No Disallowance u/s 40(a)(ia) when books rejected and income estimated

ORDER

P.M. Jagtap, Accountant Member – This appeal filed by the assessee is directed against the order of the ld. Principal Commissioner of Income Tax-9, Kolkata dated 30.03.2015 passed under section 263, whereby he revised the order passed by the Assessing Officer under section 143(3) treating the same erroneous and prejudicial to the interest of the Revenue for the failure to make the disallowance under section 40(a)(ia) on account of payment of disbursed prize monies.

2. At the outset, it is noted that there is a delay of 75 days on the part of the assessee in filing this appeal before the Tribunal. In this regard, the assessee has filed an application seeking condonation of the said delay and keeping in view the reasons given therein, which are duly supported by an affidavit filed by the assessee affirming the relevant facts on oath, we are satisfied that there was a sufficient cause for the delay on the part of the assessee in filing its appeal before the Tribunal. Even the ld. D.R. has not raised any objection in this regard. We, therefore, condone the delay on the part of the assessee in filing its appeal before the Tribunal and proceed to dispose of the same on merit.

3. The relevant facts of the case giving rise to this appeal are as follows:-

The assessee is a partnership firm, which carried on the business of buying, selling, trading or otherwise dealing in all kinds of lottery tickets during the period from 01.06.2009 to 31.05.2011. A survey under section 133A was carried out at the business premises of the assessee on 27.01.2010, during the course of which certain books of account and loose papers were impounded. Thereafter the return of income for the year under consideration was filed by the assessee on 12.10.2010, wherein profit from the business of dealing in lottery tickets was shown by the assessee at Rs.88,00,00,000/- before depreciation and interest and after claiming depreciation and interest, total income of Rs.63,96,81,915/- was declared by the assessee. On the basis of the documents impounded during the course of survey, the evidences collected during the course of assessment proceedings and the statement recorded under section 131 of one Shri Shantilaln Vira, partner of the assessee-firm, the Assessing Officer arrived at a conclusion that the business of conducting of lotteries was virtually outsourced by the Royal Government of Bhutan to the Private Group to which the assessee-firm belonged on royalty basis. He held that the entire chain of income, from that accruing to the Directorate of Lotteries, Bhutan, the sole purchaser, the wholesaler and the main seller was so arranged on the basis of Bernoullis Theorem that the lottery business conducted by the Group would always give a net profit of 8 to 10% of the total size of lottery tickets. He held that the assessee-firm, however, created a web of transactions routed through bogus/paper/front entities to distance its actual profits from the lottery business of 8% to 10% and master minded a complex tax evasion network. In this regard, the objection raised by the assessee that the Bernoullis Theorem is not applicable in case of the lottery business was not found to be sustainable by the Assessing Officer and overruling the same, he proceeded to reject the books of account of the assessee under section 145(3) of the Act and estimated the income of the assessee by applying the said theorem. Accordingly, the gross profit from the entire business of Bhutan Lotteries was estimated by the Assessing Officer at Rs.400 crores as under:-

“Face value of lottery tickets printed and claimed to have been purchased from the Royal Govt. of Bhutan-Rs.3,800 crores (Total no. of lottery tickets is also taken as around 3800 as more than 99% of the draws consisted of rupee 1 per ticket.

The discounted rate of invoice value of the tickets of Rs.3,800 crores is shown as Rs.2,800 crores i.e. (74% of the face value).

The Royal Govt. of Bhutan is to declare and shown to have declared prize winnings at 70% of the gross lottery size i.e. (70% of Rs.3800 crores) which is Rs.2660 crores.

Facts and figures of M/s. Future Distributors, M.A.V. Associates (alias Vira Enterprise). Angelica Distributor, Teesta Distributor (Marketing companies i.e. main sellers who actually collect the money from the public through dealers and stockists)

Lottery tickets actually sold 62% of 3800= 2356 tickets, Sales realization @ 86.5 prisa average per ticket= Rs.2050 crores (sale prices shown to vary from 81 paise to 94 paise per ticket)

Prize winnings tickets attributable to the sold tickets is 62% of 2660 i.e. the total prize winning tickets of Rs.1650 crores, will go to the holders of the tickets actually sold by these marketing entities.

Gross profit Rs.2050 crores minus Rs.1650 crores = Rs.400 crores (total earnings from the entire business of Bhutan lotteries)”.

4. From the above gross profit estimated at Rs.400 crores, royalty paid to Royal Government of Bhutan amounting to Rs.110 crores and the actual selling expenses spent by the marketing entities amounting to Rs.20 crores were deducted by the Assessing Officer and the net profit from the entire business of Bhutan Lotteries was worked out by him at Rs.270 crores. The net profit of Rs.270 crores so worked out was divided by the Assessing Officer between the assessee-firm and the other distributors in the ratio of their sales and accordingly, the net profit of the assessee from the business of dealing in lottery tickets was arrived at by the Assessing Officer at Rs.197 crores being 73% of Rs.270 crores (before depreciation and interest) as against the net profit of Rs.88 crores shown by the assessee in the return of income. After allowing deduction on account of depreciation and interest, the total income of the assessee from the business of dealing in lottery tickets was determined by the Assessing Officer at Rs.1,72,96,81,920/- for the year under consideration in the assessment completed under section 143(3)/144 vide an order dated 22.03.2013.

5. The records of the assessment made under section 143(3)/144 in the case of the assessee thereafter came to be examined by the ld. Pr. CIT and on such examination, he found that the assessee during the year under consideration had made an aggregate payment of Rs.551.30 crores to the various stockists by way of prize winning money attributable to the unsold lottery tickets. He also found that no tax at source was deducted by the assessee from the said payments, which were forming part of the total purchases debited by it to the profit & Loss Account. According to him, the assessee was liable to deduct tax at source from the said payment under section 194G of the Act and since there was a failure on the part of the assessee to do so, the prize winning money was liable to be disallowed under section 40(a)(ia). Since no such disallowance under section 40(a)(ia) was made by the Assessing Officer in the assessment completed under section 143(3) in the case of the assessee, the ld. Pr. CIT was of the view that the assessment order passed by the Assessing Officer under section 143(3) was erroneous as well as prejudicial to the interest of the Revenue. He, therefore, issued a notice under section 263 on 18.03.2015 followed by a corrigendum notice dated 23.03.2015 requiring the assessee to explain as to why the order passed by the Assessing Officer under section 143(3) should not be revised by exercising the powers conferred upon him under section 263.

6. In reply to the notice issued by the ld. CIT under section 263, a detailed submission in writing was filed by the assessee, which as reproduced by the ld. CIT in the impugned order, is extracted below:-

“In this connection, we refer to your said impugned Notice dated 18th March, 2015 purportedly issued by you under section 263 of the Income Tax Act, 1961 asking us to show cause as to why the provisions of the said section should not be invoked in our case for the assessment year 2010-11, as it appears to you that the Assessing Officer (AO) allegedly omitted to consider certain issues viz. alleged payment of commission in the sum of Rs. 551,30,41,569/- to retailers on account of ‘prize winning tickets’, which according to you came within the ambit of section 194G of the said Act; and that since such payment was made without deducting any tax at source, the same, according to you, was not allowable as an expenditure in view of the provisions contained in section 40(a)(ia) of the said Act.

2. You have also alleged in your said purported notice dated 18th March, 2015 that since the Assessing Officer did not disallow the said sum of Rs.551,30,41,569/-, while passing the assessment order in our case on March, 2013 under section 143(3)/144 of the said Act in respect of the assessment year 2010-11, the said Assessment Order, according to you, was allegedly erroneous as well as prejudicial to the interest of the Revenue within the meaning of section 263 of the said Act.

3. At the very outset, we deny and dispute each and every allegation made by you in your said purported Notice dated 18th March, 2015; and we say and submit that the said impugned Assessment Order dated 22nd March, 2013 passed by the learned AO under section 143(3}/144 of the said Act, although erroneous in law in respect of various issues already raised by us in the Appeal filed by us and pending before the learned CIT(A)- XXXIII, Kolkata (now renumbered as CIT(A)-VII], is not prejudicial to the interest of the Revenue, as alleged or otherwise or at all.

4. We repeat and reiterate that the said impugned Assessment Order dated 22nd March, 2013 passed in our case is in fact prejudicial to the interest of the Assessee Firm herein, and not prejudicial to the interest of the Revenue.

5. We also say and submit that the issue raised by you in your said impugned Notice dated 18th March, 2015 had already been examined by the AO, in course of the assessment proceedings in our case for the assessment year 2010-11.

