Madras High Court
The Commissioner Of Income vs M/S Martin Lottery Agencies on 9 April, 2026
Author: G. Jayachandran
Bench: G. Jayachandran
TC No. 955 of 2008
IN THE HIGH COURT OF JUDICATURE AT MADRAS
RESERVED ON : 27.03.2026
PRONOUNCED ON : 09.04.2026
CORAM
THE HON'BLE DR JUSTICE G. JAYACHANDRAN
AND
THE HON'BLE MR.JUSTICE SHAMIM AHMED
TC No. 955 of 2008
The Commissioner Of Income
Tax, Coimbatore.
..Petitioner(s)
Vs
M/s Martin Lottery Agencies Ltd
355, 369, 6th Street Gandhipuram Coimbatore 641
012.
..Respondent(s)
Prayer: This Tax Case is filed by the Commissioner of Income Tax,
Coimbatore, against the order of the Income Tax Appellate Tribunal, D-Bench,
Chennai, dated 04.08.2005, passed in ITA.No.451/Mds/2001.
For Petitioner(s): DR.B.RAMASAMY
For Respondent(s): MR. P.S RAMAN SR COUNSEL and
MR.M.GANESH KANNAN, Advocate
ORDER
(Order of the Court was made by Shamim Ahmed J.)
1. This Tax Case is filed by the Commissioner of Income Tax, Coimbatore,
against the order of the Income Tax Appellate Tribunal, D-Bench, Chennai,
dated 04.08.2005, passed in ITA.No.451/Mds/2001.
__________
Page1 of 20
https://www.mhc.tn.gov.in/judis
TC No. 955 of 2008
2. The facts of the case, in a nutshell, leading to filing of this Tax Case are that
the Respondent/Assessee was carrying on the business of purchase and sale
of lottery tickets, sponsored by various State Governments, during the
relevant period of time. It is alleged that while the face value of the lottery
tickets sold being Rs.1.00, the Assessee sold the same to their immediate
Agents/Dealers, at the rate of Rs.0.76 and Rs.0.77 per ticket. The Assessing
Officer had raised a demand of Rs.2,19,58,083/- along with interest of
Rs.6,68,785/- for the assessment year 1999-2000, under Sections 201(1) and
201(1A) of the Income Tax Act, by the proceedings dated 25.03.1999, on the
grounds that since the difference between the sale price and the face value of
the lottery tickets would amount to payment of commission to the Agents/
Dealers, the Assessee is liable to deduct tax at source, under Section 194G of
the Income Tax Act, which it had failed to do so. As against the same, the
Assessee had preferred an appeal before the Commissioner of Income Tax
(Appeals), Coimbatore, in ITA.No.1726-C/98-99, which was dismissed as
not maintainable, by the order dated, 24.06.1999, on the ground that the order
of demand of the Assessing Officer is not an appealable order. Thereafter,
after amendment of Section 240A by the Finance Act, 2000, the Assessee had
preferred an appeal before the Commissioner of Income Tax (Appeals)-X,
Chennai in ITA.No.323/2000-2001, which was allowed by the order dated,
18.12.2000, holding that the Assessee was not liable under Section 194G of
the said Act to deduct tax at source and the Assessee cannot be proceeded
__________
Page2 of 20
https://www.mhc.tn.gov.in/judis
TC No. 955 of 2008
under Sections 201(1) and 201(1A) of the Income Tax Act and cancelling the
order of demand of the Assessing Officer. As against the same, the Revenue
Department had filed an appeal before the Income Tax Appellate Tribunal
Bench ‘D” Chennai, in ITA.No.451/Mds/01, which was also dismissed, by
the impugned order, dated 04.08.2005, upholding the order, dated
18.12.2000, passed by the Commissioner of Income Tax (Appeals)-X,
Chennai. Aggrieved by the same, the Revenue Department has filed this Tax
Case.
3. This Tax Case was admitted, by the order, dated 23.07.2008, on the following
question of law:-
“Whether the difference between the face value and the amount to
which the lotteries were given to the distributors/ stockists/ dealers
in order to encourage the sale of lottery, would amount to the
‘Commission or Not?”
4. This Court heard Dr.B.Ramasamy, the learned counsel for the Petitioner and
Mr.P.S.Raman, the learned senior counsel, assisted by Mr.M.Ganesh Kannan,
Advocate for the Respondent.
