section 4/income-tax act

[2005] 142 Taxman 130 (Raj.)

High Court of Rajasthan, Jaipur Bench

Mahaveer Kumar Jain

v.

Commissioner of Income-tax

Rajesh Balia and Shashi Kant Sharma, JJ.

D.B. IT Reference No. 40 of 1995

September 10, 2004

Section 4, read with section 5, of the Income-tax Act, 1961, and article 371F of the Constitution - Income - Chargeable as - Assessment year 1986-87 - Whether operation of two enactments within their respective fields of operation by itself is not inflicted with vice of double taxation, so long as nexus between subject-matter or subject of enactment and territory to which such law extends is discernible - Held, yes - Whether any income which accrues or arises to any person outside India, i.e., beyond operative territory of Act, is liable to be included within total income to be computed for purpose of levy without qualification in case of a resident and with certain qualification in case of not ordinarily resident irrespective of fact whether it is received in taxable territory or not - Held, yes - Whether Income-tax Act was inapplicable to State of Sikkim until notification under section 371F(n) was issued - Held, yes - Whether income from winning lotteries declared by State of Sikkim was liable to be included in hands of assessee as resident of India within State where Act was in force, notwithstanding that such income had accrued or arisen in State where Act was not in force - Held, yes

Facts

The assessee was a resident Indian citizen earning income from business and property at Jaipur. He won first prize in the Bumper Draw of the Sikkim State Lottery. After having deducted an amount on account of payment of agent/sellers commission, etc., and another amount on account of income-tax, as per Sikkim State Income-tax laws, the Director of Lotteries paid the balance amount to the assessee through two demand drafts which were encashed at Jaipur. Thereafter, the assessee declared his net income, claiming deduction under section 80TT on the gross amount of the prize money. However, the Assessing Officer allowed the deduction under section 80-TT on the net amount, which was obtained by deducting the amount paid as commission, etc., to agent/sellers from the total winning amount. On appeal, the Commissioner (Appeals) affirmed the assessment order made by the Assessing Officer.

On second appeal before the Tribunal, the assessee contended that when the lottery was announced and prize money was distributed, the Act was not applicable to Sikkim State and the notification extending the Act to the Sikkim State was issued only after expiry of the assessment year in question under article 371F(n); therefore, any income earned, accrued or received in Sikkim in relevant assessment year was beyond the charge of taxation under the Act. Further, the assessee was subjected to tax on income from the winnings of lotteries under the Sikkim Income-tax Laws. The same income could not be subjected to tax under the Act in the hands of the same assessee as it would amount to double taxation on the same income accrued, arisen or received in India in the hands of the assessee. The Tribunal, however, dismissed the appeal.

On reference :

Held

So far as principle against double taxation was concerned, the issue raised by the assessee was founded on unsound premise. The principle is well- settled that where the tax is imposed by two different Legislatures under different enactments, the question of double taxation in stricto sensu does not arise. The question of double taxation may become of significance if under the same law, same income is taxed twice in the hands of same person through same passage. There is no inherent anathema to double taxation if the law prescribes it. [Para 15]

Since in the instant case, the winning from lotteries was made subject to levy of income-tax in the territories of State of Sikkim under the laws made by the erstwhile Sikkim State which were continued to remain in force under article 371-F(k) and the levy of income-tax on winning of lotteries was also made under the Act, a law enacted by the Parliament, a different legislative authority by applying it within the territories to which the Act extends, the charge and levy was imposed under two different authorities competent to enter such law on the subject-matter in question, viz., tax on income of a person. The operation of two enactments within their respective fields of operation by itself is not inflicted with vice of double taxation, so long as nexus between the subject-matter or the subject of enactment and the territory to which such law extends is discernible. [Para 19]

Therefore, the question of double taxation as ground to avoid taxation under either of them would not arise, if the same was otherwise eligible to tax under the charging provisions of the respective enactments. [Para 20]

The acceptance of contentions of the assessee on the anvil of double taxation would result in yielding to two different conclusions about exigibility of income in question to tax, not on the basis of applicability of law, but on the anvil whether the income in question was taxable in Sikkim or not. If the winnings from lottery were not to be taxed in Sikkim State, on the principle of double taxation, the income would be exigible to tax under the Act. Thus, the result destroyed the premise that Act cannot have extra-territorial operation in respect of income accruing or arising in Sikkim, leaving apart the taxability on the basis of receipt. [Para 21]

The succour sought under the Explanation 2 to section 5 in that regard had rightly been rejected by the Tribunal. Explanation 2 indicates that if an income has been taxed earlier on accrual basis, in the hands of a person, the same person cannot be taxed again in respect of the same income on its receipt. It has relevance with the method of accounting employed by the assessee, viz., whether he maintains his accounts on mercantile basis, where income is accounted for as soon as it accrues to the assessee entitling him to receive it, though actual receipt may be later in time. The accounts may be maintained on cash basis also, that is, on the basis of actual receipt of income. However, in either case, the operation of Explanation becomes operative only if earlier assessment has taken place under the Act and later assessment is also sought to be made under the Act. But where the assessments proceed under different enactments which are otherwise operative in respective areas, the occasion for invoking Explanation 2 to section 5 does not arise. [Para 22]

The test for examining the exigibility to tax of any income, therefore, is not merely the factum of double taxation but the touchstone is extent and reach of the law imposing tax to the subject-matter and/or the subject of taxation. [Para 23]

Section 1(2), read with articles 371F(k) and (n), has the effect that the Act enacted with effect from 1-4-1962, before Sikkim became a State of India, had territorial operation for whole of India. When Sikkim became a State of India with effect from 26-4-1975, to take care of special circumstances emerging therefrom, article 371F was inserted in the Constitution of India vide Constitution (37th) Amendment Act, 1975 with effect from 26-4-1975. The combined effect of clauses (k) and (n) was that laws in force in territories comprised in State of Sikkim immediately before 26-4-1975 continued to remain in force in the said territory and until President by above referred notifications issued under articles 371F(n) extended the Act, to Sikkim with effect from the assessment year 1990 relating to previous year commencing from 1-4-1989, the Act which was in force in all other States of India was not extended to State of Sikkim. Thus, the effect of these provisions was that the Act, an enactment by Parliament with effect from 26-4-1975, was in force only in part of India and not in whole of India. Because every law made by any Legislature is subject to provisions of the Constitution. [Para 26]

The object of the enactment is the levy of an income, the subject-matter of such levy is the ‘total income’ of the previous year and the subject of such levy, is every person to whom such income belongs. [Para 28]

The provisions relating to scope of total income which is the subject-matter of tax and the status of a person in respect of whose income, tax is to be levied, make the reach of the Act, extra-territorial both in respect of subject-matter, i.e., total income to be taxed and the subject, i.e., person to be subjected to tax. It operates extra-territorial in respect of any income which accrues or arises outside operative territorial limit of the Act as well as in respect of person who resides outside the extent of the Act. Any income which accrues or arises to any person outside India, that is to say beyond the operative territory of the Act is liable to be included within the total income to be computed for the purpose of levy without qualification in the case of a resident and with certain qualification in the case of not ordinarily resident irrespective of fact whether it is received in taxable territory or not. In the case of non-resident also, such income becomes taxable if it is received by him or on his behalf in India. [Para 37]

Merely because the provisions of the Act operate on such subject-matter beyond its territorial operative field, it does not go beyond its reach nor does render it ineffective. A provision which has extra-territorial operation by itself is neither invalid nor ineffective. [Para 39]

Delineating legislative powers of Union and State, the Constitution of India envisaged under article 245(1), that the Parliament can make laws for whole or any part of India. Thus, law made by the Parliament may not necessarily extend to whole of India, but may be operative in some parts of India only. In such an event, a law made for a part of India, if it affects any person or act outside its territorial field, i.e., in other part of India, and the provisions of such law reaches it, it becomes a case of extra-territorial operation of law made by the Parliament. [Para 41]