6. We therefore say and submit that the conditions precedent for invoking the powers and jurisdiction under section 263 of the said Act are not satisfied in the instant case; and therefore the impugned proceedings sought to be initiated by you through your said impugned notice dated 18th March, 2015 is wholly without jurisdiction, illegal, invalid and void ab-initio.

7. Without prejudice to the above, we deal hereunder on merits the issues raised by you in your said purported notice dated 18th March, 2015:

8. The modus operandi of the business carried on by the Assessee Firm may be briefly summarized as under:

9. During the financial year ending 31st March, 2010 corresponding to the assessment year 2010-11, the assessee firm purchased and sold Bhutan lottery Tickets organized and conducted by the Royal Government of Bhutan, as per Audit Certificate dated 15th March, 2013, a copy whereof, which is already on the assessment records, is annexed hereto for ready reference and marked with the letter ‘A’.

10. The break-up details of purchases of paper lottery tickets made by the assessee firm from PLE, during the said financial year ending 31st March, 2010, draw date wise, are also given in the enclosed statement, a copy whereof, which is already on the assessment records, is annexed hereto for ready reference and marked with the letter ‘B’:

11. In any lottery draw, the prizes may be won with reference to the denomination printed on the various tickets forming part of one or other bundles. When a prize is won on anyone or more particular ticket forming part of any bundle, the ‘super/gold/special ticket’ contained in the respective bundle would also become entitled to a prize, as clearly printed in the Scheme itself.

12. The expression “PWT” was used to describe those paper lottery tickets, on which prizes were declared, in the usual course, as per Scheme framed by the Royal Government of Bhutan; and that the expression PWT-1/PWT-2″was ued to describe those “super and special lottery tickets”, which were separately printed and on which prize amounts were different, as per Scheme framed by the Royal Government of Bhutan, as compared to the PWT Paper Lottery Tickets.

13. It has also been confirmed by Shri Martin in reply to Question No.17 put to him, while recording his statement on 23’d November, 2013, that each bundle of 100 paper lottery tickets contained one ‘super/gold ticket’ (with range of printed number of the entire bundle of 100 tickets); and each bundle of 1000 paper lottery tickets [in addition to ten ‘super/gold tickets’] contained one ‘special ticket’ (with range of printed number of the entire bundle of 1000 tickets);

14. Any buyer of either of the said two bundles get these ‘super/gold/special tickets’ along with the bundle of 100/1000 tickets. The ‘super/gold/special tickets’ also participate in the draw, through the independent numbers of 100/1000 tickets. The number printed on these tickets is only the ‘range of the entire bundle of 100/1000 lottery tickets’, as the case may be. If an individual buyer buys the whole bundle, he automatically gets the ‘super/gold/special tickets’ already contained in the bundle. When a retailer buys the bundles, he may sell the entire bundle to anyone person; or in the alternative, he may sell one or more tickets, in loose form, to one or more persons. In such cases, the retailer himself may retain the ‘super! gold/special ticket’. But such ‘super/gold/special tickets’ are not meant to be retained by the distributor/stockist/agent/sub-agent/retailer by way of their commission or remuneration, as the case may be; The Super/Gold/Special tickets are meant for the public, who buy in large quantity such as 100/1000 tickets.

15. The Assessee Firm states that it does not pay the prize monies directly to any person who possesses the prize winning lottery ticket. The agents/sub-agents/retailers concerned make payments of prize monies (always not exceeding Rs.5,ooO/- per ticket), both by way of PWT and also PWT-1/PWT-2 (super/gold/special) tickets, on production of the prize winning ticket before either of them; and the Assessee Firm makes reimbursements on behalf of PLE/RGB by way of adjustments of the accounts, as and when submitted by the stockists to it. The Assessee Firm deals only with the stockists. The stockists, in their turn deal with the agents, the agents deal with sub-agents and the sub-agents deal with the retailers, all in the form of a chain.

16. The Assessee Firm states that it did not pay and/or distribute any prizes on any prize winning tickets to any person whatsoever. In so far as, the prize money of the value not exceeding Rs.5,000/- is concerned, the same was paid and/or distributed directly to the prize winners by agents/sub-agents/retailers for and on behalf of RGB, and not by the Assessee Firm, who was merely a Distributor. In any event the responsibility to deduct tax at source under section 194B of the said Act, if at all applicable, was upon RGB; and not on the distributor/stockist/agent/sub-agent/retailer etc., as the case may be, who only claimed reimbursements. This is for the reason that the RGB is the ‘person responsible’ for making the payment as provided for under the relevant provision of the Income Tax Act, 1961.

17. The payment of prize money was the sole responsibility of RGB and so far as the assesee firm is concerned the same was required to be adjusted against the purchase price payment by the assessee firm in terms of clause 12 of the said Agreement dated 1st June, 2009. In other words, payment of prize money is not the expenditure of the Assessee Firm; the expenditure of the Assessee Firm, which is debited in its Profit & Loss Account, is the cost of purchase of such tickets (Rs.1,393.22 crores) in bulk from PLE.

18. The prize monies paid on the winning tickets is the expenditure of RGB, and not of a distributors/Stockists/agents/sub-agents/retailers etc. Further, the Assessee Firm did not pay and/or distribute any prizes on any prize winning tickets to any persons whatsoever. In so far as, the prize money of the value not exceeding Rs.5,000/- is concerned, the same was paid and/or distributed directly to the prize winners by the agents/sub-agents/retailers for and/or on behalf of RGB, and not by the Assessee Firm, who was merely a distributor.

19. The Assessee Firm did not debit its Profit & loss Account with the prize money paid on the winning tickets. What is debited in the Profit & Loss Account of the Assessee Firm is the purchase consideration payable by it to M/s. Pema Lhaden Enterprise for purchase of lottery tickets.

20. The Assessee Firm states that the sum of Rs.551,30,41,569/- representing payments made by stockists/agents/sub-agents/retailers by way of prizes won on ‘super/gold/special tickets’ for and on behalf of RGB, has not been debited by the Assessee Firm, in its books of accounts, as an expenditure. The prize monies paid on the winning tickets is the expenditure of RGB, and not of the distributors/stockists/agents/sub-agents/retailers etc. The said amount has been claimed by the stockists from the Assessee Firm, by way of adjustments, against the dues payable by them to the Assessee Firm, for purchase of lottery tickets in bulk. The same has been reimbursed by RGB through their chain of distributors by way of adjustment against invoices raised by RGB.

21. Since the amount of prizes paid on such ‘super/gold/special ticket’ are nothing but “winnings from lottery” within the meaning of section 1946 of the Income Tax Act, 1961, and the amount of prize is Rs.5,000/- or less per ticket, no tax was at all required to be deducted at source at any relevant time whatsoever. The said limit of Rs.5,000/- is now increased to Rs.10,000/- by the Finance Act, 2010 w.e.f. 01.07.2010.

22. In any event, there is no liability to deduct tax at source when the person making the payment seeks reimbursement from the Principal (PLE/RGB, in the instant case); and the prize monies having been reimbursed, the same does not enter the Profit & loss Account of the person seeking reimbursement, as it is not his/their expenditure. Reliance in this connection is placed on the decision of the Hon’ble Delhi High Court in CIT v. Hardarshan Singh [2013] 350 ITR 427 (Del), as well as of the Hon’ble Gujarat High Court in CIT v. Gujarat Narmada Valley Fertilizers Co. Ltd. [2014] 361ITR 192 (Guj), the SLP filed by the Revenue against the later judgment was dismissed by the Hon’ble Supreme Court on 17th January, 2014 (ITA 315 of 2013 & CC No. 175 of 2014).

23. It may be appreciated that section 194G of the said Act applies only to payment of commission, remuneration or prize (by whatever named called) on lottery tickets, to any person who is the stockist, distributor or seller of the lottery tickets. The word ‘prize’ appearing in section 194G must be understoodejusdem generis of the nature of preceding words viz. ‘commission’ or ‘remuneration’. In other words, section 194G would apply only when prizes by way of commission or remuneration, is paid to any stockist, distributor or seller of the lottery tickets. It does not, and in our respectful submission, cannot apply to prizes won on any ticket, as per pre declared prize distribution Scheme of any lottery. We therefore say and submit that section 194G of the said Act has no application whatsoever in the facts and circumstances of the instant case.

24. We say and submit that no portion of the sum of Rs.551,30,41,569/-referred to by you in your impugned Show Cause Notice dated 18th March, 2015 purportedly issued under section 263 of the said Act is payment of commission within the meaning of section 194G of the said Act, as arbitrarily and wrongly alleged by you, or otherwise or at all.