5. The learned counsel for the Petitioner has submitted that since the difference
between the sale price and the face value of the lottery tickets would amount
to payment of commission made to the Agents/Dealers, the Assessee is liable
to deduct tax at source, under Section 194G of the Income Tax Act, which it
had failed to do so and hence, the Assessing Officer had rightly made a
demand to the tune of Rs.2,12,89,298/-, along with interest of Rs.6,68,785/-
__________
Page3 of 20
https://www.mhc.tn.gov.in/judis
TC No. 955 of 2008
under Sections 201 and 201(1A) of the Income Tax Act.
6. The learned counsel for the Petitioner has further submitted that the
relationship between the Assessee and the Dealer is not that of a ‘Seller’ and
‘Buyer’, when the Dealer returns the unsold tickets to the Assessee and pays
only for the tickets sold before the draw and that when the Dealer returns the
unsold tickets and pays for the sold tickets at the face value, after deducting
some amount retained for him, it can be treated as only a payment of
commission allowed to him by the Assessee and it is not a sale and that so
called margin money is, in reality, a commission allowed to the Dealer,
thereby attracting the provisions of Section 194G of the Income Tax Act and
hence, this Tax Case is liable to be allowed, upholding the order of demand
of the Assessing Officer.
7. Per contra, the learned senior counsel for the Respondent/Assessee has
submitted that the transaction between the Assessee and the Dealer is that of
Principal to Principal and that there is no relationship of employer and the
employee between the Assessee and the Dealer and that since the transactions
are out right sales and there is no payment of any commission, the expression
“Commission” cannot be used in respect of transaction involving sale and
purchase and that the rebate allowed by the Assessee on the face value of the
lottery tickets would not amount to “Commission”, within the meaning of
Section 194G of the Income Tax Act, 1961 and hence, the opinion of the
Assessing Officer that the difference between the face value and the invoice
__________
Page4 of 20
https://www.mhc.tn.gov.in/judis
TC No. 955 of 2008
value can be treated as “Commission”, so as to attract the provisions of
Section 194G of the Income Tax Act, 1961, is erroneous.
8. We have given our anxious consideration to the rival submissions of the
learned counsel on either side and also perused the entire materials placed on
record, including the relevant authorities of various Courts.
9. It is not in dispute that the Respondent/Assessee had purchased the lottery
tickets in bulk from the State Governments at a reduced price and sold the
same in bulk to its next level of Dealers at a profit margin, during the relevant
period of time. The face value of the lottery ticket was Rs.1.00 per ticket. It
is also admitted that the Respondent/ Assessee had sold the lottery tickets to
its immediate Dealers at the rate of Rs.0.76 and Rs.077 per ticket. Relying on
Section 194G of the Income Tax Act, the Assessing Officer had made a
demand of Rs.2,12,89,298/- along with interest of Rs.6,68,785/-, for the
assessment year 1999-2000.
10.Be that as it may. From the averments of the parties and the submissions of
the learned counsel on either side, the question of law that emerges for
consideration in this Tax Case, is as to whether the difference between the
face value and the amount to which the lotteries were given to the
distributors/ stockists/ dealers in order to encourage the sale of lottery would
amount to the ‘Commission or Not?”
11.At this juncture, it is appropriate to quote the provisions of Section 194G of
the Income Tax Act, based on which, the Assessing Officer had passed the
__________
Page5 of 20
https://www.mhc.tn.gov.in/judis
TC No. 955 of 2008
impugned order of assessment, as under:-
”194G. Commission, etc., on the sale of lottery tickets:–(1) Any
person who is responsible for paying, on or after the 1st day of
October, 1991 to any person, who is or has been stocking,
distributing, purchasing or selling lottery tickets, any income by
way of commission, remuneration or prize (by whatever name
called) on such tickets in an amount exceeding fifteen thousand
rupees shall, at the time of credit of such income to the account of
the payee or at the time of payment of such income in cash or by
the issue of a cheque or draft or by any other mode, whichever is
earlier, deduct income-tax thereon at the rate of two per cent.
Explanation:- For the purposes of this section, where any income
is credited to any account, whether called “Suspense Account” or
by any other name, in the books of account of the person liable to
pay such income, such crediting shall be deemed to be credit of
such income to the account of the payee and the provisions of this
section shall apply accordingly.