Article 245(2) declares that no law made by the Parliament shall be deemed to be invalid on the ground that it would have extra-territorial operation. [Para 42]

Therefore, under the Scheme of Constitution, a Parliamentary Statute having extra-territorial operation cannot be ruled out from contemplation. The operation of law can extend to persons, things and acts outside the territory of India. The general principle suffering from the sovereignty of States is that the law made by one State can have no operation in another State. The position emanating from article 245(2) is that while it has not affected the legislative competency of making such law, it made certain difficulties in its enforcement. [Para 43]

The Act came into effect with effect from 1-4-1962 and extended to whole of India. At the time of its promulgation, Sikkim was not a part of India and the provisions of the Act were not enforceable in Sikkim. Yet, any income which accrued or arose in Sikkim was liable to be taxed under the Act if either the subject or subject-matter of the Act had nexus with territories where the Act was in force, namely, if the person, to whom such income had accrued or arisen in Sikkim was a resident in any State of India where the Act was in force. Notwithstanding the income having arisen or accrued outside the territorial operation of the Act, it could be taxed in the hands of a resident Indian whether received in India or not received in India. Likewise, if the income which had arisen in Sikkim to any person who may not be resident of any State in India, but if such income was received in any State in India by him or on his behalf, it could be taxed. Such income became taxable in the hands of any person whether resident or non-resident or ordinary resident. [Para 49]

So far as the income accruing or arising to any person, resident within such State of India where the Act is in force is concerned, his total income is liable to be computed in terms of section 5 independent of his status. If he is an ordinary resident in India, then his entire income from whatever source is to be computed in accordance with the provision of the Act whether it accrued or arose beyond the territory to which it is extending. This would be irrespective of the fact whether he receives such income within taxable territories after it had accrued or arisen to him. If the income is received in India at a place to which Act is in force, still it would be included in the total income of recipient person, irrespective of his residential status. [Para 55]

The difference may arise in the case of income accruing or arising in territory of Sikkim State where the Act was not in force, in the case of a resident but not ordinarily resident or a non-resident. Where subject- matter and subject both are beyond the territory where the Act extends, it cannot be enforced. [Para 56]

There being no dispute that winning of lotteries was otherwise an income which was liable to be included in the total income of the assessee and it had accrued or arisen to the assessee as resident in India during the period in question, whether it was considered to have accrued or arisen in India or was taken to have been accrued or arisen outside the territorial operation of the Act, he was liable to include such winnings into his total income. There was no doubt or dispute about that; had Sikkim not become a State of India, the winning was liable to be taxed in the hands of the assessee notwithstanding the fact that it was liable to be taxed in Sikkim also. [Para 58]

For a person who is a resident in the taxable territory, the principle applies that all income which accrues or arises to him or is deemed to so accrue or arise whether within the taxable territory or outside the taxable territory, is to be included in total income under section 4 of the Act of 1922 or under section 5 of Act of 1961. [Para 60]

The specific provisions made under article 371-F, which have to be read together with the existing provisions of Act, bring about the same result making the Act inapplicable to the State of Sikkim, until notification under clause (n) of article 371F is issued. In that context, expression ‘accrued or arising in India’ or ‘received or deemed to receive in India’ has to be construed vis-a-vis the income arising in territory of India to which the Act is applicable and to any area to which the Act does not extend in which case, the extra-territorial operation of the Act would bring about the same result. [Para 61]

That being the position, therefore, the Tribunal was right in holding that income from winning of lotteries declared by the State of Sikkim during the assessment year in question was liable to be included in the hands of the assessee as resident of India within the State of Rajasthan where the Act was in force, notwithstanding the fact that it had accrued or arisen to him at a place where the Act was not in force even in respect of income accruing to him without taxable territory. In such event, situs of receipt of income lost its relevance. That might have relevance in considering the year in which it was to be assessed to tax if accrual and receipts were on different dates falling in different assessment years, in which case, the subject-matter of enquiry would have been the method of accounting followed by the assessee. Such was not the question in the dispute. [Para 62]

If the income was received by the assessee in Jaipur as found by the Tribunal, then the status of the assessee lost its relevance. Had the income from all sources in whichever territory it had arisen been received in the territories where the Act was applicable, a nexus with the income so received within the taxable territory would have been established with the territory where the Act was enforceable, the provision of the Act, could be enforced in respect of it. Such income could be included in total taxable income of such assessee. [Para 63]

Where amounts are sent from taxable territory to non-taxable territory, it makes vital distinction if the income is to be taken into account for taxing it on receipt basis. The principle is well-settled that when payment is received by cheque, the receipt is ordinarily deemed to be at the place and at the time when the cheque is delivered to the recipient. [Para 76]

Consequently, the Tribunal was justified in holding that the income of winnings from Sikkim State Lotteries in the hands of the assessee was taxable under the Act. [Para 79]

In view of sections 80AB and 80B, for the purpose of claiming deduction in respect of income included in gross total income, the expression ‘gross total income included in total income’ denotes income of that nature computed in accordance with the provisions of the Act, before computing deduction under Part C of Chapter VI A. Therefore, all deductions or adjustments which are otherwise liable to be made for computing the income of particular nature, as are otherwise liable to be deducted from or adjusted against such income, have to be taken into account before determining the ‘such income’ included in ‘the gross total income’ for the purpose of computing deduction under section 80TT. [Para 84]

That being the position, it was immaterial whether the amount of commission, etc., paid by the Sikkim Government was considered as part of its expenses for running the lottery of the Sikkim Government reducing the amount which was actually won by the lottery winner or were considered to be expenses incurred by the Sikkim Government on behalf of the assessee. Such amount in case of the assessee, as winning from lottery would remain the same. It was considered that since Rs. 2 lakhs were the expenses incurred by the Sikkim Government before making the payment of lottery amount to the assessee, the assessee’s winning from lottery would only be Rs. 16 lakhs. If the amount of Rs. 2 lakhs was considered as an expense incurred by the assessee for carrying income from winning of lottery, and was to be allowed as deduction under section 37, the amount included in gross total income for the purposes of section 80TT read with section 80AB made a little difference so far as the amount included in the gross total income of the assessee by way of winning from lottery was concerned. [Para 85]

Consequently, the Tribunal was justified in holding that deduction under section 80TT was applicable on the net winning amount received by the assessee and not on the gross amount of the winning prize. [Para 91]

Case review

Nirmala L. Mehta v. A. Balasubramaniam [2004] 269 ITR 1/139 Taxman 394 (Bom.) dissented from. [Para 64].

Cases referred to

Sri Krishna Das v. Town Area Committee [1990] 183 ITR 401 (SC) [Para 16], Avinder Singh v. State of Punjab [1979] 1 SCR 845 [Para 16], Cantonment Board v. Western India Theatres Ltd. AIR 1954 Bom. 261 [Para 16], Jain Bros. v. Union of India [1970] 77 ITR 107 (SC) [Para 17], H.H. Prince Azam Jha Bahadur v. Expenditure Tax Officer [1972] 83 ITR 92 (SC) [Para 17], Radhakisan Rathi v. Additional Collector, Durg [1995] 4 SCC 309 [Para 18], British Columbia Electric Railway Co. Ltd. v. King 1946 AC 527 [Para 40], Electronics Corpn. of India Ltd. v. CIT [1990] 183 ITR 43/44 Taxman 342 (SC) [Para 45], CIT v. Dharamdas Hargovandas [1961] 42 ITR 427 (SC) [Para 59], Nirmala L. Mehta v. A. Balasubramaniam [2004] 269 ITR 1/139 Taxman 394 (Bom.) [Para 64], State of Sikkim v. Surendra Prasad Sharma AIR 1994 SC 2342 [Para 66], CIT v. Ogale Glass Works Ltd. [1954] 25 ITR 529 (SC) [Para 71], CIT v. Chokshi Contracts P. Ltd. [2002] 120 Taxman 1 [Para 86], CIT v. P.K. Jhaveri [1990] 181 ITR 79/[1991] 54 Taxman 497 [Para 88], Smt. Pramila v. CIT [1998] 232 ITR 262 (MP) (Ind.) [Para 88], Distributors (Baroda) P. Ltd. v. Union of India [1985] 155 ITR 120/22 Taxman 49 (SC) [Para 89].