25. We say and submit that the said sum of Rs.551,30,41,569/- is part of Rs.1326,81,63,490/- (kindly see column 6 of the Statement annexed hereto and marked with the letter ‘8’) being the value of prizes won on the sold tickets, which amount was reimbursed by us to the stockists, who in turn made reimbursements to their agents/sub-agents/retailers etc. The said sum of Rs.1326,81,63,490/- was deducted by us from the net purchase value in the aggregate sum of Rs.1393,22,38,446/- (kindly see column 5 of the Statement annexed hereto and marked with the letter ‘B’), payable by us to PLE for purchase of Bhutan paper lottery tickets in terms of the Agreement executed on 1st June, 2009 between the Assessee Firm and PLE, a copy whereof is already on our assessment records.

26. As already stated earlier, since our Profit and loss A/c for the financial year ending 31st March, 2010 corresponding to the assessment year 2010-11 is debited only with the purchase value of Lottery Tickets in the said sum of Rs.1393,22,38,446/-, and not with any commission and/or any prize payable on the lottery tickets, we say and submit that there was no requirement of any deduction of tax at source either under section 194G and/or section 194G of the said Act; and therefore there was no question of applying section 40(a)(ia) of the said Act, in our case, in respect of the assessment year 2010-11.

27. We therefore say and submit that in the facts and circumstances of the instant case, the Assessment .order dated 22nd March, 2013, cannot by any stretch of imagination, can be said to be erroneous in law and/or prejudicial to the interest of the revenue, in respect of the matters raised by you in your said impugned Show Cause Notice dated 18th March, 2015.

28. Please also note that the aforesaid issues have already been examined by the learned Commissioner of Income Tax (Appeals)-XXXIII, Kolkata in Appeal No.45/CIT(A)-XXXIII, JCIT, R-53 of 2013-14 filed by us against the said impugned Assessment Order dated 22nd March, 2013 passed in our case under section 143(3) /144 of the said Act in respect of the assessment year 2010-11.

29. The said issue in question had already been raised by the AO in his Remand Report dated 12th March, 2014 filed by him before the learned CIT(A), in the course of hearing of the said Appeal; and our firm has also dealt with the said issue in our reply dated ih April, 2014 to the said Remand Report filed before the learned CIT(A).

30. Please also note that we had made our full submissions before the learned CIT(A), but no final order could be passed by him, since he has been waiting till date for further comments from the AO, in regard to various other issues raised by him to the AO.

31. We therefore say and submit that the initiation of impugned proceedings under section 263 of the said Act, in the facts and circumstances of the instant case, is wholly without jurisdiction, illegal, invalid and void ab-initio”

7. In addition to the above submission, the following documents were also filed by the assessee before the ld Pr. CIT in response to the Corrigendum issued by the ld. Pr. CIT dated 23.03.2015:-

8. The written submissions filed by the assessee as well as the documents filed in support were considered by the ld. CIT in the light of material already available on record and after discussing the same in detail, he held that there was no merit in the case of the assessee. Accordingly, he rejected the stand of the assessee after recording his findings/observations in paragraph no. 3 of his impugned order, which is reproduced hereunder:-

“3. The arguments put forward by the Id A.R.s have carefully been examined in the light of the documents furnished by them and the evidences collected by the A.O. in the course of the enquiry during the ongoing remand proceeding before the Ld. CIT(A)-7, Kolkata (erstwhile CIT(A)-XXXIII, Kolkata). It is seen that Shri Santiago Martin acquired the right to market the Bhutan lottery tickets through his company M/s Martin Lottery Agencies Ltd. which was subsequently renamed as M/s. Future Gaming Solutions India Pvt Ltd.(FGSIPL). Instead of appointing the stockists directly he created a new intermediary tax entity every two years for the purpose of appointing a large chain of stockists. These intermediary tax identities were M/s. Tiger Associates (2005-2007), M/s Vira Enterprise alias M/s M.A.V. Associates (2007-2009), M/s Future Distributors, i.e. the assessee firm (2009-2011) and M/s Future Plus Enterprise Pvt. Ltd. (2011-2013). These concerns acted as the main sellers of the Bhutan Lotteries. The business of selling Bhutan Lottery tickets changed’ hands every two years without any valid reason. It was found that the changing over of hands would never be with the reference to the F.Y. period and it would always be after two or three months into a new financial year.’ This made the reconciliation ‘of the balances of the different entities (floated by Shri Martin) by any tax officer a virtual impossibility and thereby gave the assessee a free hand to claim journal entry adjustments whenever caught in a tax bind. The new entity would take over the earlier entity with the assets and liabilities which remained unsettled even till the time the new entity would further be taken over by another new entity. The outgoing entity would not close its multiple bank accounts and keep receiving money from the stockists in those accounts long after it had stopped its business and the said money would be transferred mainly to the multiple bank accounts of M/s. Best & Company, the proprietorship concern of Shri S. Martin. In the course of the assessment proceeding, no satisfactory explanation could be adduced by Sri Martin regarding the aforesaid frequent change of entities and non-closure of their multiple bank accounts. As a result of a thorough probe by the assessing officer about the modus operandi of the entire chain of Bhutan lottery business starting from Bhutan to the final lottery buying public in West Bengal, it stood established that Shri S. Martin along with his cahoots Shri Vira and Sri Chowrasia had masterminded a complex tax evasion network. The assessee group has refused to give any explanation as to why the intermediary concerns in the whole chain (periodically discontinued) were not formally dissolved and the requisite intimation provided by the concerned assessing Officer. It has been observed that M/s. Pema Lhaden Enterprise (Proprietor Ms. Pema Lhaden was appointed the assessee group with the prior concurrence of the Royal Govt of Bhutan (RGB) as the sole purchaser (again in the nature of an intermediary) with the primary objective of avoidance of the payment of service tax introduced by the Finance Bill, 2008. The same has been admitted by Shri S. Martin in his statement recorded by the A.O. It has come to the notice that Ms. Pema Lhaden claimed to have paid huge amount of commission to her stockists based in India and paid TDS @ 3% thereon as shown in her returns filed with the Bhutan income-tax department. It was later on discovered that none of such India-based stockists declared any such commission income in their LT. returns filed in India. It, therefore, transpired that Ms. Pema Lhaden claimed bogus commission expenditure to reduce her taxable income arising out of the illegal transfer of money generated by the lottery business ‘conducted by the Martin Group. That Shri Martin operated as a lottery scamster has been established by the chargesheet filed by the CBI, Cochin Branch against Shri Martin. The press reports also highlighted at the relevant point of time the details of the Bhutan lottery scam. It is to be noted that on being informed by the Govt. of India about the flagrant violations of the Lotteries Regulation Act, 1998, the Royal Govt. of Bhutan was compelled to shut down its Directorate of Lotteries in August, 2011. The CBI charge-sheet matter has been confessed by Shri Martin. It is established beyond doubt that the web of entities in various tax jurisdictions’ was created and controlled by the Martin Group (of which the assessee firm was an active member) either directly or through its stooges for avoiding the detection of the juggling of figures of the number of lottery tickets sold and unsold so as to appropriate the entire prize winnings from the unsold tickets without paying any tax thereon. The Directorate of Lotteries of the RGB had actually outsourced the conducting of Bhutan lotteries to the Martin group on a fixed royalty I guarantee payment of Rs. 23 crores as evidenced by the weekly payments made to it by FGSIPL. It has been contended by the Id. A.Rs that the Bhutan lottery tickets used to be received by the assessee from the sole purchaser, i.e. PLE and subsequently transmitted to its stockists on “Actual Sold Basis” only. In this regard a copy of the agreement dated 15-05-2008 between the Royal Govt. of Bhutan and M/s Martin Lottery Agencies Ltd. (now M/s Future Gaming Solutions India Pvt. Ltd.) has been examined: In the course of the recording of his deposition Shri Martin intimated the department that the said agreement was entered through a tender process floated by the RGB. As per this agreement, the tickets were to be purchased by the Martin Group from the RGB on “All Sold Basis” which entitled the group to a discounted price of 26% of the M.R.P. along with the risk of paying for the unsold tickets and simultaneously gaining the winnings from the unsold tickets. By the own admission of Shri Martin, various State Govts., i.e. Tamil Nadu, Andhra Pradesh, Arunachal Pradesh, Maharashtra, Punjab and West Bengal used to sell tickets to him on “All Sold Basis” only and that too for a much lesser discount than allowed by the RGB. It is, therefore, established that where the lotteries are conducted by the Govts. (subjected to a high degree of regulation and transparency) the “All Sold Basis” is the usual norm. Shri S. Martin in his deposition dated 30-12-2013 had contended that the basis of sale was subsequently changed by the RGB to the “actual sold basis” through introduction of an addendum in the original agreement which was stated to have been effected without any re-tendering process. It is pertinent to mention that the original agreement which operated on “All Sold Basis” did not have any clause requiring the sole purchaser to intimate the details the unsold lottery tickets to the RGB before the actual draw. Had the addendum in the agreement been genuine, then the changing of the terms from “All Sold Basis” to “Actual Sold Basis” could not take place without such a precondition of reporting the unsold tickets before the happening of the actual draw. The absence of such a clause in the revised agreement confirms that the addendum was merely a facade to’ hoodwink the Service-tax department, while in reality the transactions were carried out on “All Sold Basis” as stipulated in the original agreement. The fact that both the agreement and the addendum did not have any clause as to how the unsold tickets would be returned to the RGB for destruction also corroborates that the Govt. and the assessee group had sold lottery tickets only on “All Sold Basis”. The findings point to a grand collusion between the defacto conductor (the assessee group) and the dejure conductor (RGB) of the lottery operation. The RGB by outsourcing the purported destruction of the unsold tickets is found to have abdicated its sovereign and statutory responsibility. As per the Lotteries Regulation Act, 1998, the proceeds for the sale of lottery tickets can be credited only in the public account of the state. The RGB had basically tailed to comply with the same. The Directorate of Lotteries, Bhutan without obtaining any FEMA permission had opened a current account with the IOB, Cannaught Place Branch, New Delhi like a private citizen and allowed the benami operation of the same by the Martin Group. This account was subsequently shifted to the IOB, Palakkad Branch, Kerala in July, 2010. This account has been found to contain transactions of only two types, i.e., receipts of all kinds of odd amounts from Martin Lottery Agencies Ltd. and immediate payments to the various lottery printers through RTGS. It proves that the printing work was also supervised by the Martin Group. Though it was the duty of the RGB to deliver the lottery tickets from the high security printing press to the sole purchaser, the evidences corroborate that the transportation charges for the lottery tickets were never paid by the RGB. On the contrary, the freight charges were borne by the different marketing entities controlled by Shri Martin. The above facts clinchingly established that Shri S. Martin and his business concerns were the defacto conductors of the Bhutan lotteries. Therefore, the arguments of the Id. A.Rs that the lottery operation was exclusively controlled by the RGB and that the lottery tickets were sold by it on “Actual Sold Basis” are not acceptable.