12.In order to make an Assessee liable to deduct tax at source under Section
194G of the Income Tax Act, the Assessee should be responsible for paying
Commission and the income by way of Commission should be paid by way
of credit of such income to the account of the payee or by way of cash or
draft or any other mode. Only on fulfilment of these ingredients, the
Assessee can be made liable to deduct tax at source under Section 194G of
the Income Tax Act.
13.In the Judgement and order, dated 10.11.2000, of the High Court of
Kerala, reported in 2001 (249) Income Tax Return 186 (Ker)
(M.S.Hameed and another Vs. Director of State Lotteries), the High Court
of Kerala was pleased to observe as under:-
21. According to me, the transaction which the petitioners have
__________
Page6 of 20
https://www.mhc.tn.gov.in/judis
TC No. 955 of 2008entered into do not appear to be one in the contemplation of Section
194G. The sub-headings of the section is commission, etc., on sale of
lottery tickets. The liability is for deduction at source, under Chapter
XVII. The general provision by Section 190 prescribes for deduction,
collection at source or advance payment. It is not disputed that if at
all the first alone is applicable here. Section 192 concerns salary.
Deduction at the time of payment is compulsory. Section 193 refers
to the deductions made at the time of payment of interest,
and Section 194 concerns with dividends payable by a company.
Likewise Section 194A concerns payments of certain types of
interests, Section 194B deals with winnings from lottery or
crossword puzzle, Section 194C deals with payments to
contractors, Section 194D deals with similar payments arising as is
similar commission, Sections 194 H, I, J, K, L also refer to deduction
of income-tax on payments under the respective heads.
22. Only Section 194G deals with a situation of a slightly different
category. The responsibility for deduction of tax is on any person
responsible for paying to any person any income by way of
commission, remuneration or prize, who purchases or sells or stocks
lottery tickets, on such tickets, here in this case, the State
Government. The deduction is to be at the time of credit of such
income to the account of the payee or at the time of payment of such
income.
23. Therefore, the demand of tax is to be shown as one on the income
of the person concerned. There is neither payment of cash or by
cheque, and the Government never credits any income to the account
of the persons like the petitioners. When the deduction is
contemplated at the time of payment to the person concerned and
when it is shown that there is no payment to the agent at the time of
purchase of the ticket, the section automatically becomes
inapplicable. If any prize or remuneration is payable by the
Government, to any person, deduction at source as envisaged under
the section, may arise. But when no payment is made in view of the
mandate of the section, no deduction is envisaged. That the ticket is
given on a discount of 28 per cent., can by no imagination be pressed
into service for an interpretation that, none the less, ten per cent, of
28 paise is deductible as tax. Perhaps the intention might have been
to bring the agents within the tax net, but the section as it stands,
according to me, is not authority for taxation at source, as is
envisaged by exhibit P-4.
__________
Page7 of 20
https://www.mhc.tn.gov.in/judis
TC No. 955 of 2008
25. However, as pointed out by the Supreme Court of India in CIT v.
Khatau Makanji Spinning and Weaving Co. Ltd. [1960] 40 ITR 189,
this also is a case where the Act could have resorted to some fiction
which might conceivably have met the case, but it has failed to do so.
The provision has failed to achieve the underlying
objective. Reliance on Union of India v. A, Sanyusi Rao [1996] 219
ITR 330 (SC), that what could be converted to income can
reasonably be regarded as giving rise to income, though a salutary
principle, can have no application to the facts of the present case.
26. Reference had been made to the Finance Act, 1992, as seen
published in [1992] 195 ITR (St.) 214 at page 255. Sub-sections (2)
and (3) were added to Section 194G but in view of my finding that
exhibit P-4 cannot be issued on the authority of Section 194G,
nothing more turns on that.
27.From a consideration of the relevant aspects, the view possible,
according to me, is that exhibit P-4 has proceeded on an erroneous
assumption, and the petitioners were not liable to be covered
under Section 194G of the Income-tax Act. Exhibit P-4 is therefore,
set aside and the original petition stands allowed.”