N.M. Ranka and R.K. Yadav for the Petitioner. J.K. Singhi and Anuroop Singhi for the Respondent.

Judgment

Rajesh Balia, J. - This reference is made under section 256(1) of the Income-tax Act, 1961, by the Tribunal, Jaipur. It relates to assessment year 1986-87. The following questions have been referred to this Court for its decision:

“1. Whether, on the facts and in the circumstances of the case, the Hon’ble Tribunal was justified in holding that income from Sikkim State Lottery is taxable under the Income-tax Act, 1961 ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that deduction under section 80TT is applicable on the net winning amount received by the assessee and not on the gross amount of the winning prize ?”

2. The facts found by the Tribunal are that the assessee is a Resident Indian Citizen earning income, from business and property, at Jaipur, Rajasthan. He won the first prize of Rs. 10 lacs in the 287th Bumper Draw of the Sikkim State Lottery, held on 20-2-1986 at Gangtok by the Director, State Lotteries, Govt. of Sikkim, Gangtok. After having deducted a sum of Rs. 2 lacs on account of payment of agent/sellers commission etc. and another sum of Rs. 1,79,088 on account of Income-tax, as per Sikkim State Income-tax Laws, the Director of Lotteries paid the balance of Rs. 16,20,912 to the assessee through two Demand Drafts which were encashed at Jaipur. The assessee declared the net income of Rs. 8,21,375 claiming deduction under section 80TT of the Income-tax Act, 1961 on Rs. 10,00,000 i.e. the gross amount of the prize money. The ITO however, allowed the deduction under section 80TT on Rs. 18 lacs only.

3. On appeal, the CIT(A) agreed with the Assessing Officer and affirmed the assessment order in that regard.

4. Before the Tribunal, an additional ground was raised by the assessee which was permitted by the Tribunal that ‘authorities below have grossly erred in law in treating lottery income of Sikkim Government as taxable income under the Income-tax Act, 1961’.

This contention had two aspects of the matter. Firstly, that the Sikkim was not originally a part of India when Income-tax Act, 1961 was enacted. Leaving aside the historical background, which does not have much bearing on the present controversy, by 36th Constitutional Amendment Act, Sikkim was admitted into Union of India as a State and special provisions were made under article 371-F relating to administration of territorial constituency of Sikkim.

5. It was contended that the combined reading of clause (k) and (n) of article 371-F have the effect that while as per clause (k) all laws which were in force immediately before the appointed day in territories comprised in the State of Sikkim or any part thereof were to continue to be in force therein, until amended or repealed by competent Legislature or other competent authority, as per clause (n) the President could by public notification extend with such restrictions or modifications as it thinks fit to the State of Sikkim any enactment which is in force in a State in India at the date of notification.

6. On the anvil of the aforesaid provisions, in the Constitution under article 371-F, it was contended that when the lottery was announced and prize money was distributed, Income-tax Act, 1961 was not applicable, a priori vigre to Sikkim State, which too was a part of India. Its operation in Sikkim needed that the President issued notification in exercise of his power under clause (n) of article 371-F. The notification extending the Income-tax Act, 1961 to the Sikkim State had been issued only on 7th November, 1988 under article 371-F(n) after the expiry of assessment year in question. By another notification dated 23rd February, 1989, 1st April, 1989 was declared that Income-tax Act, 1961 was to come into force in the State of Sikkim in relation to the previous year commencing on 1st April, 1989 which made provisions of Income-tax Act, 1961 applicable to State of Sikkim w.e.f. assessment year 1990-91. Thus, for the assessment year in question i.e. 1986-87, previous year relevant to which ended on 31st March, 1986 during which the assessee had won the lottery, the Income-tax Act, 1961 was not extended to the State of Sikkim. Therefore, any income earned, accrued or received in Sikkim in previous year 1986-87 was beyond the charge of taxation under the Act of 1961.

7. The other aspect of the above contention is that since in the territory of Sikkim, the Income-tax laws as were applicable to the Sikkim before its becoming part of India, were continuing in force during the assessment year in question, by virtue of article 376-F(k), the assessee had been subjected to tax on income from the winnings of lotteries under the Sikkim Income-tax laws. The same income could not be subjected to tax under the Income-tax Act, 1961 in the hands of the same assessee as it would amount to double taxation on same income accrued arisen or received in India in the hands of the assessee.

8. The above controversy is subject-matter of question No. 1 referred to us.

9. The other controversy which is referred to us vide question No. 2 is related to claim of assessee to deduction under section 80TT on the winnings of lottery. The assessee claimed deduction on the entire amount of Rs. 20 lacs. The Assessing Officer had allowed the deduction on the net amount of lottery after adjusting two lacs paid by the Sikkim Government by way of commission to commission agents or other expenses before the amount was paid to the assessee.

Question No. 1 :

10. The Tribunal did not accept the contention of the assessee regarding its claim to non-exigibility of the winnings from lottery announced by the Sikkim Government and received by the assessee on either ground, to income-tax under the Act of 1961.

11. The Tribunal had found on facts that the assessee is an ordinary resident of India to whom the provisions of the Act of 1961 did unquestionably apply. Income from winning from lotteries was received in Jaipur in India during the year under consideration as the two demand drafts were encashed at Jaipur, which is situated in territory to which Income-tax Act, 1961, extends. Such income is to be included in the computation of total income for the assessment year under consideration as winning from lottery were not exempted under chapter 3A of the Act and his case fell within the ambit of section 5(1)(a) of the Act of 1961 which inter alia provides the total income of any previous year of a person, who is resident, included income from any source which has been received or deemed to have been received in India by or on behalf of such person. It held that under section 5(1) of the Income-tax Act, 1961, charge of tax net is wide enough to include all income received or deemed to be received, accrued or arisen or deemed to have accrued or arisen to a person in India or outside India.

12. In the written submission made by the assessee, it has been stated that the amount was remitted to assessee at Jaipur by draft at the request of the assessee and it would not make any change that instead of paying cash, amount has been remitted by drafts and that drafts had been encashed at Jaipur. Since income in question had arisen in Sikkim, outside the operative field of Income-tax Act, 1961, but within India, the income accruing or arising in India in territory beyond the applicability of Act of 1961, cannot be taxed on the basis of its place of accrual.

13. In this connection, it was also contended in the written submission that had the amount received by cheque or cash by the assessee and were to be credited to his Bank Account at Gangtok and thereafter has been brought to India, the receipts of winnings were to be considered in Sikkim - a non-taxable territory. Raising this posure, it was contended that the mere receipt at Jaipur outside State of Sikkim would not make any difference. Any person whether residing in Indian State of Sikkim or Indian State of Rajasthan remain a citizen of India and amount received by resident of Sikkim is also received in India and by resident of India. The upshot of Tribunal’s order is that under section 5(1)(a) of the Income-tax Act, while the resident of India residing in Sikkim receiving income in India (at Sikkim) will not be subjected to tax, but a person like assessee on receipt of same income in India (outside Sikkim) will be subjected to income-tax, on the like basis viz. receipt of Income in India. The provision of Income-tax Act ought not to be interpreted to bring about such a discriminatory result.

14. Before coming to the core issue about the taxability of winning of Sikkim lottery announced in Sikkim under the Income-tax Act, 1961 which had accrued and arisen in Sikkim, where the Income-tax Act, 1961 was not extended, we may take other aspects of the first question, viz. whether the tax on winning of lottery is unsustainable on principle of Double Taxation.

15. So far as principle against double taxation is concerned, the issue raised by the assessee is founded on unsound premise. The principle is well-settled that where the tax is imposed by two different Legislatures under different enactments, the question of double taxation in stricto senso does not arise. The question of double taxation may become of significance if under the same law, same income is taxed twice in the hands of same person through same passage. There is no inherent anathema to double taxation if the law prescribes it.