The perusal of the various documents Impounded during survey operation revealed that the same contained payments to various stockists against the entries having narrations PWT and PWT-1. When required to explain the exact nature and significance of such payments, the assesse firm had come out with various contradictory submissions and it kept on changing its stand vis-a vis the issue. PWT basically represented the prize winning tickets. Hence the figures indicated against the said abbreviation implied payments relating to the tickets which won the prizes. It has been the contention of the Id. A.Rs that the prizes not exceeding Rs. 5000/- declared on the paper lottery tickets are required to be disbursed to the general public directly by the stockists/sub-stockists/retailers/agents appointed by assessee and the stockists and that the prize money exceeding Rs. 5000/- was to be paid by the RGB only. It has been contended that stockists used to seek only reimbursement of disbursal of the prize money from the assessee through comission of their respective weekly bills raised on the assessee. The Id. A.Rs averred that the expression “PWT” has been used in the assessee’s books to describe the paper lottery tickets on which prizes were declared in the usual course as per the scheme framed by the RGB and that the expression “PWT-1/PWT-2” has been used to describe the “super, gold and special lottery tickets” which are separately printed and which carried different prize amounts as compared to the ordinary PWT lottery tickets. In the written submission the assessee has sought to explain the composition of the super, gold and special lottery tickets in the bundles of 100/ 1000 ordinary tickets which participate in the draw. The “super, gold and special lottery tickets” along with the other tickets of the bundles are stated to be participating in the lottery draw through the independent numbers printed on them. It was pointed out that if any individual buyer purchases the whole bundle, he automatically gets the “super, gold and special lottery tickets” already forming a part of the bundle. It has been claimed that the “super, gold and special lottery tickets” are not meant to be retained by the distributor/stockist/agent/sub-agent/retailer by way of their commission or remuneration, but the same are meant for the public who buy tickets in large quantity such as bundles of 100/1000 tickets. The Id A.R.s have emphasized that the assessee never pays the prize money directly to any person whatsoever who possesses the prize winning tickets. It was averred that the prize money below Rs. 5000/- was paid and/or distributed directly to the prize winners by agents/sub-agents/retailers for and on behalf the RGB and not by the assessee firm which acts as a mere distributor. It is their submission that the stockists who make the payments to the prize winners claim the reimbursements from the assessee by way of adjustment in their accounts periodically submitted. According to the Id. A.Rs, the payment of the prize money was the sole responsibility of the RGB primarily constituted an expenditure of the RGB and not of a distributor/stockist/agent/sub-agent/retailer and hence the responsibility, if any, to deduct tax at source u/s 194B of the I.T. Act devolved on the RGB which is the “person responsible” for making the payment. The above contentions of the Id. A.R.s regarding the payments on the prize winning tickets and the consequent disbursements taking place among the PLE, the assessee, stockists, sub-stockists, agents etc. have carefully been examined vis-a-vis the findings of the A.O. during the assessment proceeding and subsequently on the basis of the documents obtained and the statements of the major partner of the assessee. The ledger account of the RGB (Directorate of Lotteries) as appearing in the books of a/cs of FGSIPL Bhutan branch revealed that even the prizes above Rs. 5000/- were all paid by FGSIPL from its a/c no. 5002 maintained with the Bhutan National Bank and not by the RGB. Not a single prize was found to have been paid by the RGB. As per the account of the RGB appearing in the books of M/s Martin Lotteries Agencies Ltd., it has been debited by passing entries prize money received by way of journal entries. In fact, the said company never received any prize money from the RGB, the same being only a book entry. In the said account there was no mention of PWT and PWT-l. The agreement dated 15-05-2008 does not state that the RGB will be declaring two different types of prizes, i.e. one for the winning ticket holder and the other for the seller of the ticket. The assessee firm in reply to the AO.’s show cause notice has submitted that for the sake of easy accounting the assessee had termed the super ticket prize and special ticket) prize as PWT-1 and that the same was nothing but the general prize winning tickets as mentioned in the scheme of the lotteries. However, perusal of the schemes indicated that nowhere it stipulated that super tickets and special tickets are PWT-l and they are payable to the sellers of the tickets. Subsequent to the completion of the assessment proceeding Shri S. Martin in his deposition dated 23-11-2013 categorically stated that PWT-1 are separate tickets in separate bundles given to the stockists and were thus not transferrable like the winners of PWT. In that deposition Shri Martin also indicated that PWT-I constituted a part of the total winning draw of the lottery scheme. In a subsequent letter dated24-02-2014 Shri Martin offered a completely different version, wherein he clarified that PWT and PWT-l (super, special and bulk) were supposed to be meant for the purchaser of the ticket bearing the lucky draw number and that no amount attributable to PWT and PWT-1 was payable to any seller of the tickets. This version of Shri Martin clearly militates against the statements given by three stockists and a retailer [ i.e. Shri Manoj Halder of M/s Nirala Agency, Shri Anup Khasnobis of Mls Puja Agency, Shri Srichand Bansal of M/s Rishi Lottery Agency Pvt. Ltd and the retailer Shri Uma Shankar Das) whose depositions were recorded by the A.O, These stockists and the retailer had categorically submitted that the prize money relating to PWT-l was exclusively for the sellers. Shri Martin also failed to explain as to why the schemes had three different prizes for the same prize winning tickets, if the same were all meant to be given to the ultimate holder of the prize winning ticket. It has been found by the A.O. that weekly payment statement summary of the 125 stockists contained only the details of the super and special tickets (PWT-I) with no mention of PWT at all therein. This fact vindicated that PWT-1 were not meant for the ultimate prize winner. In the course of the enquiry conducted by the A,O, it has come to the fore that the majority of the stockists were basically the colluding beneficiaries of the assessee firm, because without their active help the assessee firm and for that matter the Martin Group would not have been in a position to fudge the accounts by shifting the prize winning tickets of the unsold lot to the sold lot. As a result, these stockists have also been found to be changing their versions frequently regarding the physical features of the super and special tickets as well as the persons who can claim the same. At times they stated that the super and special tickets are part of the saleable lottery ticket booklets and at other times they claim the same to be a separate booklet by itself. This change in versions was prompted when the A.O. raised the question of deduction of tax at source in terms of the provisions ofS.194G of the I.T. Act. In order to ascertain the correct nature of PWT-1 the A.O. also conducted enquiries with the Director of Lotteries, West Bengal. As per his reply dated 21-05-2014, it has been gathered that though the nomenclature “super and special tickets” is given to PWT-1, the same are basically in the nature of incentives for the sellers and not payable to the winners of the lottery tickets. It is, therefore, established beyond doubt that the PWT-1 payments were basically made by the assessee to its stockists, which, in turn, were not supposed to part with any part of the said money by way of the other payments to any lottery playing public. It has been found (on the basis of the entries recorded in computerised ledger a/cs of the prize winning tickets as extracted from the impounded hard disk FDA-1 and also on the basis of the details subsequently furnished by the assessee) that during the relevant accounting year the total payments made by the assessee against PWT-1 stood at Rs. 551,30,41,569/-. The said amount was also found to be a part of the total purchase amount of Rs.1393,22,38,446/- debited to the profit & loss a/c. Since the entire sum of Rs.551,30,41,569/- represented the incentive payment/prize money given to the stockists by the assessee, the same constituted income in the hands of the former. Therefore, the question of deduction of tax at source u/s 194G from the said payment naturally arose. When confronted in this regard, the Id. A.Rs vehemently assailed the interpretation of the department in this regard and contended that the impugned sum of Rs.551.30 crore was a part of a sum of Rs.1326.82 crore being the value of the prizes won on the sold tickets which amount was reportedly reimbursed by the assessee to the stockists. They also submitted that the said sum of Rs.1326.82 crore was deducted by the assessee from the net purchase value in the aggregate sum of Rs.1393.22 crore ‘payable by the assessee to M/s Pema Lhaden Enterprise for purchase of the Bhutan paper lottery tickets. Another argument has been advanced by the Id. A.Rs that since the sum of Rs.551.30 crore was basically in the nature of reimbursement to the stockists it cannot come within the ambit of the provisions of S. 194G of the I.T. Act. They also argued that if the said sum be treated as a part of the purchase figure debited to the P&L a/c, then also it cannot be hit by the mischief of the provisions of S. 194G. After careful consideration, I do not find force in the arguments of the Id A.Rs, because the sum of Rs.551.30 crore paid to the stockists by way of incentive constituted income in their hands and hence the same warranted deduction of tax at source by the assessee u/s 194G. Further, the sum of Rs.551.30 crore stands debited to the P&L a/c by virtue of being a part of the purchase figure reflected in the P&L a/c and was thus in the nature of an expenditure claimed by the assessee. For non-deduction of tax at source this expenditure ought to have been disallowed u/s 40(a)(ia) of the LT. Act. Since the A.O. omitted to make the said disallowance, the assessment order dated 22-03-2013 was rendered grossly erroneous as well as prejudicial to the interest of the revenue”.