14.In the case of Principal CIT v. Usha Murugan, 2021 (18) ITR-OL 502 :
2021 SCC OnLine Ker 16435:2022 (326) CTR 614, the Division Bench of
the Kerala High Court was pleased to observe as under:-
“10.2 The Assessee acts as a post-office by receiving counterfoils of
prize winning tickets sold by different retailers in the organisation of
lottery business presented to the State Government and the
prize/incentive/bonus received from the Government is transferred to
retailers. In the circumstances of the case our attention has been
drawn to the flow of counterfoils into the hands of the Assessee and
presentation of counterfoils to the Government and receipt of
incentive by the Assessee and subsequent transfer of incentive to
retailers. The person responsible for making the payment is the
Government. Admittedly, the Government after effecting the tax
deduction at source (TDS) has paid the amount to the Assessee
towards prize incentive etc. The Assessee has collected the amount
and claims to have made over the incentive to the end retailers.
Section 194G, as rightly held by the Commissioner of Income-tax
and the Tribunal, is not attracted to the instant payment inasmuch as__________
Page8 of 20
https://www.mhc.tn.gov.in/judis
TC No. 955 of 2008the Assessee is not under an obligation to pay towards commission
etc. to any of these persons.
10.3 The substantial questions of law framed by the Revenue are
examined by keeping in perspective the confirming order of the
Tribunal and the findings of facts recorded by the Tribunal on which
no exception is pointed out to the effect that sections 194H and 194G
are not attracted. It is definitely a case for consideration of
substantial questions of law, had the Revenue established the basic
ingredients required for attracting any one of the sections to the
controversy covered by the appeal. We are of the view that the
Assessee being a wholesale dealer/stockist of lottery tickets has
purchased from the Government and sold to the retailers. It is
accepted as a purchase from the organizing agency of lottery and
sale to retailers. The amount covered is incentive payable by the
organizing department to the agent and none of the ingredients
required for adding the disputed amount is established. The
questions, in our view, do not arise for consideration particularly
having regard to the findings appreciated by the Commissioner of
Income-tax (Appeals) and the Tribunal and accordingly the
questions are answered in favour of the Assessee and against the
Revenue. The consideration of the issues should be understood as
made in the circumstances of the case and not relied on as precedent
on the applicability of any of the sections referred to above vis-a-vis
lottery business and implications on tax liability. In other words, the
decision is fact specific to the cases on hand.
For the very same reasons I. T. A. Nos. 13 and 29 of 2017 are
dismissed.”
15.In 2024 (10) SCC 733 (K.Arumugam Vs. Union of India), the Honourable
Supreme Court was pleased to observe as under:-
“27.The definition of goods has also been noted in clause (50)
of Section 65 of the Finance Act, 1994 which refers to clause (7)
of Section 2 of the Sale of Goods Act, 1930. The expression “goods”
under the Sale of Goods Act expressly excludes actionable claims as
well as money. This Court in Sunrise Associates has held that lottery
tickets are actionable claims. Therefore, as lottery tickets would not
come within the meaning of the expression goods under clause (7)
of Section 2 of the Sale of Goods Act, 1930, they would also not
come within the scope and ambit of clause (50) of Section 65 of the__________
Page9 of 20
https://www.mhc.tn.gov.in/judis
TC No. 955 of 2008Finance Act, 1994. If that is so, they would also not come within the
scope and ambit of clause (19)(i) of Section 65 of the Finance Act,
1994. Lottery tickets being actionable claims and not being goods
within the meaning of sub-clause (i) of clause (19) of Section 65 of
the Finance Act, 1994, would expressly get excluded from the scope
of the said provision. In the circumstances, service tax on the
promotion or marketing or sale of lottery tickets which are
actionable claims could not have been levied under the said sub-
clause.
28. In order to remove the doubt whether service tax could be levied
on promotion or marketing or sale of lottery tickets under Clause
19(ii) of Section 65 of the Finance Act, 1994, an Explanation was
added with effect from 16.05.2008. The Explanation has also been
extracted above. Although the Explanation is for the purpose of
removal of doubts, it is relevant to note that what is excluded in sub-
clause (i) of clause (19) of Section 65 of the Act, namely lotteries
being actionable claim and not goods, as analysed above, is sought
to be mentioned as lottery per se in the Explanation. Thus, when
lottery ticket is an actionable claim and not “goods” and is therefore
outside the scope of sub-clause (i) of clause 19 of Section 65 of the
Finance Act, 1994, it could not have been included as lottery per se
in the Explanation to sub-clause (ii) of Clause 19 of Section 65 of the
Finance Act, 1994 as “service in relation to promotion or marketing
of service provided by the client” including any service provided in
relation to promotion or marketing of games of chance, organized,
conducted or promoted by the client, in whatever form or by
whatever name called, whether or not conducted online, including
lottery, lotto, bingo.