16. The principle was stated clearly and unequivocally by the Apex Court in Sri Krishna Das v. Town Area Committee, Chirgaon [1990] 183 ITR 401. It was a case where the same goods were subjected to levy of tax under U.P. Sales Tax Act as well as to fee under Municipalities Act. The contention was raised challenging the levy on the ground that it amounts to double taxation on the same subject-matter. The contention was repelled by the Allahabad High Court. Affirming the judgment of Allahabad High Court, the Apex Court said :—

“. . . To constitute double taxation, the two or more taxes must have been (1) levied on the same property or subject-matter, (2) by the same Government or authority, (3) during the same taxing period, and (4) for the same purpose. “There is no double taxation, strictly speaking”. . . where (a) where the taxes are imposed by different States, (b) one of the impositions is not a tax, (c) one tax is against property and the other is not a property tax, or (d) the double taxation is indirect rather than direct.” (p. 410)

On this premise, the Court further concluded :

“Where more than one legislative authority, such as the State Legislature and a local or municipal body, possess the power to levy a tax, there is nothing in the Constitution to prevent the same person or property being subject to both the State and municipal taxation or the same Legislature exercising its power twice for different purposes. . . .” (p. 410)

In coming to this conclusion, the Court referred to observations made in its earlier decision in Avinder Singh v. State of Punjab [1979] 1 SCR 845, holding that :

“there is nothing in article 265 of the Constitution from which one come spin out, the constitutional vice called double taxation (Bad Economics may be good law and vice versa). . . . Some undeserving contentions die hard, rather survive after death. The only epitaph we may inscribe is: Rest in piece and don’t be re-born. If, on the same subject-matter, the Legislature chooses to levy tax twice over, there is no inherent invalidity in the fiscal adventure save where other prohibitions exist.”

The Court approved the decision of the Bombay High Court in Cantonment Board v. Western India Theatres Ltd. AIR 1954 Bom. 261.

17. The principle was accepted by the Supreme Court in Jain Bros. v. Union of India [1970] 77 ITR 107 that there can be double taxation because Legislature has distinctly enacted it. It is only when there are general words of taxation and they have to be interpreted that they cannot be so interpreted as to tax the subject twice over to the same tax. The Constitution does not contain any prohibition against double taxation.

The principle was accepted in H.H. Prince Azam Jha Bahadur v. Expenditure Tax Officer [1972] 83 ITR 92.

18. Again the principle was restated in Radhakrisan Rathi v. Additional Collector, Durg [1995] 4 SCC 309. Referring to the aforesaid three cases, the Court said :

“It is now well-settled that the same subject-matter can be covered by the taxation nets imposed by different competent authorities, and there will be no double taxation involved in such cases.”

19. Since in the present case, the winning from lotteries are made subject to levy of income-tax in the territories of State of Sikkim under the laws made by the erstwhile Sikkim State which were continued to remain to force under article 371-F(k) and the levy of income-tax on winning of lotteries is also made under the Income-tax Act, 1961 a law enacted by the Parliament, a different Legislative Authority by applying it within the territories to which the Act of 1961 extends, the charge and levy is imposed under two different authorities competent to enact such law on subject-matter in question, viz., tax on income of a person. The operation of two enactments within their respective field of operation by itself is not inflicted with vice of double taxation, so long as nexus between the subject-matter or the subject of enactment and the territory to which such law extends is discernible.

20. Therefore, the question of double taxation as ground to avoid taxation under either of them would not arise, if the same is otherwise eligible to tax under the charging provisions of the respective enactment.

21. The acceptance of contentions of the assessee on the anvil of double taxation would result in yielding to two different conclusions about exigibility of income in question to tax, not on the basis of applicability of law, but on the anvil whether the income in question was taxable in Sikkim or not. If the winnings from lottery were not to be taxed in Sikkim State, on the principle of double taxation, the income will be exigible to tax under the Income-tax Act, 1961. This result destroys the premise that Income-tax Act, 1961 cannot have extra territorial operation in respect of income accruing or arising in Sikkim, leaving apart the taxability on the basis of receipt.

22. The succour sought under the Explanation 2 section 5 in this regard has rightly been rejected by the Tribunal. Explanation 2 indicates that if an income has been taxed earlier on accrual basis in the hands of a person, the same person cannot be taxed again in respect of the same income on its receipt. In other words, a person can be taxed only once in respect of the income whether on accrual basis or on receipt basis. It has relevance with the method of accounting employed by the assessee viz., whether he maintains his accounts on mercantile basis, where income is accounted for as soon as it accrues to the assessee entitling him to receive it, though actual receipt may be later in time. The accounts may be maintained on cash basis also that is on the basis of actual receipt of income. However, in either case, the operation of Explanation becomes operative only if earlier assessment has taken place under the Act of 1961, and later assessment is also sought to be made under the Act of 1961. But where the assessments proceed under different enactments which are otherwise operative in respective areas, the occasion for invoking Explanation 2 to section 5 does not arise.

23. The test for examining the exigibility to tax of any income, therefore, is not merely the factum of double taxation but the touchstone is extent and reach of the law imposing tax to the subject-matter and/or the subject of taxation.

24. The core question, therefore, is whether in view of non obstante article 371-F, the provisions of Income-tax Act, 1961 can reach the income accrued or arisen or received in Sikkim, where the Act of 1961 was not extended during the relevant assessment year in question by virtue of constitutional provisions.

25. The relevant provisions of Constitution which needs notice at this stage are as under :—

“Article 245. Extent of laws made by Parliament and by the Legislatures of States : (1) Subject to the provisions of this Constitution Parliament may make laws for the whole or any part of the territory of India, and the Legislature of a State may make laws for the whole or any part of the State.

(2) No law made by Parliament shall be deemed to be invalid on the ground that it would have extra-territorial operation.

Article 371F. Special provisions with respect to the State of Sikkim :

Notwithstanding anything in this Constitution—

(a) to (j)**

**

**

(k) all laws in force immediately before the appointed day in the territories comprised in the State of Sikkim or any part thereof shall continue to be in force therein until amended or repealed by a competent Legislature or other competent authority.

(l) and (m)**

**

**

(n) the President may, by public notification, extend with such restrictions or modifications as he thinks fit to the State of Sikkim any enactment which is in force in a State in India at the date of the notification.”

26. Section 1(2) of I.T. Act, read with article 371F(k) and (n) has the effect that the Income-tax Act, 1961 enacted w.e.f. 1-4-1962, before Sikkim became a State of India, had territorial operation for whole of India. When Sikkim became a State of India w.e.f. 26-4-1975 to take care of special circumstances emerging therefrom. Article 371F was inserted in Constitution of India vide Constitution (36th) Amended Act, 1975 w.e.f. 26-4-1975. The combined effect of clauses (h) and (n) was that laws in force in territories comprised in State of Sikkim immediately before 26-4-1975 continued to remain in force in the said territory and until President by above referred notifications issued under article 371F(n) extended the Income-tax Act, 1961 to Sikkim w.e.f. assessment year 1990 relating to previous year commencing from 1-4-1989, the Act of 1961 which was in force in all other States of India was not extended to State of Sikkim. Thus, the effect of these provisions was that the Income-tax Act, 1961 an enactment by Parliament w.e.f. 26-4-1975 was in force only in part of India and not in whole of India. Because every law made by any Legislature is subject to provisions of the Constitution. We shall consider presently the operation of Act of 1961, at very inception had been extended to persons, things and acts outside its territory which has nexus within taxable territory.

27. Under section 1(2) of the Act of 1961, which came into effect w.e.f. 1st April, 1961 save as provided otherwise in the Act, was its operative territory, the whole of Union Territory of India. Section 4 is a charging section and provides for levy of income-tax for any assessment year in respect of total income of the previous year relevant thereto of every person.

28. The object of the enactment is the levy of an income, the subject-matter of such levy is the ‘total income’ of the previous year and the subject of such levy is every person to whom such income belongs.