9. On the basis of the above observations and findings recorded by him, the ld. CIT held that the order passed by the Assessing Officer under section 143(3)/144 was erroneous and prejudicial to the interest of the Revenue and setting aside the same by exercising the powers conferred upon him under section 263, he directed the Assessing Officer to frame the assessment de novo by taking cognizance of the issues raised by him after conducting necessary enquiries in that regard. Aggrieved by the order of the ld. Pr. CIT passed under section 263, the assessee has preferred this appeal before the Tribunal.

10. The ld. counsel for the assessee, at the outset, explained the entire modus operandi of the business through which the lottery tickets issued by the Royal Government of Bhutan were distributed. He submitted that the Royal Government of Bhutan had appointed M/s. Martin Lottery Agencies Limited (earlier known as Future Gaming Solutions India Pvt. Limited and now as Future Gaming and Hotel Services Pvt. Limited) as its sole purchaser to sell all types of conventional paper lotteries all over Bhutan and India. The said sole purchaser appointed two wholesalers namely M/s. Megha Distributor for the State of Kerala and M/s. Pema Lhaden Enterprise for Bhutan and West Bengal. M/s. Pema Lhaden Enterprise, a proprietary concern of Ms. Pema Lhaden of Phuentsholing, appointed the assessee-firm as the main seller of Bhutan Paper Lotteries in the State of West Bengal in terms of agreement dated 01.06.2009. The assessee-firm appointed more than 100 stockists in the area of South Bengal for the sale of paper lottery tickets and the said stockists in turn engaged various persons as sub-stockists, who again appointed retailers to sell the lottery tickets. The ld. counsel for the assessee submitted that all these arrangements/agreements between sole purchaser, wholeseller, main seller, stockists, sub-stockists and retailers were on net sale basis or actual sale basis and accordingly the unsold tickets, if any, were required to be returned back for ultimate destruction by the Royal Government of Bhutan. He submitted that the assessee-firm thus only dealt with M/s. Pema Lhaden Enterprise (PLE) and stockists and it had no connection either with the sub-stockists and/or with the retailers. He submitted that PLE used to raise weekly bills/invoices on the assessee in respect of actual sold paper lottery tickets while the assessee in its turn used to raise weekly bills/invoices on each of the stockists only in respect of actual sold paper lottery tickets.

11. After elaborating the modus operandi followed in the distribution of lottery tickets of Royal Government of Bhutan, the ld. counsel for the assessee submitted that the prizes declared on paper lottery tickets exceeding Rs.5,000/- were to be paid directly by the Royal Government of Bhutan as per the terms of the agreement while the prizes not exceeding Rs.5,000/- were to be disbursed to the prize winners directly by the retailers/last sellers of the lottery tickets. He submitted that the retailers used to seek reimbursement of such prize money distributed by them to ultimate prize winning from the concerned stockists/sub-stockists and the stockist appointed by the assessee-firm in turn used to seek reimbursement of disbursed prize monies by way of adjustment against the respective weekly bills drawn by the assessee-firm on them. He submitted that the assessee-firm in turn claimed reimbursement of the disbursed prize monies from PLE by way of adjustment against the amount due to the said entity towards purchase of lottery tickets.

12. The ld. counsel for the assessee also explained that there was another scheme framed by the Royal Government of Bhutan called as Prize Winning Tickets(1) (in short PWT-1). He submitted that the tickets under this scheme described as “super and special lottery tickets” or “bulk tickets” were separately printed and each bundle of 100 tickets contained one ‘super/gold ticket’, while each bundle of such 1000 tickets contained ‘special ticket’. He explained that any buyer of either of the said two bundles got these ‘super/gold/special tickets’ and these ‘super/gold/special tickets’ also participated in the draw through the independent numbers. He submitted that when a retailer bought the bundles, he could sell the entire bundle to any one person, or alternatively he could sell one or more tickets in loose form to one or more persons. Where tickets were sold loose, the retailer himself was entitled to retain the ‘super/gold/special tickets’. He contended that the prize money under this scheme, i.e. PWT-1 also was disbursed in the same manner as the prize money was distributed on ordinary/normal paper lottery tickets (PWT), inasmuch as, the prize monies above Rs.5,000/-were paid by Royal Government of Bhutan directly while the prize monies upto Rs.5,000/- were paid by the retailer directly to the prize winner, which was subsequently reimbursed by the Royal Government of Bhutan through its chain of intermediaries.

