Lottery Ticket Discount Not “Commission” Absent Payment Or Credit, No TDS Applicable: Madras High Court

The Madras High Court on 9 April held that the difference between the face value of lottery tickets and the discounted price at which a taxpayer sells them to dealers does not constitute “commission.” Therefore, it is not subject to tax deduction at source (TDS) under Section 194G of the Income Tax Act.

The Division Bench of Justices G. Jayachandran and Shamim Ahmed dismissed the Revenue's appeal and upheld the Tribunal's order in favour of Martin Lottery Agencies Ltd. The judges observed:

“A person is chargeable to tax not on the basis what he saves in his pocket, but what goes into his pocket. In this case, as stated above, the Assessee had never paid any amount to the Dealer by way of commission. Hence, the amount saved by the Dealer cannot be termed as “Commission”, as the Assessee never credited any income to the account of its Dealers. When it is shown that there is no payment of commission to the Dealer by the Assessee at the time of purchase of the lottery tickets, Section 194G becomes inapplicable and no deduction of tax is envisaged.”

The case arose from Assessment Year 1999–2000. Martin Lottery Agencies purchased lottery tickets from State Governments and sold them to distributors and dealers at discounted rates of Rs.0.76–Rs.0.77 against a face value of Rs.1.

The Assessing Officer treated the margin as “commission” and raised a demand under Sections 201(1) and 201(1A) for failure to deduct tax at source under Section 194G.

The Revenue argued that the difference between the face value and the discounted sale price amounted to payment of “commission”, which made the taxpayer liable to deduct tax at source.

The taxpayer argued that it carried out the transactions on a principal-to-principal basis through outright sales, did not pay or credit any commission, and therefore fell outside the scope of Section 194G.

The Bench examined the statutory requirement and emphasised that liability under Section 194G arises only when the taxpayer pays or credits income by way of commission. It found that the taxpayer did not make any such payment, whether in cash, by credit, or otherwise, to the dealers. It noted:

“The transaction did not fall within the expression 'commission' for the purpose of Section 194G. In the case of a commission payment, there was no transfer of property by the seller to the commission agent.”

The Court observed that the taxpayer and its dealers operated on a principal-to-principal basis, as ownership in the lottery tickets passed upon sale and the taxpayer did not retain control over subsequent transactions. It held that the margin retained by dealers arose from resale and did not constitute a payment from the taxpayer. It said:

“There was only payment of the price of the lottery tickets fixed as payable by the Principal and no Commission was paid by the Assessee to its immediate Agent or Dealer. Hence, such difference cannot be termed as “Commission” and it cannot also be held that the Assessee had paid commission to the extent of Rs.0.24 or Rs.0.23 and actually, no commission was paid by way of credit to the account of the immediate Dealer by the Assessee, by way of cash or any other mode. Hence, Section 194G of the Act has no application to the case of the Assessee.”

Concluding that the essential ingredients of Section 194G were not satisfied, the Bench held that Martin Lottery Agencies was not liable to deduct tax at source and could not be treated as a taxpayer in default under Sections 201(1) and 201(1A).

Accordingly, the High Court dismissed the Tax Case filed by the Revenue.

For Petitioner: Dr. B. Ramasamy, Advocate 

For Respondent: P.S. Raman, Senior Counsel and M. Ganesh Kannan, Advocate