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Bhola Nath Kesari vs Director Of State Lotteries And ...

High Court Of Judicature at Allahabad|22 April, 1974

JUDGMENT / ORDER

JUDGMENT Gulati, J.
1. This and the connected petitions raise a common question and hence are being disposed of by a common judgment.
2. The petitioner won a prize of Rs. 1,00,000 in the twentieth draw of the U.P. State Lotteries held on 8th December, 1972. Under the rules one-tenth of the prize money goes to the person who sells the ticket. The petitioner was thus entitled to Rs. 90,000. Out of this sum, a sum of Rs. 31,050 was deducted on account of income-tax and the petitioner was paid the balance of Rs. 58,950. A certificate of deduction of income-tax was duly sent to the petitioner by the Director-of State Lotteries, the second respondent. The petitioner has challenged the deduction of income-tax and has impleaded as respondents besides the State of Uttar Pradesh, the Director of State Lotteries, the Commissioner of Income-tax, Lucknow, the Union of India and the Income-tax Officer, Lucknow.
3. Prior to 1972 winnings from lotteries used to be exempt from Income-tax as being receipts of casual and non-recurring nature. By the Finance Act, 1972, certain amendments were made to the Income-tax Act, 1961, as a result of which the winnings from lotteries and gains from certain other pastimes like races, card games, gambling and betting also became taxable. The following amendments were made in the Income-tax Act, 1961.
4. In Section 2(24), which defines " income ", a new Clause (ix) was added reading as under:
" 2(24)(ix). Any winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever. "
5. Section 10(3) which provided that in computing the total income of any person, any receipts which are of a casual and non-recurring nature, shall not be included, was replaced by the following :
" 10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included--. .....
(3) any receipts which are of a casual and non-recurring nature, not being winnings from lotteries, to the extent such receipts do not exceed one thousand rupees in the aggregate :......"
6. Section 56(2) provides as to what income shall be chargeable to income-tax under the head " Income from other sources ". The following Clause (ib) was added to this section.
" (ib) income referred to in Sub-clause (ix) of Clause (24) of Section 2, "
7. A new Section 80TT was added, which reads :
" 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 (such income being hereafter in this section referred to as winnings), 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 gross total income does not exceed ten thousand rupees or 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."
8. The net result of these amendments was that winnings from lotteries became taxable as income from other sources at a concessional rate, the, concession being that tax on such winnings is leviable only on half the prize money minus rupees 5,000. These amendments of the Income-tax Act have been challenged in this writ petition under Article 226 of the Constitution.
9. The first ground of attack is that the levy of tax on lotteries is ultra vires the powers of Parliament. It is urged that the new tax does not fall either under entry 82 or entry 97 of List I of the Seventh Schedule of the Constitution (hereinafter referred to as the Union List) which are the only two entries defining the field of legislation of Parliament with regard to levy of taxes. It is urged that the new tax would fall, if at all, under entry 62 of List II of the Seventh Schedule (hereinafter referred to as the State List). In other words, the argument is that Parliament has no power to enact a law levying tax on lotteries and it is only the State Legislature which can do so, -if at all.
10. Entry 82 of the Union List provides for taxes on income other than agricultural income, while entry 97 of the same list is a residuary entry and provides for any other matter not enumerated in List II or List III including any tax not mentioned in either of those two lists.
11. The argument of the learned counsel is that, according to the popular meaning and the accepted connotation, the word " income" does not include capital, nor does it include a receipt which is not derived from a definite source, but is in the nature of windfall. Reliance was placed upon a decision of a Full Bench of this court in Rani Amrit Kunwar v. Commissioner of Income-tax, [1946] 14 I.T.R. 561 (All.) [F.B.).
That was a case where a wife who was a resident in British India, received some remittances from her husband, who was the ruler of a native State and as such a non-resident. The remittances received by her were held to be income liable to tax under Section 4(2) of the Income-tax Act, 1922. In the course of judgment the learned judges made an observation that no doubt in order to be income it must be some thing which comes periodically as a return with some sort of regularity and from a definite source. This and similar other cases where an attempt has been made, to evolve a definition of the word " income " are not helpful at all in the case before us, because we are not concerned with the word " income " as occurring in the Income-tax Act, but are dealing with the word " income " as occurring in entry 82 of the Union List. The Income-tax Act seeks to tax only some kinds of income which arise from sources mentioned in the Income-tax Act, like income from salaries, interest on securities, income from property, profits and gains from