13. After explaining the modus operandi of the lottery business and unfolding the scheme of prize distribution to the winners of the lottery tickets, the ld. counsel for the assessee proceeded to raise various contention in support of the assessee’s case that there was no obligation to deduct tax at source from the payment of prize monies as per the provisions of section 194G and the order of the Assessing Officer not making disallowance under section 40(a)(ia) on account of prize monies was neither erroneous nor prejudicial to the interest of the Revenue calling for revision under section 263 by the ld. CIT. Firstly he contended that the relationship between the assessee-firm and the stockists being that of principal to principal, the amount in question paid/reimbursed by the assessee on account of prize money was not in the nature of ‘commission’ as envisaged in section 40(a)(ia) read with section 194G of the Act. He submitted that a combined reading of section 40(a)(ia) and 194G of the Act makes it abundantly clear that the disallowance under section 40(a)(ia) with respect to the failure on the part of the assessee to deduct tax at source under section 194G is restricted to income of the payee in the nature of commission on the sale of lottery tickets, which has been claimed by the payer as expenditure in its Profit & Loss Account. He submitted the term ‘commission or brokerage’ as defined in Explanation (i) to section 194H includes payments received or receivable by a person acting on behalf of the another person for services of specified nature rendered by the former to the latter. He contended that commission or brokerage for the purpose of section 40(a)(ia) thus should emerge from its principal-agent relationship and disallowance by invoking the said provision could be made in the instant case only if there was a principal-agent relationship between the assesese and the stockists and the impugned payments constituted income in the nature of commission on the sale of lottery tickets in the hands of the stockists. He contended that the relationship between the assessee and the stockists, however, was that of seller and buyer on principle to principle basis and therefore, the amount of prize money could not be treated as commission on sale of lottery tickets paid by the assessee to the stockists arising on account of principal-agent relationship so as to attract the provisions of section 194G as well as the consequential disallowance under section 40(a)(ia). In support of this contention, he relied on the decision of the Hon’ble Sikkim High Court in the case of Future Gaming and Hotel Services Pvt. Limited –vs.- Union of India (WP(C) No. 39 of 2015 dated 14.10.2015), wherein it was held that activities of the lottery distributors did not constitute the service as the activity comprising of promotion, organizing, reselling or in any other manner assisting or arranging the lottery tickets of the State, did not establish the relationship of principal and agent but it was rather that of a buyer and a seller on principal to principal basis.

14. The ld. counsel for the assessee also contended that the provisions of section 194G are applicable only in cases, where the impugned payments constitute income by way of commission, remuneration or prize of the payee. He contended that where such payments do not constitute income of the said nature in the hands of the payee, the payer is not required to deduct tax at source on such payment under section 194G of the Act. He reiterated that the amount in question on account of prize money was paid by the assessee to the stockists as reimbursement on behalf of the Royal Government of Bhutan and since the amount of such prize money was in turn paid by the stockists to the sub-stockists/retailers, the same did not constitute the income in their hands.

He contended that no tax at source, therefore, was deductible under section 194G from the amount in question paid by the assessee as reimbursement of prize money actually paid over by them to the sub-stockists or retailers which did not constitute their income. In support of this contention, he relied on the following judicial pronouncements, wherein it was held that TDS provision is not applicable in the case of reimbursement of expenses:-

15. The ld. counsel for the assessee then referred to the provisions of section 194G and section 204 and submitted that as per clause(iii) of section 204- ‘person responsible for paying’ ‘winnings from lottery or crossword puzzle’ under section 194B and commission etc. on sale of lottery tickets under section 194G is the payer himself, i.e. the person actually making payment of the impugned sum under consideration. He contended that the assessee in the present case cannot be treated as ‘the person responsible for paying’ the prize monies on super/special tickets (PWT-1) in terms of section 204 read with sections 194B and 194G of the Act as the person responsible for paying prize monies exceeding Rs.5,000/- was the Royal Government of Bhutan, while the person responsible for paying prize monies upto Rs.5,000/- were the retailers/sellers, who had ultimately sold the tickets to the general public. He submitted that even the prize money upto Rs.5,000/- in respect of bulk tickets retained by the retailers/last sellers were paid by sub-stockists. He contended that the assessee-firm thus never paid any prize money (either PWT or PWT-1) either to the lottery playing public or to the retailers/last sellers and it, therefore, cannot be treated as person responsible for paying prize monies in terms of section 204 and the question of liability to deduct tax under section 194G or consequential disallowance under section 40(a)(ia) would not arise.

16. The ld. counsel for the assessee further contended that the amount in question was not in the nature of any commission or remuneration paid to the stockists by the assessee, but the same represented reimbursement of prizes from the winning lottery tickets, which were paid by the retailers to the general public. He submitted that such prizes exceeding Rs.5,000/- were directly paid by the Royal Government of Bhutan while the prize money upto Rs.5,000/- was paid by the retailers/sellers of the lottery tickets to the general public, which was subsequently got reimbursed from Royal Government of Bhutan through the various agencies acting in distribution chain. He contended that even if his argument relating to no requirement of TDS on reimbursement is found to be not acceptable, the deduction of tax at source, if any, was required to be done as per the provisions of section 194B applicable to payment of income by way of winning from any lottery, etc. and not under section 194G as held by the ld. CIT. He invited our attention to the provisions of section 194B and submitted that the person responsible for paying to any person, any income by way of winning from any lottery, etc. is liable to deduct tax at the time of payment thereof only when the amount of such income exceeded Rs.5,000/- as applicable in the year under consideration. He contended that since the amount in question was paid/reimbursed on account of prize money by way of winning from lottery paid to the ticket-holders upto Rs.5,000/-, even the provisions of section 194B were not applicable in the present case. He contended that the assessee thus was not required to deduct tax at source from the payment of amount in question even as per the provisions of section 194B and the question of disallowance under section 40(a)(ia) would not arise.

17. The ld. counsel for the assessee also submitted that the amount in question reimbursed by the assessee to the stockists on account of prize money of lottery tickets was recovered from the wholesaler by way of adjustment against the amount due to them on account of purchase of lottery tickets. He submitted that the ld. CIT in his impugned order passed under section 263 treated the said amount as in the nature of purchase of lottery tickets on the basis of the relevant accounting entries passed by the assessee while adjusting the amount in question against purchases. He contended that going by this treatment given by the ld. CIT to the amount in question, no tax was deductible under section 194G as the said provision is not applicable for payments made against purchases of lottery tickets. He contended that the question of disallowance under section 40(a)(ia) thus would not arise even on this count.

18. Without prejudice to all his arguments already advanced and as an alternative, the ld. counsel for the assessee contended that even if it is assumed for the sake of argument that the assessee was required to deduct tax at source from the amount in question representing payment/reimbursement of prize money on lottery tickets, no disallowance under section 40(a)(ia) for failure to deduct tax at source was liable to be made by the Assessing Officer in the assessment completed under section 143(3)/144, wherein the books of account of the assessee were rejected by the Assessing Officer and the income from business was determined by him on estimated basis. He contended that when the income of the assessee was determined on estimated basis after rejecting the books of account, the Assessing Officer could not rely on the same books of account of the assessee for making a disallowance separately of any expenditure claimed therein by invoking the provisions of section 40(a)(ia). In support of this contention, he relied on the decision of the Coordinate Bench of this Tribunal in the case of Shri Arjun Bhowmick v. DCIT rendered vide its order dated 30.03.2014 in ITA No. 767/KOL/2013, wherein it was held that when the profit was estimated by the Assessing Officer, he could not make any disallowance on the basis of same books of account by invoking the provision of section 40(a)(ia). It was held by the Tribunal that the estimation made by the Assessing Officer of net profit will take care of every addition related to the business income or business receipts and no further disallowance can be made. The ld. counsel for the assessee submitted that the decision rendered by the Tribunal in the case of Arjun Bhowmick (supra) has already been upheld by the Hon’ble Calcutta High Court vide its order dated 29.08.2014 in G.A. No. 2683 of 2014.

19. Keeping in view all the submissions made by him, the ld. counsel for the assessee finally contended that no disallowance under section 40(a)(ia) on account of the amount in question paid/reimbursed towards prize money from lottery tickets was warranted in the assessment made by the Assessing Officer under section 143(3)/144 and the said order, therefore, was neither erroneous nor prejudicial to the interest of the revenue so as to justify the interference by the ld. Pr. CIT under section 263. He, therefore, urged that the impugned order passed by the ld. CIT under section 263 may be set aside and that of the Assessing Officer passed under section 143(3)/144 be restored.

20. The ld. D.R., on the other hand, strongly relied on the impugned order of the ld. CIT passed under section 263 in support of the revenue’s case. He also referred to section 2(24)(ix) and contended that the concept of income from any winning from lottery, etc. is applicable only in case of prize winners and not in the case of the assessee who is dealing in lottery tickets as its business activity. He contended that the relevant prize winning tickets 1 (PWT-1) were retained by the stockists/agents and, therefore, the amount in question paid towards prize money on such tickets was payable to the stockists/agents which was clearly in the nature of incentive given to them to boost the sale as rightly held by the ld. Pr. CIT. He contended that the assessee, therefore, was liable to deduct tax at source from the said amount as per section 194G and the failure of the assessee to do so warranted a disallowance under section 40(a)(ia). He contended that the assessment order passed by the Assessing Officer under section 143(3)/144 without making the said disallowance, therefore, was erroneous as well as prejudicial to the interest of the revenue and the ld. Pr. CIT was fully justified to revise the same by exercising the powers conferred upon him under section 263.

