section 5 independent on his status. If he is an ordinary resident in India, then his entire income from whatever source was to be computed 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 it has accrued or arisen to the assessee as resident in India during the period in question, whether it is considered to have accrued or arisen in India or is taken to have accrued or arisen outside the territorial operation of the Income-tax Act, 1961, he is liable to include such winnings into his total income. There is no doubt or dispute that, had Sikkim not become a State of India, the winning was liable to be taxed in the hands of the assessee notwithstanding it was liable to be taxed in Sikkim also.

In this connection, reference may be made to the decision of the Supreme Court in CIT v. Dharamdas Hargovandas [1961] 42 ITR 427 inter preting section 4 of the Act of 1922 which corresponds to section 5 of the Income-tax Act, 1961, the court said:

"It is divided into three parts. The first part, which is clause (a) provides that all income, profits and gains received or deemed to be received in the taxable territories in such year by or on behalf of such person will be included in the taxable income. So far as clause (a) is concerned, it is immaterial whether the person is resident in the taxable territories or is not resident therein; as long as income etc. is received in the taxable territories by or on behalf of such person in the previous year, it is liable to be included in the computation of total income. Under this clause, therefore, it is the receipt in the previous year that is material and the residence of the person to be taxed is immaterial."

For a person who is resident in the taxable territory in such taxable territories, the principle applies that all income which accrues or arises to him or is deemed to so accrue or arise whether within the taxable territory or outside the taxable territory, is to be included in the total income under section 4 of the Act of 1922 or under section 5 of the Act of 1961.

The fact that under the Act of 1922, expression "taxable territory" has been used in the place of "India" under the Act of 1961, does not make any difference, so far as enforcement of its provisions within the State governed by the Act which have extra-territorial reach. Applicability of the Act of 1922 had been extended not to the whole of India, but to British India only. Erstwhile States forming part of the Indian sub-continent were not within the applicable reach of the Act of 1922. In the context of a taxing statute which has extra-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-à-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, 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. In such event, the situs of the receipt of income loses its relevance. That may have relevance in considering the year in which it is to be assessed to tax if accrual and receipt are on different dates falling in different assessment years, in which case the matter of enquiry would have been method of accounting followed by the assessee. Such is not the question in dispute before us.

If the income is received by him in Jaipur as found by the Tribunal, then the status of the assessee loses its relevance and the income from all sources in whichever territory it has arisen if it has been received in the territories where the Act of 1961 is applicable, a nexus with the income so received within the taxable territory is established with the territory where the Act is enforceable, the provision of the Act of 1961 can be enforced in respect of it. Such income can be included in the taxable total income of such assessee.

Before parting with this issue, we may notice that learned counsel for the assessee has placed before us a decision of the Bombay High Court in Nirmala L. Mehta v. A. Balasubramaniam, CIT [2004] 269 ITR 1 in support of his contention that income from lottery in Sikkim earned in 1987 is not amenable to tax under the Income-tax Act, 1961.

The Bombay High Court having reached the same conclusion on construction of article 371F(k) and (n) that the Income-tax Act, 1961 was made applicable and came into force in the State of Sikkim from the assessment year 1990-91 as we have reached above, held as under:

"The Income-tax Act, 1961 was not applicable at the relevant time in Sikkim. So long as the Income-tax Act, 1961 did not become applicable to the State of Sikkim, Income-tax Act, 1961 could not be applied to the income earned in Sikkim. In the circumstances, we have no hesitation in holding that the prize money won by the petitioner from the lottery of the Government of Sikkim could have been charged to tax only in accordance with then existing income-tax laws in the State of Sikkim and could not be charged to tax under the Income-tax Act, 1961."

Reference has been made to two decisions of the Supreme Court in State of Sikkim v. Surendra Prasad Sharma, 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-territorial operation, both in respect of their subject-matters and subjects and such extra-territorial operation is permissible under article 245 of the Constitution and the provisions are enforceable within the area where the Act extends through machinery provided under it. The principle was explained by the Supreme Court in the case of CIT v. Dharamdas Hargovandas [1961] 42 ITR 427. That was a case where a like question had arisen in respect of levy of income-tax under the Act of 1922 which extended to British India but was not applicable within the erstwhile Indian States, yet income accrued, arisen in erstwhile Indian States to a resident in British India and the income accruing or arising in Indian States to the non-resident, but received in the British India, was held liable to be taxed by virtue of the provisions of section 4 of the Act of 1922, which corresponded to sections 5 and 6 of the Act of 1961.