29. The Explanation sought to bring the activity of sale of lottery
tickets within sub-clause (ii) of Clause 19 of Section 65 of the
Finance Act, 1994, when it was excluded from sub- clause (i) on
account of the lottery tickets being interpreted as actionable claims
and not goods on the premise that it was a service within the
meaning of said sub-clause. On a plain reading of the Explanation in
light of the activity actually carried on by the appellant(s)-
assessee(s) herein, it becomes clear that the outright purchase of
lottery tickets from the promoters of the State or Directorate of
Lotteries, as the case may be, is not a service in relation to
promotion or marketing of service provided by the client, i.e., the
State conducting the lottery. The conduct of lottery is a revenue
generating activity by a State or any other entity in the field of
__________
Page10 of 20
https://www.mhc.tn.gov.in/judis
TC No. 955 of 2008
actionable claims. The client, i.e., the State is not engaging in an
activity of service while dealing with the business of lottery.
Explanation to sub- clause (ii) of Clause 19 of Section 65 of the
Finance Act, 1994 cannot bring within sub-clause (ii) by assuming
an activity which was initially sought to be covered under sub-clause
(i) thereof but could not be by virtue of the definition of goods under
the very same Act read with Section 2(7) of the Sale of Goods Act,
1930. The mere insertion of an explanation cannot make an activity
a taxable service when it is not covered under the main provision
(which has to be read into the said sub- clause by virtue of the
legislative device of express incorporation). This is because sale of
lottery tickets is not a service in relation to promotion or marketing
of service provided by a client, i.e., the State in the instant case.
Conducting a lottery which is a game of chance is ex facie a
privilege and an activity conducted by the State and not a service
being rendered by the State. The said activity would have a profit
motive and is for the purpose of earning additional revenue to the
State exchequer. The activity is carried out by sale of lottery tickets
to persons, such as the assessees herein, on an outright basis and
once the lottery tickets are sold and the amount collected, there is
no further relationship between the assessees herein and the State in
respect of the lottery tickets sold. The burden is on the assessees
herein to further sell the lottery tickets to the divisional / regional
stockists for a profit as their business activity. This activity is not a
promotion or a marketing service rendered by the assessees herein
to the State within the meaning of sub-clause (ii) of Clause 19
of Section 65 of the Finance Act, 1994. This is because, to reiterate,
the States are not rendering a service but engaged in the activity of
conducting lottery to earn additional revenue. Moreover, once the
lottery tickets are sold by the Directorate of Lotteries—a Department
of the State, there is transfer of the title of the lottery tickets to the
appellants, who, as owners of the said lottery tickets, in turn sell
them to stockists and others. Thus, there is no promotion of the
business of the State as its agent. Thus, there is no ‘principal—
agent’ relationship which would normally be the case in a
relationship where a business auxiliary service is rendered. The
relationship between the State and the appellants is on a principal to
principal basis. Thus, there is no activity of promotion or marketing
of a service on behalf of the State. Neither is the State, which
conducts the lottery, rendering a service within the meaning of
the Finance Act, 1994.
16.In 2025 (5) SCC 601 (Union of India Vs. Future Gaming Solutions
__________
Page11 of 20
https://www.mhc.tn.gov.in/judis
TC No. 955 of 2008
Private Limited), the Honourable Supreme Court was pleased to observe as
under:-
“73. In M.S. Hameed vs. Director of State Lotteries, (2001) 249 ITR
186 (Ker), the facts were that the petitioner therein received in bulk
quantities of lottery tickets from the State Government. They were
given a discount which was on a slab system, such as for the
purchase of 50,001 and above tickets, there was a 28% discount. The
petitioners contended that the tickets purchased were thereafter
distributed to other agents and sub- agents on commission basis.
That after purchase of the tickets, it was not for the Government to
look out as to how they were distributed and there was no control
over the affairs thereafter. That there was only payment of the price
of the ticket fixed as payable by the principal, and no commission or
discount was paid to them by the Government. That Section 194G of
the Income Tax Act, which imposes liability on the person
responsible for paying to any person who is or has been stocking,
distributing, purchasing or selling lottery tickets, any income by way
of commission, remuneration, on such tickets in all amounts
exceeding Rs.1000, to deduct income tax thereon at the rate of 10%,
had no application. Hence, the demand of tax was without
jurisdiction.
