THE issues before the Bench are - Whether when the assessee
gives prizes wholly in kind as part of its sales promotion schemes, any TDS
obligation arises u/s 194B and Whether any responsibility is cast u/s 194B on
the assessee before it releases the prizes to winners. And the answers go
against the Revenue.
Facts of the
case
The assessee is a Company engaged in
the business of manufacture and sale of various consumer goods/products. During
the previous years, it had conducted certain sales promotion Schemes. The
assessee advertised the Schemes wherein coupons were inserted in
packs/containers of their products. Some of those coupons indicated that on
purchase of the packs/containers, they would get prizes. The prizes that were
offered were Santro Car, Maruthi Car, Gold chains, Gold Coins, Gold Tablas,
Silver Coins & Emblems. The total amount of prizes distributed valued Rs.
6,51,238/- for the assessment year 2001-02 and Rs. 54,73,643/- for the
Assessment Year 2002- 03. The AO, having received the information about the
Schemes, sought clarification and also conducted survey of the assessee’s
business premises under Rule 133A of the Act. The AO, thereafter, passed an
order under Sections 201(1) and 201(A) of the Act for the Assessment Year
2001-02 and treated the respondent as an assessee-in-default of its obligation
in terms of Section 194B of the Act. Similar order was passed for the Assessment
year 2002-03. According to the AO, the assessee was obliged to ensure that the
tax in respect of the winnings, wholly in kind, was remitted before the winnings
were released. Having failed to do so, the proceedings under Section 201(1) of
the Act were initiated. The AO held that although the customers did not pay
anything extra to receive the prize, nevertheless they had participated in the
scheme by purchasing the products advertised to take a chance at winning the
prize. It was further held that what has been paid as prize in kind in various
schemes conducted by the respondent is a lottery on which the tax was deductible
under Section 194B of the Act and as the respondent neither deducted the tax nor
ensured payment thereof before the winnings were released, treated the it as an
assessee in default. He passed similar order for the Assessment Year 2002-03.
On
appeal, the CIT(A) upheld the view taken by the AO. The Tribunal allowed the
assessee's appeals and held that the schemes conducted were not a
lottery as the said expression was understood upto the Assessment Year 2001-02.
The Tribunal found, as a matter of fact, that the customers did not pay any
excess amount for getting coupons indicating winnings in the packs/containers of
products they purchased, and therefore, nothing was paid by them for
participating in the Scheme. Accordingly, the Tribunal concluded that although
there was an element of chance, but as no consideration or payment was made by
the customers for the purpose of participation in the lottery with the object of
winning the prizes, the schemes conducted would not fall within the ambit of
Section 194B. The Tribunal, further held that having regard to the insertion of
the explanation below Section 2(24)(ix) of the Act, the scheme conducted by the
assessee would be a lottery for the Assessment Year 2002-03 but, nevertheless,
they accepted the assessee’s alternate contention that having regard to the
Circular No.390 dated 8.8.1984 (erroneously referred to as circular No.956 in
the order), there was no obligation on the assessee to deduct tax at source in
respect of prizes paid in kind and in absence of any such obligation no
proceedings under Section 201 could be taken against.