21. We have considered the rival submissions and also perused the relevant material available on record. Although the Assessing Officer in the assessment completed under section 143(3) as well as the ld. CIT in his impugned order passed under section 263 has levelled allegation against the assessee of having master minded a complex tax evasion network through a web of transactions routed through bogus/paper/front entities created to distance actual profits from the lottery business and thereby indulged in concealment of income on the basis of adverse findings of survey, enquiries made independently, statements of the concerned persons recorded under section 131 etc. and the assessee has made a detailed submission at the time of assessment proceedings before the Assessing Officer as well as during the course of proceedings under section 263 before the ld. CIT and has also filed a written submission before us in order to dislodge the said allegations, it is observed that the issue that requires our consideration and decision in order to dispose of the present appeal lies in a narrow compass. The limited issue that is required to be considered and decided by us as involved in the present appeal is whether the assessee was liable to deduct tax at source from the amount in question disbursed as prize monies on lottery tickets under section 194G and if the answer to this question is affirmative, whether the order passed by the Assessing Officer under section 143(3) without making disallowance under section 40(a)(ia) on account of assessee’s failure to deduct tax at source under section 194G could be said to be erroneous as well as prejudicial to the interest of the Revenue calling for revision under section 263 by the ld. CIT. In support of the assessee’s case on this issue, the ld. counsel for the assessee has raised various contentions at the time of hearing before us. One of the contentions raised by him is that the amount in question disbursed as prize monies on lottery tickets not being in the nature of commission as defined in Clause (i) of the Explanation to Section 194H, the provisions of section 40(a)(ia) read with section 194G are not applicable. In order to appreciate this contention of the ld. counsel for the assessee, it is relevant to refer to the relevant provision of section 40(a)(ia) and section 194G, which are extracted below:-

“Section 40(a)(ia) [any interest, commission or brokerage, [rent, royalty,] fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work)], on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, [has not been paid on or before the due date specified in sub-section (1) of section 139 :]

[Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, [thirty per cent of] such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid :]

[Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso.”]

“Section 194G. Any person who is responsible for paying, on or after the 1st day of October, 1991 to any person, who is or has been stocking, distributing, purchasing or selling lottery tickets, any income by way of commission, remuneration or prize (by whatever name called) on such tickets in an amount exceeding one thousand rupees shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of ten per cent.

Explanation.—For the purposes of this section, where any income is credited to any account, whether called “Suspense Account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.”]

22. A combined reading of the provisions of section 40(a)(ia) and 194G (emphasis supplied in bold letters) makes it abundantly clear that disallowance under section 40(a)(ia) is liable to be made on account of commission payable by any person to any other person, who is or has been stocking, distributing, purchasing or selling lottery tickets and the said disallowance thus is restricted to income of the payee of the nature of commission on the sale of lottery tickets. As provided in Clause (i) of Explanation to Section 40(a)(ia), the term “commission or brokerage” shall have the same meaning as in Clause (i) of Explanation to Section 194H. The said term is defined in Clause (i) of Explanation to Section 194H as under:-

“The term “commission or brokerage” for the purpose of section 40(a)(ia) thus is defined to include any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered or for any services in the course of buying or selling of goods”. (emphasis supplied in bold letters)

23. As rightly contended by the ld. counsel for the assessee, the amount in question can be considered as in the nature of commission for the purpose of section 40(a)(ia) read with section 194G only if the same represents payment received or receivable, directly or indirectly, by a person acting on behalf of another person for any services rendered, inter alia, in the course of buying or selling of goods. In short, even if the amount in question is in the nature of income by way of remuneration or prize on lottery tickets and the person, who is responsible for paying to any person, who is or has been stocking, distributing, purchasing or selling lottery tickets, such income by way of remuneration or prize fails to deduct tax at source, the provision of section 40(a)(ia) cannot be invoked to make a disallowance on account of such remuneration or prize and the said provision would get attracted only when the amount is in the nature of commission as defined in Clause (i) of Explanation to Section 194H. As already noted, the term ‘commission’ as defined in Clause (i) of Explanation 194H includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered, inter alia, for the purpose of buying or selling of goods and as rightly contended by the ld. counsel for the assessee, there has to be a relationship of principal-agent between the concerned two persons in order to say that the payment received or receivable by one person acting on behalf of another person for the services rendered is in the nature of commission. In this regard, the ld. counsel for the assessee has relied on the decision of the Hon’ble High Court of Sikkim in the case of M/s. Future Gaming & Hotel Services Pvt. Limited v. Union of India rendered on 24.01.2015 in W.P.(C) No. 39 of 2015. In the said case, the petitioner was engaged in the business of sale of paper lottery tickets and had procured, during the course of said business, the lottery tickets in bulk from the Government and resold the same to the public at large through various agents, stockists, re-sellers, etc. The issue that arose for the consideration of Hon’ble High Court of Sikkim was whether the petitioner was liable to pay service tax. In this context, Hon’ble High Court of Sikkim examined the relationship between the concerned parties in the light of the agreement entered into between them and after referring to the relevant terms and conditions of the said agreement, the sums and substance of which is similar to the agreement entered into by the assessee in the present case with its stockists (sample copy available at page 129 to 137 of the paper book), it was held by Their Lordships that the activity of the petitioner comprising of promotion, organising, reselling or in any other manner assisting or arranging the lottery tickets of the State, did not establish the relationship of principal and agent but it was rather that of a buyer and a seller on principal to principal basis in view of the nature of the transactions being bulk purchase of the lottery tickets by the petitioners from the State Government on full payment of price as a natural business transaction as well as other related features and there being no privity of contract between the State Government and the stockists, agents, resellers, etc. under the petitioners.

24. As per the terms and conditions of the agreements entered into between the assessee and its stockists (copy of Stockist Agreement placed at pages 129 to 137 of the paper book), the assessee-firm and the stockists were acting on principal to principal basis, inasmuch as, the stockists were free to act in their capacity and once the lottery tickets were sold to them, such lottery tickets stood transferred to the stockists. The stockists were mainly concerned with their shares on sale of lottery tickets and they were not entitled to receive any commission on sale of lottery tickets from the assessee. They were free to sale the lottery tickets to any sub-stockists or retailers at the self determined prices as per their free will and the contract between the assessee and the stockists was that of purchase and sale of lottery tickets and not that of rendering services on commission. In the matter of lottery business as governed by the relevant agreements, the stockists were to act on their own and not for or on behalf of the assessee. The relationship between the assessee and the stockists thus was that of principal to principal and there being no principal – agent relationship between them as held by the Hon’ble High Court of Sikkim in the case of Future Gaming and Hotel Services Pvt. Limited (supra), we agree with the contention of the ld. counsel for the assessee that the amount in question was not in the nature of commission as defined in clause (i) of Explanation to Section 194H so as to attract the provision of section 40(a)(ia) read with section 194G. In our opinion, the amount in question representing the disbursal of prize monies on lottery tickets thus was not liable to be disallowed under section 40(a)(ia) in the facts and circumstances of the case and there was no error in the order of the Assessing Officer not making such disallowance as alleged by the ld. CIT justifying revision under section 263.

25. The ld. counsel for the assessee has also raised a plea that even if it is assumed for the sake of argument, that the assessee was liable to deduct tax at source from the amount in question disbursed as prize monies on lottery tickets under section 194G, no disallowance under section 40(a)(ia) could be made for the failure of the assessee to do so in the assessment completed by the Assessing Officer under section 143(3)/144 since the books of account of the assessee were rejected by him by invoking the provision of section 145(3) and the income of the assessee from lottery business was determined on estimated basis. In support of this contention, he has relied on the decision of the Coordinate Bench of this Tribunal in the case of Shri Arun Bhowmik v. DCIT (ITA No. 767/KOL/2013 dated 13.03.2014), which has been subsequently affirmed by the Hon’ble Calcutta High Court. In the said case, the book results declared by the assessee were rejected by the Assessing Officer and the income of the assessee was estimated by applying net profit rate. The income so estimated was further enhanced by the Assessing Officer by way of disallowance made under section 40(a)(ia) for the failure of the assessee to deduct tax at source from the payment of hire charges, transportation charges and slurry removable charges. On confirmation of the said disallowance by the ld. CIT(Appeals), an appeal was preferred by the assessee before the Tribunal and the Tribunal vide its order dated 13.03.2014 (supra) deleted the disallowance made by the Assessing Officer by invoking the provision of section 40(a)(ia) for the following reasons given in paragraph no. 5 of its order:-