74. The Kerala High Court in M.S.Hameed considered the question
whether the amount received as commission or discount or any
incentive or as a margin is income or earning which was taxable at
the hand of the assessee concerned, coming under the purview
of Section 194G of the Income Tax Act. It was observed that if the
face value of the lottery ticket was Re. 1, the petitioner therein would
receive it at Rs. 0.72 paise and could sell at any price and it was not
the State’s business to enquire into the matter at all. It was observed
that the deduction under Section 194G was on any person
responsible for paying to any person any income by way of
commission, etc. who purchased or sold or stocked lottery tickets, in
this case, the State Government. The deduction was to be made at the
time of credit of such income to the account of the payee or at the
time of payment of such income. The Kerala High Court observed
that when the deduction is contemplated at the time of the payment to
the person concerned but it is shown that there was no payment to the
agent at the time of purchase of the ticket, the section automatically
becomes inapplicable. That the ticket is given on a discount of 28%,
can by no imagination be pressed into service for an interpretation
__________
Page12 of 20
https://www.mhc.tn.gov.in/judis
TC No. 955 of 2008
that, nonetheless, 10% of 28 paise is deductible as tax. Thus, it was
held that Section 194G was not applicable. The Kerala High Court
held that since the lottery tickets were sold at a discounted price, the
purchasers were sought to be taxed as agents which could not be the
case as there was no transaction under an agency and the petitioner
therein were not liable to be covered under Section 194G of the
Income Tax Act.
75. Ahmedabad Stamp Vendors Association vs. Union of India,
(2002) 257 ITR 202 (Guj), raised a question with regard to whether,
the petitioners therein being stamp vendors were agents of the State
Government who were being paid commission or brokerage or
whether the sale of stamp papers by the Government to the licensed
vendors was on principal to principal basis involving a contract of
sale. Reference was made to Bhopal Sugar Industries Ltd. and also to
the meanings of the expressions “commission” and “discount”. The
licensed vendors have to pay for the price of the stamp paperless the
discount at the rates provided varying from 0.5% to 4%. It was not
that the stamp vendor collected the stamp papers from the
Government, sold them to the retail customers and then deposited the
sale proceeds with the Government less the discount. The liability of
the stamp vendor to pay the price less the discount was not dependent
upon or contingent to sale of stamp papers by the licensed vendor.
The licensed vendor was not entitled to get any compensation or
refund of the price if the stamp papers were lost or destroyed. The
crucial question was whether the ownership in the stamp papers
passed to the stamp vendor when the Treasury Officer delivered
stamp papers on payment of price less discount. Clause (b) of sub-
rule (2) of Rule 24 of Gujarat Stamps Supply and Sales Rules, 1987
indicated that the discount which the licensed vendor had
obtained from the Government was on purchase of the stamp papers.
Consequently, it was held that the discount made available to the
stamp vendors under the provisions of the aforesaid 1987 Rules did
not fall within the expression “commission” or “brokerage”
under Section 194H of the Income Tax Act, 1961.”
17.In 2024 (2) SCR 1001:2024 INSC 148 (Bharti Cellular Limited Vs.
Assistant Commissioner of Income Tax), the Honourable Supreme
Court was pleased to observe as under:-
“41. Thus, the term ‘agent’ denotes a relationship that is very
__________
Page13 of 20
https://www.mhc.tn.gov.in/judis
TC No. 955 of 2008different from that existing between a master and his servant, or
between a principal and principal, or between an employer and
his independent contractor. Although servants and independent
contractors are parties to relationships in which one person acts
for another, and thereby possesses the capacity to involve them in
liability, yet the nature of the relationship and the kind of acts in
question are sufficiently different to justify the exclusion of
servants and independent contractors from the law relating to
agency. In other words, the term ‘agent’ should be restricted to
one who has the power of affecting the legal position of his
principal by the making of contracts, or the disposition of the
principal’s property; viz. an independent contractor who may,
incidentally, also affect the legal position of his principal in other
ways. This can be ascertained by referring to and examining the
indicia mentioned in clauses (a) to (d) in paragraph 8 of this
judgment. It is in the restricted sense in which the term agent is
used in Explanation (i) to Section 194-H of the Act.