In view of the reason detailed hereinabove, we with utmost respect, regret our inability to agree with the decision in Nirmala L. Mehta's case [2004] 269 ITR 1 (Bom).

The factual ground raised by the assessee that the amount was received by him in Sikkim because the drafts were posted at Sikkim as a result of his

request for remitting the same to him at Jaipur, thereby laying the foundation for the contention that the post office became his agent and the receipt of income was complete as soon as the drafts were delivered to the courier in Sikkim, he shall be deemed to have received the same on behalf of the assessee at Sikkim.

This position as principle of law is in consonance with the principle explained by the Supreme Court in CIT v. Ogale Glass Works Ltd. [1954] 25 ITR 529. The question that fell before the Supreme Court was in like circumstances, the assessee who was doing his business in an erstwhile Indian State had sold goods under a contract to the Government of India and he was paid by cheques drawn on the Reserve Bank of India. The cheques were posted at Delhi and were encashed at Bombay. The delivery of cheques was made in the Indian State. The Indian Income-tax Act, 1922, the predecessor to the Act of 1961 was extended to the whole of British India but was not in force in the erstwhile Indian States, which did not form part of British India. Under section 4(a) of the Act of 1922 which was corresponding to sections 5 and 6 of the Income-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 delivery of the letter or cheque to the post office is delivery to the agent of the sender himself".

The court further explained the principle by saying that apart from this principle of agency, there is no other circumstance, which makes the delivery of the cheque to the post office at the request of the addressee which is delivered to him and that is by posting the cheque in pursuance of the request of the creditor, the party performs the obligation in the manner prescribed and sanctioned by the contract and thereby discharge the onus of such contracts. Reliance was placed on Illustration (d) of section 50 of the Indian Contract Act. Therefore, when any sum is sent by post or courier, where the same is received by the addressee then it is delivered to him or his agent. If the post office or courier is acting as an agent of the addressee, the delivery to the courier fulfils the requirement of delivery to the addressee. In such case, the post office or courier acts as an agent of the addressee. Ordinarily, the post office or courier is considered as an agent of the sender unless delivery to post office or courier is at the request of the addressee, expressed or implied. However, this is a finding of fact which must be reached in each case on its own facts. In the absence of such request, the post office or courier is considered an agent of the sender himself. Therefore, unless issue is joined, on such question of fact, no finding can be reached or assumed unless necessary facts are admitted.

In the present case, there is no finding in the order of the Tribunal as to at whose instance remittance was made to the taxable territory from non-taxable territory by post, nor does such issue appear to have been joined before the Tribunal.

In such cases, where amounts are sent from a taxable territory to a non-taxable territory, it makes vital distinction if the income is to be taken into account for taxing it on receipt basis. The principle is well-settled that when payment is received by cheque, the receipt is ordinarily deemed to be at the place and at the time when the cheque is delivered to the recipient.

Be that as it may, though the principle referred to by the Tribunal that encashment at Jaipur made the delivery at Jaipur, does not appear to be the correct proposition because the act of encashment is not relevant for determining the place at which the receipt 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, we answer question No. 1 in positive, in favour of the Revenue and against the assessee. We hold that the Tribunal was justified in holding that the income of winnings from Sikkim State lotteries in the hands of the assessee was taxable under the Income-tax Act, 1961.

Question No. 2

The assessee has claimed that since his winnings from lottery declared by the Sikkim State was Rs. 20 lakhs and the amount paid to the agents by way of commission, etc., directly, before remitting the amount to him was only a part of expenses incurred by the assessee. Total income of the assessee, from winnings of lottery, which has been included in the gross total income, therefore, must be deemed to include the expenses incurred by the assessee after he has earned the income. Therefore, the deduction allowed under section 80TT, which was in force during the assessment year in question, since omitted, must be on the entire sum of Rs. 20 lakhs and not on the net amount of lottery after deduction of expenses on Rs. 18 lakhs only as has been allowed by the Assessing Officer. The Tribunal has not acceded to this foundation.

Section 80TT is a provision which finds place under Heading of Chapter VI-A which provides for certain deductions in the computation of the total income of the assessee, included in the gross total income of the assessee. Deduction in respect of income by way of winnings from any lottery, was provided under section 80TT.

"80TT. Deduction in respect of winnings from lottery.- Where the gross total income of an assessee, not being a company, includes any income by way of winnings from any lottery, there shall be allowed, in computing the total income of the assessee, a deduction from the winnings of an amount equal to,-

(a) in a case where the winnings do not exceed five thousand rupees, the whole of such winnings;

(b) in any other case, five thousand rupees as increased by a sum equal to fifty per cent, of the amount by which the winnings exceed five thousand rupees."