“5. We find that there is no dispute that there are no books of account as the assessee failed to produce the same. It is also an admitted position that assessee has accepted the application of net profit rate @ 8% on the gross receipts. The dispute only is as regards to disallowance on account of hire charges, transportation charges and slurry removable charges by invoking the provisions of section 40(a)(ia) of the Act. Further, disallowance of supervision charges, labour charges, site expenses, load testing expenses at 50%. Whether the AO can disallow the expenses which are directly related to gross receipt of the assessee on which the AO has estimated net profit by applying the rate of 8%. It is a fact that the assessee has not produced books of account, it means that the AO has not relied on books of account for estimation of profits. This fact is accepted by assessee as wll as by revenue. We are of the view that once the net profit rate is estimated the AO cannot base his disallowance on the same books of account for the purpose of disallowance by invoking the provisions of section 40(a)(ia) of the Act or general disallowances u/s 37 of the Act. The estimation made by AO of net profit will take care of every addition related to business income or business receipts and no further disallowance can be made. We see force in the argument of the assessee that when the income of the assessee was computed applying gross profit rate and no deduction was allowed in regard to the expenses claimed by the assessee, there was no need to look into the provisions of section 40(a)(ia) of the Act or section 37 of the Act. Accordingly, no disallowance could have been made in view of the above facts that once the profit is estimated by applying net profit rate. Accordingly, we direct the AO to delete the other disallowances and restrict the addition by applying Net Profit rate @ 8% of gross receipts. Appeal of assessee is allowed”.

26. Against the order passed by the Tribunal in the case of Shri Arun Bhowmik (supra), an appeal under section 260A of the Act was filed by the Revenue before the Hon’ble Calcutta High Court and one of the questions raised before the Hon’ble High Court was “whether on the facts and circumstances of the case, the Tribunal was justified in law to direct that once profit rate is estimated, further disallowance on the same books of account cannot be made in the light of the provisions of section 40(a)(ia) of the Act”. The Hon’ble Calcutta High Court after extracting paragraph no. 5 of the Tribunal’s order in their judgment held that there were valid reasons given by the Tribunal in support of its decision to delete the disallowance made by the Assessing Officer under section 40(a)(ia) and dismissed the appeal of the Revenue filed in the case of Shri Arun Bhowmik (supra) holding that the order of the Tribunal did not give rise to any substantial question of law. The decision rendered by the Coordinate Bench of this Tribunal in the case of Shri Arun Bhowmik holding that no disallowance under section 40(a)(ia) can be made separately when the income of the assessee is determined on estimated basis after rejection of books of account thus has been affirmed by the Hon’ble Calcutta High Court and since there is no other judicial pronouncements cited by the ld. D.R. taking a different view, we find that the ratio of the decision of the Hon’ble Jurisdictional High Court in the case of Shri Arun Bhowmik (supra) is squarely applicable in the facts of the present case. Respectfully following the same, we hold that the order passed by the Assessing Officer under section 143(3)/144 without making disallowance under section 40(a)(ia) when the books of account of the assessee were rejected and the income of the assessee was determined on the estimated basis was neither erroneous nor prejudicial to the interest of the Revenue as alleged by the ld. CIT and the revision of the same by him under section 263 was not justified.

27. In the case of Indwell Constructions v. CIT [232 ITR 776], a similar issue had come up for consideration before the Hon’ble Andhra Pradesh High Court. In the said case, the assessee-firm having contract business in engineering works, had declared gross contract receipts at Rs.27,20,083/- and the net income at Rs.1,24,830/-. The Assessing Officer rejected the books and applying the proviso to section 145, estimated the income of the assessee at Rs.2,50,000/-. Thereafter the Commissioner of Income Tax in exercise of his revisional powers under section 263 directed the Assessing Officer to make a further addition of Rs.63,859/-to the income of the assessee estimated by him on account of interest and salary paid to the partners by applying the provisions of section 40(b) of the Act. The Tribunal upheld the order of the ld. Commissioner of Income Tax passed under section 263 and when the matter reached to the Hon’ble Andhra Pradesh High Court on a reference made by the assessee, Their Lordships reversed the order of the Tribunal and held that where the books of account had been rejected, the Revenue could not rely on the same books for addition of an extra item of expenditure. It was noted by the Hon’ble Andhra Pradesh High Court that the pattern of assessment under the Income Tax Act, 1961, is given by section 29 which states that the income from profits and gains of business shall be computed in accordance with the provisions contained in section 30 to 43D of the Act. It was also noted that section 40 provides for certain disallowances in certain cases notwithstanding that those amounts are allowed generally under other sections. It was observed by the Hon’ble Andhra Pradesh High Court that the computation under section 29 is to be made under section 145 on the basis of the books regularly maintained by the assessee and if those books are not correct or complete, the Income Tax Officer may reject those books and estimate the income to the best of his judgment. It was held that when such an estimate is made, it is in substitution of the income that is computed under section 29 and all the deductions, which are referred to under section 30 to 43D, are deemed to have been taken into account including the embargo placed in section 40 while making such an estimate. It was held that in a case where the books of account have been rejected by the Assessing Officer and the income of the assessee is estimated by him to the best of his judgment, the Assessing Officer cannot make any disallowance under section 40 separately as the same is deemed to have been taken into account by him while making such estimate. In our opinion, the ratio of this decision rendered by the Hon’ble Andhra Pradesh High Court in the case of Indwell Constructions(supra) is also squarely applicable in the facts of the present case and the order passed by the Assessing Officer under section 143(3)/144 without making disallowance under section 40(a)(ia) when the books of the assessee were rejected by him and the income was determined on estimated basis cannot be said to be erroneous so as to warrant interference by the ld. CIT under section 263.

28. The ld. counsel for the assessee has also raised certain other contentions in support of the assessee’s case that there being no obligation on the part of the assessee to deduct tax at source from the amount in question representing disbursal of prize monies on lottery tickets under section 194G, the question of disallowance under section 40(a)(ia) does not arise and the order of the Assessing Officer passed under section 143(3) not making such disallowance is neither erroneous nor prejudicial to the interest of the Revenue calling for revision under section 263. These contentions raised by the ld. counsel for the assessee are summarized below:-

29. At the time of hearing, the ld. counsel for the assessee has vehemently argued the case of the assessee by raising the above contentions and has also explained the assessee’s stand thereon by filing detailed written submission. However, keeping in view that we have already accepted the case of the assessee as made out by him on the basis of two main propositions, which are duly supported by the relevant judicial pronouncements already discussed in the foregoing portion of this order including the decision of the Hon’ble Jurisdictional High Court in the case of Shri Arun Bhowmik (supra), we do not consider it necessary or expedient to delve into all these other contentions raised by the ld. counsel for the assessee in support of the assessee’s case. However, suffice it to say that all these contentions raised by the ld. counsel for the assessee clearly show that the issue involved in the case of the assessee relating to the disallowance under section 40(a)(ia) read with section 194G is highly debatable on which one possible view was taken by the Assessing Officer while completing the assessment under section 143(3)/144 wherein no disallowance under section 40(a)(ia) was made by him. It is well settled position of law that when a possible view has been taken by the Assessing Officer on a debatable issue while completing the assessment, it is not permissible to the ld. CIT to substitute his own view in place of such possible view taken by the Assessing Officer by exercising the powers of revision under section 263. In this context, a useful reference can be made to the decision of the Hon’ble Supreme Court in the case of Malabar Industrial Co. Limited v. CIT [243 ITR 83], wherein it was held that when an Income Tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the Income Tax Officer is unsustainable in law. To the similar effect is the decision of the Hon’ble Bombay High Court in the case of CIT v. Gabriel India Limited [203 ITR 109], wherein it was held that section 263 does not visualise a case of substitution of the judgment of the Commissioner for that of the Assessing Officer, who passed the order, unless the decision is held to be erroneous. Explaining further, it was observed by the Hon’ble Bombay High Court that cases may be visualised where the Income Tax Officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimates himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the Assessing Officer was on the lower side and left to the Commissioner, he would have estimated the income at a higher figure than the one determined by the Income Tax Officer. However, that would not vest the Commissioner with power to re-examine the accounts and determine the income at a higher figure because the Income Tax officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion, which cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion.

30. Having regard to all the facts of the case and keeping in view the legal position emanating from the various judicial pronouncements as discussed above, we are of the view that the order of the Assessing Officer cannot be said to be erroneous or prejudicial to the interest of the Revenue warranting any interference by the ld. CIT under section 263. The impugned order passed under section 263 thus is not sustainable either in law or in the facts of the case and setting aside the same, we restore the order passed by the Assessing Officer under section 143(3)/144 of the Act.

31. In the result, the appeal of the assessee is allowed.