29. What constitutes the ‘total income’ has been defined under section 2(45) of the Act to mean total amount of income referred to in section 5 computed in the manner laid down in the Act.

30. Section 5 of the Act of 1961 which is captioned as “Scope of total income” during the relevant period reads” subject to the provisions of the Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which is :

(a) is received or deemed to be received in India in such year by or on behalf of such person or;

(b) accrued or arises or is deemed to have accrued or arise in India during such year; or

(c) accrues or arises or is deemed to have accrued or arisen to him outside India during such year :

Provided that in the case of ‘a person, not ordinarily a resident’ of India, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or profession set up in India.

Sub-section (2) of section 5 further provides the total income of any previous year of ‘a person who is a non-resident’ include all income from whatever source derived which is received or is deemed to be received in India during such year by him or on behalf of such person or (b) accrues or arises or is deemed to have accrued or arisen to him in India during such year.

31. Bereft of other details, section 5 qualifies the scope of total income of any previous year vis-a-vis, three class of persons (1), the resident (2) a person not ordinarily resident in India; (3) a person who is a non-resident.

32. The scope of total income in respect of all the three classified persons vary to some extent. (i) In the case of resident, who does not fall in the category of resident, but not ordinarily resident of India as defined under sub-section (6) of section 6, the scope of total income is widest. In his case wherever the income accrues or arises to him, whether in India or outside India, as well as every income which is received or deemed to be received in India during the previous year is included in his total income to be computed for the purposes of tax in accordance with the provisions of the Act of 1961.

33. In the case of a resident but not ordinary resident of India, while the income which accrues or arises to him in India as well as any income which is received or deemed to be received in India by him in such year or on his behalf such income, which is liable to be taxed, is included in the total income of such assessee in its entirety. However, in respect of income which accrues or arises to any, not or finally resident of India, it is includible in his total income only, if it is derived from business controlled from or profession set up in India.

34. Thus, unlike ordinary resident of India, a not ordinary resident of India, he is not required to include the entire income which accrues or arises to him outside India unqualifiedly but only such part of income which accrues or arises to him from a business controlled or profession set up in India.

However, if such income is received in India where Income-tax Act extends, such income is still includible in income to be taxed under section 5(1)(a).

35. Lastly, in the case of non-resident, the income accruing or arising to him outside India, from whatever source, is not includible in his total income unless the same is received or deemed to be received by him or on his behalf under India under section 5(1)(a). So far as income accruing or arising or deemed to be accruing or arising in India is concerned, he is equally liable for its inclusion in total income to be computed for taxable purposes under the Act.

In other words, income received or is deemed to be received in India whether it is accrued in India or outside India, is within the domain of the Act of 1961 to be included in the total income, if otherwise it is an income in the case of any person, whether (i) resident or (ii) ordinary resident but not ordinarily or (iii) the non-resident. Likewise, any income from any source which accrues or arises or deemed to accrue or arise to him in India is to be included in the total income irrespective of whether it is received in India or not. But in the cases where income accrues or arises to any person outside India, whether to be included in total income, depends on the status of the person to whom such income accrues or arises.

36. Section 6 deals with the criterion for determining the status of a person resident but not ordinarily resident in India for any previous year for which income is to be assessed. Non-resident has been defined in section 2(30) to mean a person who is not a resident and for the purposes of sections 92, 93 and 168 includes a person who is not ordinarily resident within the meaning of clause (6) of section 6.

37. These provisions relating to scope of total income which is subject-matter of tax and the ‘status of person’ in respect of whose income, tax is to be levied, make the reach of Income-tax Act, 1961 extra-territorial both in respect of subject-matter i.e., Total income to be taxed and the subject i.e., person to be subjected to tax. It operates extra-territorial in respect of any income which accrues or arises outside operative territorial limit of the Act as well as in respect of person who resides outside the extent of the Act of 1961. Any income which accrues or arises to any person outside India i.e., to say beyond the operative territory of the Act of 1961 is liable to be included within total income to be computed for the purpose of levy without qualification in the case of a resident and with certain qualification in the case of not ordinarily resident irrespective of fact whether it is received in taxable territory or not. In the case of non-resident also such income become taxable if it is received by him or on his behalf in India.

38. Likewise, the non-resident who does not have a residential connection with India and live, beyond the territory of India, has still been made subject to charge in respect of such income which accrues or arises to him in India or which is received by him in India.

39. Merely because the provisions of the Act operates on such subject-matter beyond its territorial operative field, it does not go beyond its reach nor does render it ineffective. A provision which has extra-territorial operation by itself is neither invalid nor ineffective.

40. In British Columbia Electric Railway Co. Ltd. v. King 1946 AC 527 Privy Council on Appeal from the Supreme Court of Canada said :

“A legislature which passes a law having territorial operation may find that what it has enacted cannot be directly enforced but the Act is not invalid on that account and the Courts of its country must enforce law with the machinery available to them”.

41. Delineating legislative powers of union and State, the Constitution of India envisaged under Article 245(1), that Parliament can make laws for whole or any part of India. Thus, law made by the Parliament may not necessarily extend to whole of India, but may be operative in some parts of India only. In such event, a law made for a part of India, if it affects any person or act outside its territorial field, in other part of India and the provisions of such law reaches it, it becomes a case of extra-territorial operation of law made by the Parliament.

42. Article 245(2) declares that no law made by the Parliament shall be deemed to be invalid on the ground that it would have extra-territorial operation.

43. Therefore, under the scheme of Constitution, a Parliamentary Statute having extra-territorial operation cannot be ruled out from contemplation. The operation of law can extend to persons, things and acts outside the territory of India. The general principle suffering from the sovereignty of States is that law made by one State can have no operation in another State. The position emanating from Article 245(2) is that while it has not affected the legislative competency of making such law, it made certain difficulties in its enforcement.

44. The Privy Council in British Columbia Electric Railway Co. Ltd.’s case (supra), considering such difficulty had enunciated that it is enforceable within the territory in which it operates through machinery set up for such enforcement.

45. The principle was approved by the Supreme Court in Electronics Corpn. of India Ltd. v. CIT [1990] 183 ITR 431 . The Court said approving the aforesaid ratio that while the enforcement of law cannot be contemplated in a foreign State, it can nonetheless, be enforced by the Courts of the enacting State to the degree that is permissible with the machinery available to them. The law will not be regarded by such Courts as invalid on the ground of such extra territoriality or ineffective.

46. Further, stating the course in what manner, the Court can give effect to such provisions and how such provisions operate, was succinctly stated thus :

“It will now be noted that Article 245(1) empowers the Parliament to enact laws for the whole or any part of the territory of India. The provocation for the law must be found within India itself. Such a law may have extra-territorial operation in order to subserve the object and that object must be related to something in India. It is inconceivable that a law should be made by Parliament in India which has no relationship with anything in India. The only question then is whether the ingredients, in terms of impugned provision, indicate a nexus”.

47. Along with the aforesaid principle, one significant point is to be noticed that Article 245(1) makes it clear that law made by the Parliament can be either for the whole of India or may be for part of the territory of India, meaning thereby that any enactment made by the Parliament need not require to be extended necessarily to every part of union territory of India. At the same time, the law made by any part of India may with reference to the subject-matter or subject can have by such enactment extra-territorial nexus beyond the operation of field of the Act, which may be falling within the operative territorial field.

48. If in the aforesaid light, we consider the extent of provisions of Income-tax Act, 1961 which like any other enactments made by Legislature in India, is subject to the provisions of the Constitution including Article 371-F. Art. 371-F of the Constitution of India was inserted in our Constitution making a special provision with a non obstante clause as a consequence of Sikkim, an erstwhile independent nation, became a State of India.

