[2019] 

109 [Link] 37 (Article)
Date of Publishing: August 13, 2019

Lottery, Betting and Gambling – Income-Tax Perspective

image
MANUJ SABHARWAL
CA, LLB

Historical Background 1

1. Betting and gambling have always been prevalent in the Indian civilization since time immemorial.
Several instances of betting and gambling are found in the Indian history and mythology. Yudhishtir,
the eldest son of Pandu had a penchant for gambling. Like Yagnavalkya, the Narada-Smriti and
Kautilya, advocated that gambling should exist under the control of the State. Gambling and betting
activities find mention in ancient texts like the Rig Veda and the Atharva Veda, both written around
1500 B.C. Translation of the verses 935 to 939 Katyayana Smriti reads:

"If gambling cannot be stopped in the kingdom, it shall be regulated. Gambling should be allowed
to be carried on openly in the gambling hall (the hall licensed for the purpose). The gambling hall
should be provided with an ornamental arch to indicate that it is a gambling hall, so that
respectable men may not mistake the nature of the place. The King should impose tax on
gambling and make it a source of income. Gambling could be carried on openly after payment of
tax to the King."

Meaning of gambling, betting and lottery

2. The Oxford dictionary defines gambling as playing game of chance for money or risky action
undertaken with the hope of success. The Black Law's dictionary defines the act of risking something of
value for a chance to win a prize.

Lottery has been defined by Black's Law dictionary as a chance for a prize; a scheme for distribution of a
prize by a lot or chance, the number and value of which is determined by the operator of the lottery. In
Future Gaming Solutions India (P.) Ltd. v. Union of India, [2013] 40 [Link] 291/42 GST 491the
Sikkim High Court held that 'lottery' is covered under 'betting and gambling'. Lottery is an act of betting
and gambling and the power to enact law for imposition of tax on lotteries has to be construed as
inherent in the expression of 'betting and gambling', lottery being one such activity.

The Oxford dictionary defines betting as an action of gambling money on the outcome of a race, game,
or other unpredictable event.

Legal Position

3. 'Skill' or 'chance' is the decisive factor in determining the legality of gambling and betting in India.
Primarily, the Indian legal landscape/Indian States allowed only betting or wagering on the game of
skill and makes betting, wagering and gambling on the game of chance entirely illegal. Horse-racing
was considered as a game of skill and is, therefore, legal 2. The state of Goa and the UT of Daman & Diu
permits casinos and other games of chance and have amended section 13A of The Goa, Daman and Diu
Public Gambling Act, 1976, which allows the State Government to authorise games of "electronic
amusement/slot machines in Five Star Hotels" and "such table games and gaming on board in vessels
offshore as may be notified". The State of Sikkim authorized 3 Government of Sikkim to grant licences to
businesses and individuals to operate casinos 4. The Sikkim Online Gaming (Regulation) Act, 2008 is
the first Indian legislation to expressly permit and regulate online gaming 5. The Nagaland Prohibition
of Gambling and Promotion and Regulation of Online Games of Skill Act, 2015 provides for a pan-
India application of Online Gaming to all those States where the games so being offered are legally
permissible 'games of skill'.

Position under the Income-Tax Act

4. Receipts of casual and non-recurring nature (except certain prescribed receipts) were specifically
exempt under section 10(3) of the Act till A.Y. 1972-73. The Finance Act, 1972 introduced the taxation of
casual and non-recurring receipts in the nature of "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" (hereinafter referred to as "winnings") in the definition of income by
introducing sub-clause (ix) in section 2(24). The said Finance Act prescribed the taxation of winnings as
income from other sources u/s 56(2)(ib) and had also withdrawn the exemption u/s 10(3) on the casual
and non-recurring receipts as regards winnings. This inclusion 6 for taxation was made primarily for two
reasons: a) the exemption is not keeping up with the principle of taxing equally persons with equal
capacity to pay; and b) it provides for scope of tax evasion and conversion of 'black' money into 'white'.
The machinery for collection and recovery of taxes was also provided u/s 194B which mandates
deduction at source at rates in force at the time of payment of winnings. However, no tax is required to
be deducted where the winnings are wholly or partly in kind (i.e., where cash is not sufficient to meet
the liability for TDS). The responsibility of deductor in such a case is to ensure that tax has been paid on
winnings7. The expenditure or allowance in connection with winnings was allowed to be claimed and
losses were allowed to be carried forward until the embargo on deductibility of expenses/allowance u/s
58(4) and on carry forward or set off u/s 74A was introduced by the Finance Act, 1986. Section 115BB
(inserted by the Finance Act, 1986) provides that winnings shall be taxed at 30%. In addition, education
and higher education cess would make the effective rate as 31.2%. The surcharge levied by the Finance
Act (No. 2), 2019 is also required to be factored in to compute the effective rate of tax on the winnings.

