Dealer’s Margin On Lottery Tickets Not “Commission” Absent Payment Or Credit Of Income; Section 194G IT Act Not Attracted: Madras High Court
The Court held that where lottery tickets are sold at a discounted rate without any payment or credit of income to dealers, the retained margin cannot be treated as commission, thereby excluding the applicability of TDS under Section 194G.
The Madras High Court held that the margin retained by dealers in the purchase of lottery tickets at a discounted rate cannot be treated as “commission” in the absence of any payment or credit of income by the assessee.
The Court clarified that liability to tax arises only on income that is received or credited, and not on savings retained by a purchaser, thereby rendering Section 194G of the Income Tax Act inapplicable in such transactions.
The Court was hearing a tax case filed by the Revenue challenging the order of the Income Tax Appellate Tribunal, which had held that the assessee was not liable to deduct TDS under Section 194G.
A Division Bench comprising Justice G. Jayachandran and Justice Shamim Ahmed 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 Bench added.
Senior Advocate P.S. Raman appeared for the Assessee, while the Revenue was represented by Advocate Dr B. Ramasamy.
Background
The assessee was engaged in the business of purchasing lottery tickets in bulk from State Governments and selling them to dealers at a discounted rate. While the face value of each ticket was ₹1.00, the assessee sold them to dealers at ₹0.76–₹0.77 per ticket.
The Assessing Officer treated the difference between the face value and the sale price as “commission” paid to dealers and raised a demand under Sections 201(1) and 201(1A) of the Income Tax Act for failure to deduct TDS under Section 194G.
The Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal both ruled in favour of the assessee, holding that no commission was paid and that Section 194G was inapplicable. Aggrieved, the Revenue approached the High Court.
Court’s Observation
The Court examined the scope of Section 194G, noting that the provision applies only where income by way of commission is either paid or credited to the account of the recipient.
It clarified that the foundational requirement for attracting Section 194G is the existence of a payment or credit of commission. The Court observed that a person is chargeable to tax not based on what he saves in his pocket, but on what goes into his pocket.
Applying this principle, the Court held that the margin retained by dealers arising from the difference between face value and purchase price cannot be equated with commission, since no amount was paid or credited by the assessee to the dealers.
It further noted, “the Assessee had never paid any amount to the Dealer by way of commission… the Assessee never credited any income to the account of its Dealers.”
The Court emphasised that the transaction between the assessee and dealers was on a principal-to-principal basis involving outright sale and purchase, rather than an agency relationship.
Distinguishing commission from trade discount, the Court held that the price difference merely reflected a commercial margin and not remuneration for services rendered.
The Bench also relied on judicial precedents to reiterate that commission presupposes a service relationship, typically involving an agent acting on behalf of a principal. In contrast, a discount or rebate is merely a price reduction and does not constitute income paid by the seller.
Further, the Court observed that in a commission transaction, there is ordinarily no transfer of property in goods to the agent, whereas in the present case, ownership of lottery tickets passed to the dealers upon sale.
Conclusion
The High Court held that the difference between the face value and the discounted sale price of lottery tickets cannot be treated as commission. Consequently, Section 194G of the Income Tax Act was held to be inapplicable.
The Court upheld the order of the Tribunal and dismissed the Revenue’s appeal, holding that the assessee was not liable to deduct TDS and could not be proceeded against under Sections 201(1) and 201(1A).
Cause Title: The Commissioner of Income Tax, Coimbatore v. M/s Martin Lottery Agencies Ltd.
Appearances
Petitioner: Advocate Dr B. Ramasamy
Respondent: Senior Advocate P.S. Raman; Advocate M. Ganesh Kannan
