JUDGMENT

Ramachandran Nair, J.

The question raised in the connected appeals filed by the department is whether the Income Tax Appellate Tribunal was justified in holding that lottery prize money received by the respondent assessee is assessable as business income and not as income assessable under the special provisions contained in Section 115BB of the Income Tax Act, 1961. The respondent assessee is a wholesale distributor of lotteries organized by the State of Kerala and under the distribution agreement respondent is entitled to certain discount on the purchase of lottery tickets. If the tickets purchased are not fully sold out by the respondent before the draw date then loss will be to the account of the respondent. For the previous years relevant to the assessment years 2000-01 and 2001-02 certain unsold tickets held by the respondent assessee were the prize winning tickets and on production of those tickets the Lottery Directorate paid the prize money to the respondent after recovery of tax at source treating the payments as “winning from lottery”. Even though respondent assessee accounted the receipt of income in the profit and loss account as prize won from lottery, in the income tax returns filed, the respondent claimed that the prize money received from the Lottery Department represents income not assessable under the special provisions contained in Section 115BB of the Income Tax Act but assessable as business income. The Income Tax Officer however rejected the claim holding that prize money received in lottery is assessable at the special rate provided under Section 115BB and so much so it cannot be treated as business income. The first appeal filed by the respondent was allowed and the Tribunal confirmed it on second appeal filed by the department against which these appeals are filed.

2. We have heard standing counsel for the Income Tax Department for the appellants and Adv. George Poonthottam appearing for the respondent assessee. 3. Appellant's case is that winnings from lottery have to be assessed strictly in terms of special provisions contained in Chapter XXII of the Act which in Section 115BB provides as follows:-

“Tax on winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or gambling or betting of any form or nature whatsoever.

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 forty 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).”

4. There is no dispute as to whether winnings from lottery is income or not because under Section 2(24)(ix) of the Act among other items winnings from lottery is specifically brought within the meaning of ‘income’ defined under the Act. So far as classification of the income for the purpose of assessment is concerned “winnings from lottery” is “income from other sources” under Section 56(2)(ib) of the Act. However, contention of the respondent assessee is that in Sub Section (2) of Section 56 it is specifically provided that items of income referred under Sub Section (2) will be treated as income from other sources only if such income does not fall under any other head specified in Section 14, items A to E. Counsel for the respondent further submitted that respondent assessee is engaged in the business of purchase and sale of lottery tickets as wholesale distributor of Lottery Department of the State and so much so the lottery tickets held as on the date of draw is stock in trade. Admittedly the prize winning tickets constitute part of stock in trade and so much so prize won on such tickets is income from business, though incidental in nature is the claim. The counsel has also relied on various decisions of the High Courts particularly decision of the Gauhati High Court in Director of State Lotteries v. Assistant Commissioner of Income-tax (238 ITR 1) and the two decisions of the Karnataka High Court reported in Visveswaraiah Lucky Centre v. Commissioner of Income Tax (189 ITR 698) and Mysore Sales International Ltd. v. Commissioner of Income Tax (117 ITR 64) and contended that income received is business income assessable at the slab rates provided under the Act. The standing counsel on the other hand relied on the decision of the Madras High Court reported in Commissioner of Income Tax v. G. Krishnan (228 ITR 557) wherein that Court had taken the view that even bonus received by lottery distributor which is 10% of the prize money received for the ticket sold by him is also winnings from lottery which is subjected to tax at the special rate and the deduction under Section 80TT of the Act is admissible. Even that the issue is apparently considered both by the Karnataka High Court and by the Gauhati High Court, the scope of Section 115BB is not the question considered in any of the decisions. The question raised and decided by the Gauhati High Court pertains to the liability of the Lottery Directorate to deduct tax at source on the prize money payable for the unsold tickets retained by the agents. However, on going through the judgment we find that there the State was not running lottery by itself but the lottery business was given on contract to the agent called organiser. The specific contention there was that:

“All prizes from unsold tickets of the lotteries shall be property of the organising agent. Similarly, all unclaimed prizes shall also be property of the organising agent and shall be refunded to the organising agent.”