business, profession and vocation and income from other sources. The word " income ", on the other hand, in entry 82 of the Union List has been used in a very wide sense to include every kind of receipt and gain. Its meaning is not restricted to the meaning of this term under the Income-tax Act. Indeed, a study of the Income-tax Act itself shows that the sources mentioned in the Income-tax Act are 'not exhaustive and they can be expanded as indeed they have been expanded from time to time, A major expansion of the sources of income liable to income-tax was made by the Income-tax and Excess Profits Tax (Amendment) Act, 1947 (Act No. 22 of 1947), Section 5 whereof added " capital gains " as the sixth source of income in Section 6 of the Income-tax Act, 1922, and enlarged the definition of the word " income " in Section 2(6C) by adding " capital gains chargeable under Section 12B ". This amendment was challenged as ultra vires the power of Parliament on the same reasoning as advanced before us, namely, that a gain of capital nature was outside the purview of " income " and as such was not covered by entry 54 in 'List I of the Seventh Schedule to the Government of India Act, 1935, which is equivalent to entry 82 of the Union List of our present Constitution.
12. The Supreme Court in Navinchandra Mafatlal v. Commissioner of Income-tax, [1954] 26 I.T.R. 758, [1955] 1 S.C.R. 829 (S.C.) upheld the validity of the amendment by holding that the word "income" in entry 54 in List I of the Seventh Schedule to the Government of India Act, 1935, should be given its widest connotation in view, of the fact that it occurs in a legislative head conferring legislative power and it included a capital gain and it will be wrong to interpret the word in the light of any supposed English legislative practice. The Supreme Court further observed that the Income-tax and Excess Profits Tax (Amendment) Act (XXII of 1947) which amended the Indian Income-tax Act by enlarging the definition of the term " income '' in Section 2(6C) so as to include capital gain and adding a new head of income in Section 6 and inserting the new Section 12B relating to capital gains was intra vires the Central Legislature acting under entry 54 in List I of the Seventh Schedule of the Government of India Act, 1935.
13. Clearly a gain of a capital nature before the amendment of the Income-tax Act was foreign to the Income-tax Act. There was a clear distinction between a receipt of income nature and a receipt of capital nature. No one had ever said that a capital gain could also be regarded as income and subjected to income-tax under the Income-tax Act, as it stood prior to the amendment. But the Supreme Court had no difficulty in holding that a capital gain, even though not income under the Income-tax Act, was -nevertheless income for purposes of entry 54 in List I of the Seventh Schedule to the Government of India Act. It is clear, therefore, that the word " income " in the Constitution cannot be restricted to the meaning of its term in a fiscal statute like the Income-tax Act which seeks to tax some kinds of income leaving out others. Precisely similar thing has happened in the instant case. The legislature has once again enlarged the definition of the word " income " in the Income-tax Act so as to include winnings from lotteries and gains from gamblings and bettings of all kinds.
14. Prior to the impugned amendment income derived from winnings from lotteries, etc., was specifically exempted from levy of income-tax under Section 4(3)(vii) of the Income-tax Act, 1922, and under Section 10(3) of the Income-tax Act, 1961. Parliament in a way has withdrawn this exemption so that income of e casual and non-recurring nature like winning from lotteries also became taxable under the Income-tax-Act.
15. It may be noticed that Navinchandra's case stood on a much stronger footing than the case before us. There " capital gain " was never considered to be income for purposes of the Income-tax Act. But in the instant case casual gains like winnings from lotteries were treated as income alright, but were specifically excepted from tax. When the exemption was withdrawn, they became automatically taxable. We are thus clearly of opinion that the impugned tax is covered by entry 82 of the Union List and Parliament was fully competent to impose a tax on such winnings.
16. It is true that the Wanchoo Commission in the Direct Taxes Enquiry Committee Report mentions that winnings from lotteries should be taxed under a separate legislation by Parliament under entry 97 of the Union List, because it would not be covered by entry 82 of List I. That observation is not correct and is not binding on courts. That apart, even if tax on winnings from lotteries is covered by entry 97 and not by entry 82 of the Union List, there is nothing wrong in levying tax on such winning by amendment of the Income-tax Act rather than enacting a separate legislation.
17. In Hari Krishna Bhargav v. Union of India, [1966] 59 I.T.R, 243, [1966] 2 S.C.R. 22 (S.C.) a question arose as to whether the scheme of collecting annuity deposits from income-tax payers could be included in the Income-tax Act or was it necessary to have a separate legislation in that regard under entry 97 of the Union List. The Supreme Court held that assuming that the scheme of Chapter XXII-A introduced in the Income-tax Act, 1961, by the Finance Act, 1964, is governed by entry 97 of the Union List, there is no prohibition against Parliament enacting in a single statute, matters which call for the exercise of power under two or more entries in the Union List.