49. We have noticed that Income-tax Act, 1961 came into effect from 1-4-1962 and extended to whole of India. At the time of its promulgation, Sikkim was not a part of India and the provisions of the Income-tax Act, 1961 were not enforceable in Sikkim. Yet, in respect of any income which accrued or arose in Sikkim was, liable to be taxed under the Act of 1961 if either the subject or subject-matter of the Act had nexus with territories where the Act of 1961 was in force namely; if the person, to whom such income had accrued or arisen in Sikkim was a resident in any State of India where the Act of 1961 was in force. Then, notwithstanding the income having arisen or accrued outside the territorial operation of the Act, it could be taxed in the hands of a resident Indian whether received in India or not received in India. Likewise, if the income which had arisen in Sikkim to any person who may not be resident of any State in India, but if such income is received in any State in India by him or on his behalf, it could be taxed as the subject-matter viz., the income when received or deemed to be received in India as envisaged under section 5(1)(a) a nexus with taxable territory where the Act could be enforced was established. Such income become taxable in the hands of any person whether resident or non-resident or ordinary resident.

50. There is no dispute that before Sikkim became a State of Union of India, the income in question which had accrued or arisen in Sikkim in the aforesaid circumstances, would have been subject to tax under the Income-tax Act, 1961 in the hands of concerned person. It is also not in dispute that winning from lotteries in such event in its entirety would have been included in computation of total income in the hands of a resident in India or in the hands of any other person if the same were received in India.

51. The question then arises is whether Sikkim on becoming part of Indian Territory had brought about any change in the situation and takes away the income accrued or arises in Sikkim but not received in the territorial extent of Income-tax Act, 1961, out of the reach of Income-tax Act, 1961 even in the case of a person who is otherwise subject to income-tax is a resident in taxable territory.

52. When Sikkim became part of Indian territory because of clause (k) of non obstante Article 371-F inserted in the Constitution, the laws operative in the State of Sikkim were to remain in force in territories constituting State of Sikkim until repealed or amended by any competent Legislature. Laws or enactments, which were in force in any other State in India, could be extended to the territory of Sikkim by notification issued in this behalf by the President.

53. Article 371-F is a non obstante clause which operates in spite of other provisions of the Constitution of India that may be contrary to it. Therefore, the laws made by the erstwhile independent Sikkim, which were in force in the territory comprised in the State of Sikkim, notwithstanding that it may be repugnant to any Central Legislation, or operating in field occupied by law made by Parliament or contrary to any other provision of the Constitution, remained effective in the territory comprised in the State of Sikkim until amended or repealed by a competent Legislature or other competent laws. Likewise, the operation of existing enactments which were in force in other State were not automatically extended to the State of Sikkim unless the same is extended in terms of clause (n) of Article 371-F. Clause (n) envisages extension of any enactment which is “in force in a State in India” at the date of notification issued by the President.

54. If expression “in force in a State in India” is confined to the laws made by the State Legislature in any particular State in India, then the Acts made by the Parliament which were operative in whole of India stood extended to Sikkim also without any reservation on its becoming part of India. If it is viewed that all enactments including enactment made by Parliament which were in force in all the States or in some States, depending upon its extent of operation, Act of 1961 did not automatically stood extended to State of Sikkim unless notification in terms of provisions of Article 371-F was issued. The existing enactment operating in the whole of India remained operative in the territory of all the States of India excluding the State of Sikkim. So far as State of Sikkim was concerned, the Act of 1961 continued to have extra-territorial operation which could be enforced in existing territories when it was in force in regard to the persons, things or acts within such States of India where the Act extended. In either case, the result would be the same.

55. So far as income accruing or arising to any person, resident within such State of India where the Act of 1961 was in force, his total income was liable to be computed in terms of section 5 independent on his status. If he is an ordinary resident in India, then his entire income from whatever source was to be computed in accordance with the provision of the Act whether it accrued or arose beyond the territory to which it was extending. This would be irrespective of the fact whether he receives such income within taxable territories after it had accrued or arisen to him. If the income is received in India at a place to which Act of 1961 is in force still it would be included in the total income of recipient person; irrespective of his resident, status.

56. The difference may arise in the case of income accruing or arising in territory of Sikkim State where the Act of 1961 was not in force, in the case of a resident but not ordinarily resident or a non-resident. Where subject-matter and subject both are beyond the territory where the Act extends, it cannot be enforced.

57. Since we are not concerned here with the person who is either a not ordinarily resident or a non-resident, but undisputably is a resident and ordinary resident in India, at a place where Act of 1961 was in force, the question has to be decided on that touchstone.

58. There being no dispute that winning of lotteries is otherwise an income which is liable to be included in the total income of the assessee and it has accrued or arisen to assessee as resident in India during the period in question. Whether it is considered to have accrued or arisen in India or is taken to have been accrued or arisen outside the territorial operation of the Income-tax Act, 1961, he is liable to include such winnings into his total income. There is no doubt or dispute about that, had Sikkim not become a State of India, the winning was liable to be taxed in the hands of assessee notwithstanding it was liable to be taxed in Sikkim also.

59. In this connection, reference may be made to the decision of the Supreme Court in CIT v. Dharamdas Hargovandas [1961] 42 ITR 427 interpreting section 4 of the Act of 1922 which corresponds to section 5 of the Income-tax Act, 1961, the Court said :—

“It is divided into three parts. The first part which is clause (a) provides that all income, profits and gains received or deemed to be received in taxable hands or on behalf of such person will be included in the taxable income. So far as clause (a) is concerned, it is immaterial whether the person is resident and not taxable or any resident so long as income tax etc. is received in the taxable territories by or on behalf of such person in the previous year which is liable to be included in the computation of total income under this clause. Therefore, it is the receipt in the previous year that is material and the recipient of the person to cheques is immaterial.”

60. For a person who is resident in the taxable territory in such taxable territories, the principle applies that all income which accrues or arises to him or is deemed to so accrue or arise wherein whether within the taxable territory or outside the taxable territory, is to be included in total income under section 4 of the Act of 1922 or under section 5 of Act of 1961.

The fact that under the Act of 1922, expression “taxable territory” has been used in place of ‘India under the Act of 1961’, does not make any difference. So far as enforcement of its provision within the State governed by the Act which have extra-territorial reach. Applicability of the Act of 1922 had been extended not to whole of India, but to British India only erstwhile State forming part of Indian sub-continent were not within the applicable reach of the Act of 1922. In the context of a taxing statute which has extra-territorial operation, a provision defining the extent of its operation in terms of territorial operation refers to ‘taxable territories’ within which the extra-territorial provisions are enforceable.

61. In the context of the specific provisions made under Article 371-F, which has to be read together with the existing provisions of Act of 1961 brings about the same result making the Act inapplicable to State of Sikkim, until notification under clause (n) of Article 371-F was issued. In the context expression “accrued or arising in India” or “received or deemed to receive in India” has to be construed vis-a-vis the income arising in territory of India to which the Act is applicable and to any area to which the Act does not extend, the extra territorial operation of the Act brings about the same result.

62. That being the position, we have no hesitation in coming to the conclusion that the Tribunal was right in holding that income from winning of lotteries declared by the State of Sikkim during the assessment year in question was liable to be included in the hands of the assessee as resident of India within State of Rajasthan where Income-tax Act, 1961 was in force notwithstanding it had accrued or arisen to him at a place where the Act of 1961 was not in force even in respect of income accruing to him without taxable territory. In such event, situs of receipt of income loses its relevance. That may have relevance in considering the year in which it is to be assessed to tax if accrual and receipt are on different dates falling in different assessment years, in which case matter of enquiry would have been method of accounting followed by the assessee. Such is not the question in dispute before us.

63. If the income is received by him in Jaipur as found by the Tribunal, then the status of the assessee losses its relevance and the income from all sources in whichever territory it has arisen if it has been received in the territories where the Act of 1961 is applicable, a nexus with the income so received within the taxable territory is established with the territory where the Act is enforceable, the provision of Act of 1961 can be enforced in respect of it. Such income can be included in taxable total income of such assessee.

64. Before parting with this issue, we may notice that the learned counsel for the assessee has placed before us a decision of the Bombay High Court in Nirmala L. Mehta v. A. Balasubramaniam [2004] 269 ITR 11 , in support of his contention that income from lottery in Sikkim earned in 1987 is not amenable to tax under the Income-tax Act, 1961.