Under the scheme of that lottery, prize money has to be deposited by the organiser (agent) with the Lottery Department in advance. If nobody claims the prize money the deposit amount will be refundable to the agent. In other words, it is not a case of agent or organiser claiming any prize money by producing the prize winning tickets. What entitles him for refund in the form of prize money is that there is no other claimant for the prize money. In other words the benefit accrues to the organiser of the lottery viz., the agent only by virtue of agreement which entitles him for refund of the prize money deposited by him with the Lottery Department irrespective of whether he has any ticket which won the prize or not. On the other hand in the case before us admittedly respondent has claimed prize money by producing the prize winning ticket like any other purchaser of lottery ticket who participated in the draw. Therefore, we do not think there is anything wrong in the Gauhati High Court holding that the amount received by the organiser of the lottery in that state which is nothing but refund of the amount deposited by him is in the nature of a business income and not as prize money paid for the prize winning ticket.

5. The first question to be considered is whether the winnings from lottery received by the respondent is income from business. The standing counsel submitted that receipt of winnings from lottery for the respondent is not on account of any physical or intellectual effort made by him and it is not “income earned” by him in business. After draw of the lottery, respondent cannot sell any ticket and the entire tickets held by him becomes waste paper except the prize winning ticket if any held held by him which if produced will entitle for the prize money. Therefore, according to him the receipt of prize money is not in the capacity as a lottery distributor but as a holder of the lottery ticket which was prized. The Lottery Department also does not treat it as business income received by the respondent but they also treat it as prize money paid on which TDS is recovered. However, counsel for the respondent contended that only by virtue of his being the distributor of the lottery he retains stock of tickets with him and the same constitutes stock in trade and whatever benefit he got from stock in trade is income from business. Even though argument on the face of it is attractive and acceptable we feel there is no business involved in the prize money received in a lottery. Of course the purchase and sale of tickets by the respondent is a business. However, there is no business activity in claiming prize money from the Lotteries Department by producing the lottery ticket which got the prize. The entire lottery tickets cease to be stock in trade on the date of draw because after the draw those tickets are unsaleable and have no value except waste paper value that the respondent will get on sale of the same. However, after the date of the draw since the tickets held by the respondent were also included in the draw respondent becomes entitled to the prize money if any of the tickets held by him fetches the prize. This is because after having paid value for the entire tickets held by him he is entitled to participation in the draw for such of the tickets held by him and when he gets the price he is entitled to receive the same as a winner of the draw. In other words at the time of draw respondent is only a participant in the draw for all the tickets held by him and this does not involve any business activity and so much so the prize won by him is only in his capacity as the holder of tickets. Further it is to be noted that business as defined under Section 2(13) of the Act includes any trade, commerce or manufacture or any adventure or concern in the nature of trade or manufacture which obviously means some effort physical or intellectual and since no activity which could be called business activity is involved in the participation in a lottery draw, we are unable to accept the respondent's contention that winning from lottery is income earned by him in a business activity. Reliance by respondent of Section 56(2) is of no help for him because no one can do the business of participation in lottery draw wherein prize is only a chance. In our view participation in a draw which alone can win lottery prize does not involve any business. Therefore income by way of winnings from lottery is always “income from the source” under Section 56(4)(1b) of the Act.

6. Between the two decisions of the Karnataka High Court only in Mysore Sales International's case (supra) they are dealing with the issue. However, we notice that in 1979 when the matter was decided there was no specific provision like Section 115BB and so much so in our view the decision should not influence interpretation on the scope of Section 115BB of the Act. In our view winnings from lotteries is assessable under this special provision irrespective as to under what head winnings from lottery falls. Therefore, assuming for argument sake the contention of the respondent that winnings from lotteries is received by him in the course of his business and is incidental to business and so such it is so his business income is right. Still, we feel in view of the specific provision contained in Section 115BB, the special rate of tax is applicable for all winnings from lottery. What is provided in the said Section is that where the total income includes any income by way of winnings from lottery or crossword puzzle etc, the income tax payable shall be calculated at the rate of 30%. Total income under Section 2(45) read with Section 5 of the Act includes income from all sources and necessarily all such income are computed under five heads referred to in A to F of Section 14 of the Act. In other words even after computation of income under various heads of income referred to in Section 14 in terms of specific provisions of the Act providing for computation of income under each head, Such of the incomes specifically covered by Chapter XII shall be identified, separated and should be subject to tax at the special rate provided there. So much so in our view the special rate of tax i.e 30% provided under Section 115BB of the Act is applicable even if winning from lottery is in the nature of business income as claimed by the respondent. We hold that the rate prescribed under Section 115BB is applicable for the winnings from lottery received by the respondent assessee irrespective of whether it is an income incidental to business or not.

We therefore allow the appeal by setting aside the orders of the Tribunal and that of the Commissioner of Income Tax (Appeal) and by restoring the assessment.