Since   By a chance.
the
defini
tion
of
'lotter
y' and
'card
game
and
other
game
of
any
sort'
was
 not
explic
itly
provi
ded
for
when
the
provi
sion
to tax
such
earni
ngs
were
broug
ht in
the
statut
e
book,
the
initial
litigat
ion in
the
conte
xt of
lotter
ies
prim
arily
revol
ved
aroun
d
busin
ess
prom
otion
/sales
prom
otion
/ince
ntives
 sche
mes
floate
d by
busin
ess
house
s
wher
ein
they
were
offeri
ng
prizes
in
cash
or in
kind
by
way
of
lucky
draw
s. The
tax
autho
rities
argue
d that
those
sche
mes
are in
the
natur
e of a
lotter
y on
the
premi
se
that
the
result
 is
merel
y
depe
ndent
upon
a
chanc
e and
not
upon
any
skill
per
se.
The
consi
stent
opini
on of
the
judici
ary
then
was -
mere
gratui
tous
distri
butio
n
witho
ut
any
price
havin
g
been
paid
by
partic
ipant
s for
accos
ting
chanc
e and
receiv
ing a
prize
that
is
ultim
ately
distri
buted
woul
d not
amou
nt to
lotter
y CIT
v.
Dy.
Direc
tor of
Smal
l
Savin
gs
[200
4]
136
Taxm
an
261/2
66
ITR
27
(Mad
), CIT
v.
Jhav
eri
Indus
tries
[200
8]
300
ITR
 300
(Guj.)
. The
judici
ary
had
laid
down
follo
wing
princi
ples
Dy.
Direc
tor of
Smal
l
Savin
gs
case
(supr
a),
ITO
(TDS
) v.
Mala
yala
Man
oram
a Co.
Ltd.
[200
5] 94
ITD
195
(Coch
.)i

ii   Subscribers should contribute to the scheme.

iii   Intention of the subscribers should be winning of the prize decided by chance.
iv   It should not be free chance to the participants.
v   Personal knowledge and skill of the participants are not involved.
As regards the expression 'other games of any sort', the Supreme Court in CIT v. G.R. Karthikeyan
[1993] 68 Taxman 145/201 ITR 866 (SC) held that it is of wide amplitude and its meaning shall not be
confined to games of a gambling nature alone.
Later on, the amendments were made by the Finance Act, 2001 and the definitions of "lottery" and
"card game and other game of any sort" were prescribed; but that came to be applicable from A.Y.
2002-03 onwards. These amendments effectively negated the opinion of the judiciary that a prize
scheme is not "lottery" until the payment is made, and also clarified that quiz programmes, contests,
etc., shall also qualify as taxable casual incomes u/s 2(24)(ix).

Another interesting question - in a case where the payment was made in kind and not in cash at all, the
Karnataka High Court CIT v. Hindustan lever Ltd. [2013] 39 [Link] 152/[2014] 220 Taxman
177/361 ITR 1 noted that in terms of the proviso to section 194B the question of deduction does not
arise and in that eventuality, the only responsibility, cast u/s 194B is to ensure that tax is paid by the
winner of prize before the prize/winnings is released in his favour and quashed proceedings u/s 201(1)
of the Act.

Since both the expressions "winnings" and "game" are not defined in the Act, there are ambiguities as
regards TDS with respect to:

(a)   the amount on which TDS is to be effected (i.e., whether it would include the gross
receipt or gross receipts less pay–in particularly in the context of gaming/casinos
where a person places multiple bets in a particular session/sitting and the amount
won/loss on each bet is set off?); and
(b)   the event of TDS (i.e., whether TDS is to be considered at the time of each bet/each
day/each event, etc.?).
The explanatory circular for a scheme to be treated as lottery:
8
explaining the provisions of the Finance Act, 1978 explained the expression winnings as under (while
introducing TDS on winnings on horse races) as under:

"The term "winnings", in common parlance, means the amount received by the punter in excess
of the bet laid by him on the horse or horses which have won in the particular race. Where a
punter places bets on more than one horse in a particular race, the expression "winnings" will
connote the amount won by the punter in that horse race as reduced by the amount invested by
way of bet on the particular horse or horses which won the race, and not by the amount invested
on the horse or horses which lost in that race. Hence, where a punter invests Rs. 100 each on two
horses - horse "A" and horse "B" - in a particular horse race, and he wins Rs. 500 on the bet
placed on horse "A" but loses the bet on horse "B", the winnings of the punter from this horse race
would be Rs. 400 (Rs. 500— Rs. 100) and not Rs. 300 (Rs. 500— Rs. 200)."

