The main legal point established in the judgment is the interpretation of 'lottery' under Section 194-B of the Income Tax Act, emphasizing the requirement of distribution of prizes by chance or lot among those who have paid a price for participating in the scheme.

R.Jayasimha Babu, J.

The question raised by the Revenue in this appeal is as to whether the Tribunal was right in holding that distribution of prizes under the District Level Gift Linked Savings Mobilisation Scheme did not constitute 'lottery' and the provisions of Section 194-B of the Income Tax Act are not applicable and if applicable, as to whether the Tribunal was right in cancelling the penalty imposed.

2. In order to encourage thrift as also to mobilise funds for the developmental works, Saving Schemes are operated by the Government. Under the gift linked scheme, a prize coupon is given to the investor when the investment made is in excess of Rs.1,000/-. The investor does not pay any price for those coupons. Prizes are awarded to the holder of the lucky coupon, which is chosen by lot. The prizes given are consumer goods, such as, fan, colour television, moped etc. During the accounting year ended 31-3-1998, the assessment year being 1998-99, the respondent released prizes worth Rs.72,94,480/-. According to the Revenue, before distributing those prizes, the assessee ought to have deducted tax at source in a sum of Rs.29,17,792/-.

3. As no tax had been deducted at source, the assessing officer, invoking the provisions of Section 201, issued notice to the respondent treating him as the assessee in default. Additional sum of Rs.2,39,919/- was also demanded as interest under Section 201(1-A) of the Act. Subsequently, penalty in a sum of Rs.29,17,792/- equal to the amount of tax that had allegedly required to be, but not with-held, was also levied.

4. The appeals filed by the respondent against those orders having proved unsuccessful, the respondent thereafter carried the matter to the Tribunal, which agreed with the assessee and held that the assessee was not liable to deduct tax at source and therefore, all the proceedings taken against the respondent were without jurisdiction.

5. Section 194-B of the Act, which was inserted with effect from 1-4-1972, as it stood at the relevant year, is captioned "Winnings from lottery or crossword puzzle". It reads thus:

"194-B: The person responsible for paying to any person any income by way of winnings from any lottery or crossword puzzle in an amount exceeding Rupees five thousand, shall, at the time of payment thereof, deduct income-tax thereon at the rates in force.

Provided that no deduction shall be made under this section from any payment made before the 1st day of June, 1972.

Provided further that in a case where the winnings are wholly in kind or partly in cash and 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."

6. By the Finance Act, 1972, which introduced Section 194-B, a new sub-clause (ix) was introduced in the definition of 'income' in Section 2(24) of the Act, which reads thus:

"2(24) ....

(ix) any winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever "

The winnings from lotteries on and after 1.4.1972 were included within the scope of the definition of 'income' and the person responsible for paying to any person any income in excess of Rupees five thousand by way of winnings from lottery, was required to deduct income tax on the amount so paid at the rates in force.

7. Prior to 1.4.2002, the Act did not contain a definition of 'lottery'. In the Finance Act, 2001, an Explanation was added below Section 2(24)(ix), which Explanation reads thus:

"Explanation:-- For the purposes of this sub-clause, --

(i) "lottery" includes winnings from prizes awarded to any person by draw of lots or by chance or in any other manner whatsoever, under any scheme or arrangement by whatever name called;

(ii) "card game and other game of any sort" includes any game show,