In the case, Commissioner of Income-tax, Chennai vs. Dr. M.A.M. Ramaswamy, it was held that business loss could not be set-off from winnings from betting. The said income would be taxed on gross basis as per section 115BB, read with section 58(4) of the Income-tax Act.thus, business loss cannot be set off with the lottery income.  

 

Facts of the case:

The assessee engaged in breeding, owning of race horses and civil construction. The assessee filed return of income declaring total income of Rs. 28,01,55,597. He has shown betting income of Rs 31,24,28,980 and has adjusted the loss suffered under the head ‘business’. After setting of such losses, betting income of Rs. 28,52,18,347 was taxed at 40% u/s 115BB. The return was processed under section 143 (1)(a). After issuing notice under section 143(2) of the Act, AO rejected the manner in which betting income was computed. AO held that loss cannot be set off against betting income. Thus, AO brought total winning from betting to tax at 40%.

Aggrieved by the order, assessee appealed to Commissioner (Appeals) [CIT(A)]. The CIT (A) observed that net income from betting i.e. after adjustment of business loss, can be subjected to tax at 40%.

On this revenue went for appeal before the Tribunal.

Tribunal viewed the relevant section-

115BB- Where the total income of an assessee includes any income by way of winnings from any lottery or crossword puzzle or race including horse race (not being income from the activity of owning and maintaining race horses) or card game and other game of any sort or from gambling or betting of any form or nature whatsoever, the income-tax payable shall be the aggregate of-

(i) the amount of income-tax calculated on income by way of winnings from such lottery or crossword puzzle or race including horse race or card game and other game of any sort or from gambling or betting of any form or nature whatsoever, at the rate of thirty per cent; and

(ii) the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause (i).

Section 58 (4) with its proviso clause does not apply to the assessee’s case as the assessee was the owner of horses maintained by him for running in horse races. A combined reading of Section 115-BB and the proviso to Section 58(4) along with the CBDT circular No.721 dated 13.09.1995 fortify the action of the Commissioner (Appeals). Thus, the Tribunal decision was in favour of the assessee.

Challenging the order of the Tribunal, revenue appealed before High Court.

 

It was held that:

Revenue contended that Section 115BB of the Act makes it clear that in respect of

the total income of the assessee, including income by way of winning from lottery or crossword puzzle or race including horse race or card game and other game of any sort or from gambling or betting in any form or nature whatsoever, income tax is payable at the aggregate in the manner provided under clauses (i) and (ii) of the said provision and not otherwise. Therefore, the Tribunal erred in confirming the order of the Commissioner of Income Tax (Appeals) directing levy of tax at the rate of 40% on the net betting receipts, as against the total winnings from betting.

On the contrary, it is the plea of the learned counsel for the assessee that while computing the “total income” as required under Section 115BB of the Act, set off as prescribed by the provisions of Sections 70 to 80 of the Act has to be given and only the balance income can be brought to tax at the rate stipulated under Section 115BB of the Act.

Sub-section (4) to Section 58 of the Act was inserted by the Finance Act, 1986 with effect from 1.4.1987 and the purport of the said amendment is to disallow any expenditure from 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 which are deemed as income for the purposes of levy of income tax under Section 2(24)(ix) of the Act.

By inserting a new section 115BB in the Income-tax Act, it has been provided that any income of a casual and non-recurring nature of the type referred to above, shall be charged to income-tax at a flat rate of 40 per cent. This provision will, however, not apply to income from the activity of owning and maintaining race horses. For this purpose, a new sub-section has been added to section 58 to provide that no deduction shall be allowed in respect of any expenditure or allowance in computing the income from the aforesaid sources.

It is to be noted that apart from the exemption of Rs. 5,000 under section 10(3), no further allowances or deductions are admissible against the gross winnings.

On a careful perusal of the above provisions Court was not inclined to accept the view as propounded by the Tribunal and the Commissioner (Appeals), as Section 115BB of the Act is a standalone special provision, which makes it clear that income of an assessee, not being income from activity of owning and maintaining race horses, would fall under Section 115BB of the Act.

High Court considered the view that the total winnings from betting of the assessee should be brought to tax at the rate of 40% as contemplated under Section 115BB of the Act. The order passed by the Tribunal, which affirmed the order of the Commissioner (Appeals) was set aside.

Hence, case was in favour of the revenue. The assessee had to pay tax at 40% on total income from betting.

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