On this basis it can be argued that since these words are not defined in the Act, they should be
understood in commercial parlance. Commercially, the amount of winnings may be construed as gross
winnings less pay-in and is dependent upon the rules framed by the casino-operator/game organiser.
However, based on the legislative intent reflected in the provisions of section 58(4) prohibiting
deduction of any expenditure, non-allowability of carry forward and set off u/s 74A, taxation on
winnings on gross basis u/s 115BB and mention of the phrase 'receipt' in the repealed section 10(3), etc.,
the tax authorities shall take a contrary position and take a view that gross receipts are required to be
considered in regard to each bet.

In context of the above it is noteworthy to mention that the GST department is already interpreting
section 159 and rule 31A10 of the CGST Act (which deals with the value of supply of goods and services)
to mean that casino operators need to pay GST on the total value of all bets placed by players, and not
just on the commission they earn. With this interpretation, the Casino operators and mobile gaming
companies in India could end up paying tax on an amount that is not even part of their revenue.
Recently, the Directorate General of GST Intelligence summoned Delta Corp Ltd.'s executives and
raised a tax demand of Rs. 6,189 crore (as reported by Bloomberg Quint - the information is not public
as yet and the company has not informed the stock exchange that it did receive a tax notice). The GST
authorities are also probing certain other operators with regard to the alleged tax evasion.

Issues raised under GST shall definitely give sleepless nights to operators in the direct tax arena also. If
the aforesaid interpretation of the GST department holds the field, it would certainly amount to taxing
the entire receipt/ winnings (without deduction of pay-in amount) in the hands of the gambler and,
consequently, the tax withholding obligation of the operator/organizer shall be on the amount of every
bet/win and that too at the time of placing every bet/every win. This would definitely make the entire
process of compliance cumbersome and tardy, particularly in light of exchange of information between
the GST and the Income-tax department.

Another provision which the gambling/ betting parties and the operators need to consider is section
269ST - which prohibits the receipt of sum of Rs. 200,000 or more in aggregate from a person in a day
or in respect of a single transaction or in respect of transactions relating to one event or occasion from a
person otherwise than by way of account-payee cheque or use of electronic platform. This is a huge
disincentive for the gambling/betting industry as section 271DA penalizes the recipient of sum to the
extent of contravention.

Black Money Law on Gaming/Poker Websites/E-wallets

5. The CBDT in the circular No. 15/2015 dated 3.9.2015 clarified that winnings from offshore online
gaming or poker websites through e-wallets would amount to 'foreign assets and income' and non-
disclosure of such winnings would fall foul of the Undisclosed Foreign Income and Assets (Imposition
of Tax) Act, 2015. The said circular also says that e-wallet or virtual card is similar to a bank account
and, therefore, 'the valuation and declaration of an e-wallet account may be made as in the case of a
bank account'.

Concluding remarks

6. Following the sane advice of Justice Madon 114 "as the society changes, the law cannot remain
immutable" and that "the law exists to serve the needs of the society which is governed by it.", since it
is not possible to prevent these activities completely, effectively regulating them remains the only viable
option. The revenue generated by regulating and taxing betting and gambling may become a good
source of revenue, which, in turn, could be used for public welfare. In order to protect the public from
the ill-effects of those activities and with a view to have enhanced transparency and State supervision all
betting and gambling transactions should be linked to the operator's as well as the participant's
/player's Aadhaar/PAN Card1.

■■

1. 276th report of the Law Commission of India

2. K.R. Lakshmanan (Dr) v. State of Tamil Nadu, AIR 1996 SC 1153, the outcome in a horse
race depends on several factors like form, fitness and inherent capacity of the animal, the
ability of the jockey, the weight carried and the distance of the race, which are all objective
facts capable of being assessed by persons placing the bets. Thus, unlike lottery, the
 prediction of the result of the race is an outcome of knowledge, study and observation.
3. Under the Sikkim Casinos (Control & Tax) Act, 2002
4. In July 2016, the Government of Sikkim, vide a notification, banned its local population
from playing in casinos situated in the State.
5. The Government of Sikkim, however, restricted the offering of "online games and sports
games" to the physical premises of 'gaming parlours' through intranet gaming terminals
within the geographical boundaries of the State, by enacting the Sikkim Online Gaming
(Regulation) Amendment Act, 2015.
6. Memorandum explaining the Finance bill, 1972
7. Circular No. 264 dated 11.02.1980 and Memorandum to Finance Bill, 1997
8. Circular No. 240 dated 17.05.1978
9. Section 15: The value of a supply of goods or services or both shall be the transaction value,
which is the price actually paid for the supply of goods or services.
10. Rule 31A: The value of supply of actionable claim in the form of chance to win in betting,
gambling or horse racing in a race club shall be 100 per cent of the face value of the bet or
the amount paid into the totalizator.
11. Central Inland Water Transport Corporation Limited v. Brojo Nath Ganguly, AIR 1986
SC 1571