On appeal, the HC held
that,
++ we
have framed the third question in view of challenge to the jurisdiction of the
AO to initiate proceedings under Section 201. If we hold that the proceedings
under Section 201 against the assessee and the orders passed by the AO and the
AA are without jurisdiction, the first two questions need not be addressed. We
have heard the counsel for the parties at considerable length. We are of the
opinion that the third question of law will have to be answered in favour of the
assessee and against the revenue;
++
from bare perusal of Section 194B, it is clear that the person responsible for
paying to any person any income by way of winnings from any lottery in an amount
exceeding ten thousand rupees shall, at the time of payment thereof is obliged
to deduct income-tax thereon at the rates in force. Proviso to this Section
clarifies that in case where the winnings are wholly in kind or partly in cash
or partly in kind but the part in cash is not sufficient to meet the liability
of deduction of tax in respect of whole of the winnings, the person responsible
for paying shall, before releasing the winnings, ensure that tax has been paid
in respect of the winnings. From plain reading of the proviso, it is clear that
it does not provide for deduction of tax at source where the winnings are wholly
in kind and it simply puts a responsibility to ensure payment of tax, where
winnings is wholly in kind. In the present case, admittedly, the winnings was
wholly in kind;
++ we
are concerned with Section 201 as it stood before its amendment by Finance Act,
2008. A plain reading of Section 201 shows that if the person referred to
therein does not deduct the whole or any part of the tax or after deducting,
fails to pay the tax as required by or under the Act, he shall, without
prejudice to any other consequences which he may incur, be deemed to be an
assessee in default in respect of the tax. The proviso to this Section states
that no penalty shall be charged under Section 221 of the Act, unless the AO is
satisfied that such person has without good or sufficient reasons failed to
deduct and pay the tax;
++ we
have already perused Section 194-B, in particular, the proviso thereto. It is
clear that there could be winnings wholly in kind and in which case, the duty
casts on the person responsible for paying is to ensure that tax has been paid
in respect of the winnings before releasing it to the winner. The proviso makes
it further clear that no duty of deduction of tax in respect of the winnings is
cast on the person who is responsible for paying, where the winnings is wholly
in kind. Undoubtedly, in that eventuality such person should ensure that the tax
has been paid in respect of the winnings before releasing it to the winner. The
combined reading of Section 194B and Section 201 would show that if any such
person fails to “deduct” the whole or any part of the tax or after deducting,
fails to pay the tax or required by or under this Act, without prejudice to any
other consequences, which he may incur, be deemed to be an assessee in default
in respect of the tax. In other words, the provisions contained in these
sections do not cast any duty/responsibility to deduct the tax at source where
the winnings is wholly in kind. If the winnings is wholly in kind, as a matter
of fact, there cannot be any deduction of tax at source;
++
the word/term deduction, employed in this provisions, postulates a reduction or
subtraction of an amount from a gross sum to be paid and payment of the net
amount thereafter. Where the winnings is wholly in kind subtraction/reduction of
any sum therefrom does not arise. The legislature, therefore, has cast
duty/responsibility on such person to ensure that the tax is paid before the
winnings is released. Thus, it is mandatory for the person who is responsible
for paying any income by way of winnings wholly in kind, to ensure that tax has
been paid in respect of the winnings, before it is released to the
winner.
++ in
short, the conjoint reading of Section 201 and Section 194B would show that the
person responsible to deduct tax at source, if he either fails to deduct or
after deducting, fails to pay, is deemed to be an assessee in default, in
respect of the tax. However, where the payment of the winnings is wholly in kind
and not in cash at all, the question of deduction does not arise and in that
eventuality, the only responsibility, as casts under Section 194B, is to ensure
that tax is paid by the winner of prize before the prize/winnings is released in
his favour;
++
having so observed, in our opinion, initiation of the proceedings under Section
201 against the assessee, was without jurisdiction. We observe, that the
authorities under the Act in such situation would not render remediless against
such person who fails to ensure that tax is paid before the winnings is released
in favour of its winner. In the Act, there are two provisions, namely Sections
271C and 276B. Section 271C empowers the Joint Commissioner to levy any penalty
where an assessee fails to deduct the whole or any part of the tax as required
by or under the provisions of Chapter XVII-B or fails to discharge the
obligation under the second proviso to Section 194-B. Similarly, Section 276B
makes it an offence against the person who fails to pay to the credit of the
Central Government the tax deducted at source as required by or under the
provisions of Chapter XVII-B or the tax payable as required by or under the
second proviso to Section 194B. Section 271C and Section 270B make reference to
the second proviso to Section 194-B, i.e., the proviso as it stands today. The
1st proviso was deleted by the Finance Act, 1999, with effect from 01.04.2000.
It is against this backdrop, we have no hesitation to hold that the proceedings
against the person under section 201, such as the assessee in the present case,
who fails to ensure payment of tax, as contemplated by proviso to Section 194B,
before releasing the winnings, is not maintainable or the proceedings against
such person is without jurisdiction.
++ in
the circumstances, the third question is answered in favour of the assessee and
against the revenue. In view of the answer to the third question, we refrain
from addressing the 1st & 2nd question formulated by us and keep them open
to be considered in appropriate case, as prayed for by learned counsel appearing
for the parties.
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