65. Bombay High Court having reached the same conclusion on construction of Article 371-F(k) and (n) that Income-tax Act, 1961 was made applicable and came into force in the State of Sikkim from the assessment year 1990-91 as we have reached above, held as under :

“The Income-tax Act, 1961 was not applicable at the relevant time in Sikkim. So long as the Income-tax Act, 1961 did not become applicable to the State of Sikkim, Income-tax Act, 1961 could not be applied to the income earned in Sikkim. In the circumstances, we have no hesitation in holding that the prize money won by the petitioner from the lottery of the Government of Sikkim could have been charged to tax only in accordance with then existing Income-tax Laws in the State of Sikkim and could not be charged to tax under the Income-tax Act, 1961.”

66. Reference has been made to two decisions of the Supreme Court in State of Sikkim v. Surendra Prasad Sharma AIR 1994 SC 2342 to hold that Income-tax Manual, 1948 in force in Sikkim was a law in force in the territories of Sikkim immediately before the appointed date as per Article 371-F(k) and was to remain in force until repealed or modified by competent Legislature. By virtue of clause (n), an Indian Act or enactment specified in President’s notification extends to Sikkim, superseding the constitutional law (sic existing) even without any repeal of that Sikkim law.

67. So far as the question of Income-tax Act, 1961 being extended to State of Sikkim only from assessment year 1990-91 (previous year 1989-90) only, there may not be any difficulty.

68. However, it appears that attention of the Hon’ble Court was not invited to provision of sections 4, 5 and 6 of the Income-tax Act laying down the scope of ‘Total Income’ liable to be taxed under section 4 of the Act of 1961 in the hands of any person which gives the Act extra-territorial operation, and which in our opinion, has vital bearing on decision of the question referred to. We have noticed above the Income-tax Act, 1922 as well as Income-tax Act, 1961 are legislations that have extra-territorial operation, both in respect of their subject-matters and subjects and such extra territorial operation is permissible under Article 245 of the Constitution and the provisions are enforceable within the area where the Act extends through machinery provided under it. The principle was explained by the Supreme Court in the case of Dharamdas Hargovandas (supra). That was a case where like question had arisen in respect of levy of income-tax under the Act of 1922 which extended to British India but was not applicable within erstwhile Indian States, yet income accrued, arisen in erstwhile Indian States to a resident in British India and the income accruing or arising in Indian States to non-resident, but received in British India, was held liable to be taxed by virtue of provisions of section 4 of the Act of 1922, which corresponded to sections 5 and 6 of the Act of 1961.

69. In view of the reason detailed hereinabove, we with utmost respect, regret our inability to agree with the decision in Nirmala L. Mehta’s case.

70. The factual ground raised by the assessee that the amount was received by him in Sikkim because the drafts were posted at Sikkim as a result of his request for remitting the same to him at Jaipur, thereby laying the foundation for the contention that the post office became his agent and the receipt of income was complete as soon as drafts were delivered to the courier in Sikkim, he shall be deemed to have received the same on behalf of the assessee at Sikkim.

71. This position as principle of law is in consonance with the principle explained by the Supreme Court in CIT v. Ogale Glass Works Ltd. [1954] 25 ITR 529. The question that fell before the Supreme Court was in like circumstances, the assessee who was doing his business at erstwhile Indian State had sold goods under a contract to the Government of India and he was paid by cheques drawn on Reserve Bank of India. The cheques were posted at Delhi and were encashed at Bombay. The delivery of cheques were made in the Indian State. The Indian Income-tax Act, 1922, the predecessor to Act of 1961 was extended to whole of British India but was not in force in the erstwhile Indian States, which did not form part of British India. Under section 4(a) of the Act of 1922 which was corresponding to sections 5 and 6 of the Indian Income-tax Act, 1961, it was provided that income received or deemed to be received in taxable territory shall be included in the total income of any person from whichever source it is derived. The assessee has contended that since cheques were delivered to the assessee in Oudh, hence the income was received in Oudh, where the cheques were delivered to him.

72. The Assessing Officer had taxed the same on the basis of its receipt in Bombay where the cheques were actually encashed. The High Court has held against the assessee though it held that if the assessee had requested the Government to remit the payment, posting of cheques at Delhi would have been deemed to be delivery of cheques to the assessee at Delhi. However, the High Court held that there is no finding by the Tribunal on the point whether the assessee had ever requested the Government to send the cheques by post.

73. The Supreme Court observed on the question of law that “there can be no doubt as between the sender and the addressees, it is the request of the addressee that the cheques be sent by post, that makes the post office the agent of the addressee, if there were no such request expressed or implied; then the delivery of the letter or cheque to the post office is delivered to the agent of the sender himself”.

74. The Court further explained the principle by saying that apart from this principle of Agency, there is no other circumstance, which makes the delivery of the cheque to the post office at the request of the addressee which is delivered to him and that is by posting the cheque in pursuance of the request of the creditor, the party performs obligation in the manner prescribed and sanctioned by the contract and thereby discharge the onus of such contracts. Reliance was placed on Illustration (d) of section 50 of the Indian Contract Act. Therefore, when any sum is sent by post or courier, where the same is received by the addressee then it is delivered to him or his agent. If the post office or courier is acting as an agent of addressee, the delivery to courier fulfils the requirement of delivery to addressee. In such case, the post office or courier acts as an agent of the addressee. Ordinarily, the post office or courier is considered as an agent of sender unless deliverance to post office or courier is at the request of addressee, expressed or implied. However, this is a finding of fact which must be reached in each case on its own facts. In the absence of such request, the post office or courier is considered an agent of sender himself. Therefore, unless issue is joined, on such question of fact, no finding can be reached or assumed unless necessary facts are admitted.

75. In the present case, there is no finding in the order of Tribunal as to at whose instance remittance was made to taxable territory from non-taxable territory by post, nor such issue appears to have been joined before the Tribunal.

76. In such cases, where amounts are sent from taxable territory to non-taxable territory, it makes vital distinction if the income is to be taken into account for taxing it on receipt basis. The principle is well-settled that when payment is received by cheque, the receipt is ordinarily deemed to be at the place and at the time when the cheque is delivered to the recipient.

77. Be that as it may, though the principle referred to by the Tribunal that encashment at Jaipur made the delivery at Jaipur, does not appear to be the correct proposition because the act of encashment is not relevant for determining the place at which the receipt is complete but the place of delivery of cheque or draft is the place where the income embedded in, is received by the recipient. Where cheques or drafts are sent by post or courier it depends on the facts of the case whether the cheques or drafts were delivered to the post office as an agent of the sender or as an agent of the recipient. There is no dispute that the drafts in the present case, were sent to the assessee from Sikkim to Jaipur and the same were delivered to him at Jaipur in ordinary course delivery of drafts in Jaipur would constitute receipt of the same by the assessee.

78. The fact whether drafts were delivered to post office depends on the fact whether the assessee had made a request to remit the payments by post or other method. The burden to prove whether there exists a contract to that effect expressed or implied is on him who asserts such fact. No presumption can be drawn in the absence of any such case put forward and material on record brought before the concerned authority about existence of such contract. Ordinary presumption, though rebuttable, is on the person who claim such fact to exist.

79. As a result of aforesaid discussion, we answer question No. 1 in positive in favour of the Revenue and against the assessee. We hold that the Tribunal was justified in holding that the income of winnings from Sikkim State Lotteries in the hands of the assessee was taxable under the Income-tax Act, 1961.

Question No. 2

80. The assessee has claimed that since his winnings from lottery declared by the Sikkim State was 20 lacs and the amount paid to the agents by way of commission etc. directly, before remitting the amount to him was only a part of expenses incurred by the assessee. Total income of the assessee, from winnings of lottery, which has been included in gross total income, therefore, must be deemed to include the expenses incurred by the assessee after he has earned the income. Therefore, the deduction allowed under section 80TT, which was in force during the assessment year in question, since omitted, must be on the entire sum of Rs. 20 lacs and not on the net amount of lottery after deduction of expenses on Rs. 18 lacs only as has been allowed by the Assessing Officer. The Tribunal has not acceded to this foundation.