The above provision is clear that the deduction envisaged is only in respect of such winnings which have been included in computing gross total income. The question, therefore, which begs answer is what amount of winning from lottery can be said to be included in the computation of gross total income of the assessee which can be a basis for computation of deduction to find out the answer to the question raised.

The assessee's contention that the entire winnings from the lottery was Rs. 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 income included in the gross total income.- Where any deduction is required to be made or allowed under any section (except section 80M) included in this Chapter under the Heading 'C-Deductions in respect of certain incomes' in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income."

Section 80B defines "gross total income" for the purpose of Chapter VI-A, section 80AB which was inserted with effect from April 1, 1981, defines the term gross total income of a particular nature of income included in the gross total income, where deduction is to be allowed with reference to such nature of income included in the gross total income of the assessee. In other words, section 80B defines the term "gross total income" in terms of aggregate of total income of a person from all sources, as computed in accordance with the provisions of the Income-tax Act before claiming deduction under Chapter VI-A, the same meaning is assigned to gross total income of a particular nature where deduction is to be allowed in respect of such particular nature of income, that has been included in the assessee's gross total income from all sources.

These two provisions read clearly that for the purpose of claiming deduction in respect of income included in the gross total income, the expression "gross total income included in total income" denotes income of that nature computed in accordance with the provisions of the Income-tax Act, 1961, before computing the deduction under Part C of Chapter VI-A. Therefore, all deductions or adjustments which are otherwise liable to be made for computing the income of a particular nature, as are otherwise liable to be deducted from or adjusted against such income have to be taken into account before determining "such income" included in "the gross total income" for the purpose of computing deduction under section 80TT.

That being the position, it is immaterial whether the amount of commission, etc., paid 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 Rs. 18 lakhs. If the amount of Rs. 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 Contacts P. Ltd. [2001] 251 ITR 587 had said while construing section 80B read with section 80AB of the Act, which was inserted with effect from April 1, 1981, as under:

"These two provisions read together leave no room of doubt in mind that while for computing deduction under any of the provisions of Chapter VI-A which relates to gross total income from any particular source of income which forms part of the total gross income of assessee the gross total income from the source only in respect of which deduction is to be claimed, is first to be computed in accordance with all the provisions of the Income-tax Act for computing income from that source without making any deduction under any provision of Chapter VI-A. Quantification of respective deduction in respect of income from that source under Chapter VI-A is to be made on the basis of such computed gross total income before any deduction under Chapter VI-A is adjusted.

The definition of the expression 'gross total profit' makes it imperative to compute the total income in accordance with the provisions of the Act before making any deduction in Chapter VI-A which is required to be made in respect of such income included in gross total income of the assessee from all sources. The deduction permissible under various heads dealt with in Chapter IV defining heads of income and providing the method and manner of computing income from different sources, viz., salaries, house property, profits and gains of business or profession, capital gains and income from other sources, as well as the adjustments are to be made in respect of income from such sources so computed while making aggregation of income and set off or carry forward of loss under Chapter VI of the Act."

The Supreme Court in CIT v. P.K. Jhaveri [1990] 181 ITR 79 and the Madhya Pradesh High Court in Smt. Pramila v. CIT [1998] 232 ITR 262 have declined to call for a reference to raise like question in respect of sections 80K and 80TT respectively.

In Distributors (Baroda) P. Ltd. v. Union of India [1985] 155 ITR 120 a five-judge Bench of the Supreme Court construed the expression "where gross total income of an assessee includes any income by way of dividends from a domestic company" as it appeared in section 80M. The court without the aid of section 80AB, interpreted the expression in its plain meaning. Rejecting the contention, as has 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 full meaning and effect. The word 'such' in the context in which it occurs can only mean that income by way of dividends from a domestic company which is included in the gross total income and that must necessarily be income by way of dividends computed in accordance with the provisions of the Act."

In parenthesis, if the words "dividends from a domestic company" are substituted by the words "winning from lotteries" in the above ratio, we reach the same answer in interpreting section 80TT of the Act.

The above ratio clearly indicates that the insertion of section 80AB is clarificatory in nature.

Consequently, question No. 2 is also answered in the affirmative, in favour of the Revenue and against the assessee.

The upshot of the aforesaid discussion is that both the questions referred to us are answered in the affirmative, in favour of the Revenue and against the assessee.

No costs.

 

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