18. Entry 62 of the State List upon which reliance has been placed by the learned counsel provides for " taxes on luxuries including taxes on entertainments, amusement, betting and gambling". It is said that lottery is a sort of gambling or betting and the State legislature alone is competent to levy tax on it. The learned counsel has cited a large number of authorities in support of his contention. It is not necessary to notice those authorities because we are prepared to assume that lottery is a sort of gambling or betting. But the fallacy lies elsewhere. Under entry 62 of the State List, the State Legislature is competent to levy tax on entertainments like gambling and betting as such, but not on the . gains or income arising from such entertainments. In other words, the State Legislature can levy tax on a person organising such amusement or on the person who participates in them irrespective of the gain or income derived from such entertainments. The income earned by the organiser of the entertainment or by the person who participates in it is outside the purview of this entry. Such incomes or gains are covered by entry 82 of the Union List and Parliament can alone levy tax on them. To illustrate this point an analogy may be taken from tax on sales. The State legislature is competent to levy tax on sales, but not on income arising from such sales.
19. Reliance was then placed on entry 34 of the State List which relates to " betting and gambling ". This entry also enables a State Legislature to enact laws in respect of betting and gambling. But this entry does not authorise the State Legislature to levy tax on income or gains arising from betting and gambling. It is well settled that a general entry in the lists of the Seventh Schedule does not include the field of taxation. The power of taxation has been separately enumerated in the three lists of the Seventh Schedule. In Sundararamier & Co. v. State of Andhra Pradesh, [1958] 9 S.T.C. 298, 340; [195R] S.C.R. 1422; A.I.R. 1958 S.C. 468, this proposition was laid down by the Supreme Court in paragraph 51, at page 493, in the following words :
" The above analysis--and it is not exhaustive of the entries in the Lists--leads to the inference that taxation is not intended to be comprised in the main subject in which it might on an extended construction be regarded as included, but is treated as a distinct matter for purposes of legislative competence. And this distinction is also manifest in the language of Article 248, Clauses (1) and (2) and of entry 97 in List I of the Constitution. Construing entry 42 in the light of the above scheme, it is difficult to resist the conclusion that the power of Parliament to legislate on inter-State trade and commerce under entry 42 does not include a power to impose a tax on sales in the course of such trade and commerce."
20. This view has again been affirmed by the Supreme Court in R.M.D.C. (Mysore) Private Ltd. v. State of Mysore, A.I.R. 1962 S.C. 594. This means that the State legislature cannot levy tax on betting and gambling under entry 34 of the State List. It can levy tax under List 62 of the State List which, we have already pointed out above, restricts the tax on the organisation or participants in entertainments like betting and gambling. Similarly entry 40 of List I which deals with lotteries organised by the Centre or the Government of a State also does not confer power on Parliament to levy tax on lotteries. It can pass other laws in respect of lotteries organised by the Centre or the State, but cannot levy a tax. The power to levy tax is to be found in entries 82 and 97 of the Union List.
21. Winnings from lotteries cannot be equated with gifts, as contended for by the learned counsel for the petitioner. A gift is a transfer of property without consideration, whereas in a lottery every person who participates in it does so for a consideration, even though'the consideration is much smaller as compared to the prize he might win. Even assuming that winning in a lottery is a gift, tax on a gift would be covered by entry 97 of the Union List and Parliament alone would be competent to enact a law in respect thereof. It was so held by the Supreme Court in the Second Gift-tax, Officer, Mangalore v. D.H. Nazareth, [1970] 76 I.T.R. 713 (S.C.).
22. The next contention raised by the learned counsel is that tax on lotteries is discriminatory and is hit by Article 14 of the Constitution. The argument is that the tax is levied only on cash prizes in a lottery, while lotteries of other kinds have been left out. According to the learned counsel, there are other kinds of lotteries also such as lotteries for allotment of houses. This argument has no merit. A lottery for the allotment of houses does not partake of the nature of gambling or betting. There a person who is allotted a house by drawing lots pays full price for the house. Drawing of the lots is only a method of selecting buyers when the buyers are more than the houses to be sold. The type of lottery that we are dealing with forms a class separate from the type of lottery where houses or other things are allotted to a purchaser by drawing lots. There is thus no question of discrimination.
23. In the result the petition fails and is dismissed with costs.
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Title

Bhola Nath Kesari vs Director Of State Lotteries And ...

Court

High Court Of Judicature at Allahabad

JudgmentDate
22 April, 1974
Judges
  • R Gulati
  • M Mehrotra