81. Section 80TT is the provision which finds place under Heading C of Chapter VIA which provides certain deduction in computation of total income of the assessee, included in Gross Total income of the assessee. Deduction in respect of income by way of winnings from any lottery, was provided under section 80TT.

“80TT. Deduction in respect of winnings from lottery.—Where the gross total income of an assessee, not being a company, includes any income by way of winnings from any lottery such income being hereafter in this section referred to as winnings, there shall be allowed, in computating the total income of the assessee, a deduction from the winnings from an amount equal to :

(a) in a case where the gross total income does not exceed 10,000 rupees or where the winnings do not exceed five thousand rupees, the whole of such winnings;

(b) in any other case, five thousand rupees as increased by a sum equal to fifty per cent of the amount by which the winnings exceed five thousand rupees.”

The above provision is clear that the deduction envisaged is only in respect of such winnings which has been included in computing in gross total income. The question, therefore, which begs answer is what amount of winning from lottery can be said to be included in computation of gross total income of the assessee which can be a basis for computation of deduction to find out the answer to the question raised.

82. The assessee’s contention that the entire winnings from the lottery was 20 lacs which was included in his gross total income as per section 5 of the Indian Income-tax Act, 1961. Any deduction made therefrom to find out net taxable income of assessee cannot be taken into consideration, for the purpose of determining the deduction under section 80TT. Since expenses incurred for earning the income from lotteries, which include the commission paid to agents, are to be deducted from gross total income for finding taxable income, after the income is so computed in accordance with provision of Income-tax Act, it remains a net income. Deduction under section 80TT is not referable to net income, but is referable to gross total income.

83. However, the contention omits to notice the provisions of sections 80B and 80AB which are clear in this regard and read as under :—

“80B. Definitions.—In this Chapter—

(1) to (4)**

**

**

(5) ‘gross total income’ means the total income computed in accordance with the provisions of this Act, before making any deduction in this Chapter.

80AB. Deductions to be made with reference to the income included in the gross total income.—Where any deduction is required to be made or allowed under any section included in this Chapter under the Heading (C-Deductions in respect of certain incomes” in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act before making any deduction under this Chapter shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income.”

Section 80B defines ‘Gross Total Income’ for the purpose of Chapter VI-A, section 80AB which was inserted with effect from 1-4-1981 defines the term gross total income of particular nature of income included in gross total income, where deduction is to be allowed with reference to such nature of income included in gross total income of the assessee. In other words, section 80B defines the term ‘Gross Total Income’ in terms of aggregate of total income of a person from all sources, as computed in accordance with provision of Income-tax Act before claiming deduction under Chapter VI-A, the same meaning is assigned to gross total income of particular nature where deduction is to be allowed in respect of such particular nature of income, that has been included in assessee’s gross total income from all sources.

84. These two provisions read clearly that for the purpose of claiming deduction in respect of income included in Gross Total Income, the expression ‘Gross Total Income included in total income’ denotes income of that nature computed in accordance with the provisions of the Income-tax Act, 1961, before computing deduction under part C of Chapter VIA. Therefore, all deductions or adjustments which are otherwise liable to be made for computing the income of particular nature, as are otherwise liable to be deducted from or adjusted against such income have to be taken into account before determining the ‘such income’ included in “the gross total income” for the purpose of computing deduction under section 80TT.

85. That being the position, it is immaterial whether the amount of commission etc. paid by the Sikkim Government are considered as part of its expenses for running the lottery of the Sikkim Government reducing the amount which is actually won by the lottery winner or are considered to be expenses incurred by the Sikkim Government on behalf of the assessee. Such amount in case of assessee, as winning from lottery will remain the same. It is considered that Rs. two lacs were the expenses incurred by the Sikkim Government before making the payment of lottery amount to the assessee, the assessee’s winning from lottery will only be Rs. 18 lacs. If the amount of Rs. 2 lacs is considered as an expense incurred by the assessee for carrying income from winning of lottery, and/was to be allowed as deduction under section 37, the amount included in Gross Total Income for the purposes of section 80TT read with section 80AB makes a little difference so far as the amount included in his gross total income of the assessee by way of winning from lottery is concerned.

86. We are fortified in our aforesaid conclusion by a Bench decision of this Court in CIT v. Chokshi Contacts P. Ltd. [2001] 120 Taxman 1.

87. The Division Bench of this Court in Chokshi Contacts P. Ltd.’s case (supra) had said while construing section 80B read with section 80AB of the Act, which was inserted w.e.f. 1-4-1981 as under :—

“These two provisions read together leave no room for doubt in mind that while computing deduction under any of the provisions of Chapter VI A which relates to gross total income from any particular source of income which forms part of the total gross income of assessee, the gross total income from the sources only in respect of which deduction is to be claimed, is first to be computed in accordance with all the provisions of the Act for computing income from that source without making any deduction under any provision of Chapter VI A. Quantification of respective deductions in respect of income from that source under Chapter VI A is to be made on the basis of such computed gross total income before any deduction under Chapter VI A is adjusted.

The definition of the expression ‘gross total profit’ makes it imperative to compute the total income in accordance with the provisions of the Act before making any deduction in Chapter VI A which is required to be made in respect of such income included in gross total income of the assessee from all sources. The deduction permissible under various heads dealt with in Chapter IV defining Heads of ‘income’ and providing method and manner of computing income from different sources viz., salaries, house property, profits and gains of business or profession, capital gains and income from other sources, as well as the adjustments are to be made in respect of income from such sources so computed while making aggregation of income and set off or carry forward of loss under Chapter VI of the Act....” (p. 7)

88. The Supreme Court in CIT v. P.K. Jhaven 161 ITR 79 and M.P. High Court in Smt. Pramila v. CIT 232 ITR 262 have declined to call for a reference to raise like question in respect of section 80K and 80TT respectively.

89. In Distributors (Baroda) P. Ltd. v. Union of India [1985] 155 ITR 120 a five Judges Bench of the Supreme Court construed the expression “where gross total income of an assessee..... includes any income by way of dividend from a domestic company” as it appeared in section 80M. The Court without aid of section 80AB, interpreted the expression in its plain meaning. Rejecting the contention, as has been raised before us in respect of like expression in section 80TT “where gross total income of an assessee.....includes income from winning from lotteries, the Court said :

“. . . What is included in the gross total income in such a case is a particular quantum of income belonging to the specified category. Therefore, the words such income by way of dividends must be referable not only to category of income included in the gross total income, but also to the quantum of income so included. It is obvious, as a matter of plain grammer, that the words “such income by way of dividends” must have reference to income by way of dividends mentioned earlier and that would be income by way of dividends from a domestic company which is included in the gross total income. Consequently, in order to determine what is ‘such income by way of dividends’, we have to ask the question. What is the income by way of dividends; from a domestic company included in the gross total income and that would obviously be the income by way of dividends computed in accordance with the provisions of the Act.... Otherwise we would not be giving to the word ‘such’ its full meaning and effect. The word ‘such’ in the context in which it occurs can only mean that income by way of dividends from a domestic company which is included in gross total income and that must necessarily be income by way of dividends computed in accordance with the provisions of the Act.” (p. 136)

90. In parenthesis, if the words “dividends from a domestic” company is substituted for words “winning from lotteries” in the above ratio, we reach the same answer in interpreting section 80TT of the Act.

The above ratio clearly indicates that the insertion of section 80AB is clarificatory in nature.

91. Consequently, Question No. 2 is also answered in the affirmative in favour of the Revenue and against the assessee.

92. Upshot of the aforesaid discussion is that both the questions referred to us are answered in affirmative in favour of Revenue and against the assessee.

No costs.

nn

11. 44 Taxman 342.

11. 139 Taxman 394.