42. In view of the aforesaid discussion, we hold that the assessees
would not be under a legal obligation to deduct tax at source on
the income/profit component in the payments received by
the distributors/franchisees from the third parties/customers, or
while selling/transferring the pre-paid coupons or starter-kits to
the distributors. Section 194-H of the Act is not applicable to the
facts and circumstances of this case. Accordingly, the appeals
filed by the assessee – cellular mobile service providers,
challenging the judgments of the High Courts of Delhi and
Calcutta are allowed and these judgments are set aside. The
appeals filed by the Revenue challenging the judgments of High
Courts of Rajasthan, Karnataka and Bombay are dismissed. There
would be no orders as to cost. Pending applications, if any, shall
stand disposed of. ”
18.In 1980 (123) ITR 592(MAD):183 ITR 592 (CIT Vs. AKS.Chetty & Sons),
the Madras High Court was pleased to observe as under:-
“9. The Tribunal has also referred to a decision of this court in Sri
Rama-linga Choodambikai Mills Ltd. v. CIT [1955] 28 ITR 952. In that
case it was pointed out that in the absence of evidence to show that
either the sales were sham transactions or that the market prices were in
fact not paid by the purchasers, the mere fact that the goods were sold at
a concessional rate to benefit the purchasers at the expertse of the__________
Page14 of 20
https://www.mhc.tn.gov.in/judis
TC No. 955 of 2008company would not entitle the income-tax department to assess the
difference between the market price and the price paid by the purchasers
as profit of the seller. The Tribunal has pointed out that that was exactly
what happened in the present case. In other words, the Tribunal’s finding
on the facts was that the assessee had charged only the net price and that
there was no discount or rebate given to the purchasers. The bona fides
of the transaction are not in dispute. In these circumstances and in view
of the finding of the Tribunal as to what happened between the seller and
the purchaser in the present case, it has to be held that there was no
expenditure which could be disallowed by reference to Section 40A(2)
(a). In this view, it is unnecessary to go into the concept of commission
or rebate discussed in Harihar Cotton Pressing Factory v. CIT [1960]
39ITR 594 (Bom). The result is that the question referred to this court in
each of the years is answered in the negative and against the revenue.
The assessee will be entitled to its costs.
19.In 1960 (62) BOMLR 675:1960 (39) ITR 594 (Harihar Cotton Pressing
Factory Vs CIT), the Bombay High Court was pleased to observe as under:-
“8. It all comes to this. Can a rebate granted by a firm of cotton pressers
to a customer-partner by way of reduction in pressing charges amount to
“commission” within the meaning of Section 10(4)(b) ? The expression
“commission” has no technical meaning but both in legal and
commercial acceptation of the term it has definite signification and is
understood as an allowance for service or labour in discharging certain
duties such for instance of an agent, factor, broker or any other person
who manages the affairs or undertakes to do some work or renders some
service to another. Mostly it is a percentage on price or value or upon
the amount of money involved in any transaction of sale or service or the
quantum of work involved in a transaction. It can. be for a variety of
services and is of the nature of recompense or reward for such services.
Rebate, on the other hand, is a remission or a payment back and of the
nature of a deduction from the gross amount. It is sometimes spoken of
as a discount or a draw-back. The dictionary meaning of the term
includes a refund to the purchaser of a thing or commodity of a portion
of the price paid by him. It is not confined to a transaction of sale and
includes any deduction or discount from a stipulated payment, charge or
rate. It need not necessarily be taken out in advance of payment hut may
be handed hack to the payer after he has paid the stipulated sum. The
repayment need not be immediate. It can he made later and in case of
persons who have continuous dealings with one another it is nothing__________
Page15 of 20
https://www.mhc.tn.gov.in/judis
TC No. 955 of 2008unusual to do so. In the case before us, we are concerned with charges
for pressing bales of cotton by a cotton presser to a constituent who is
also a partner and repayment to him of a part of those charges as a
rebate and as now found by the Tribunal on grounds of commercial
expediency. In our judgment, those deductions are nothing more than
rebate which can be given in case of a sale or any other transaction of
the nature before us. One practicable test, which may perhaps apply to a
like transaction, can be this. If the amounts in dispute were commission,
they would certainly he income of the constituent partners. It seems
extremely difficult to us to view these pavments received by the
constituent partners as income earned by them. The correct position
seems to us to be that the disputed amounts touch and directly touch the
amount of charges payable for pressing cotton hales and cannot be
regarded as anything apart from those pressing charges. They are
rebates in both the legal and commercial signification of that expression
and cannot be treated as “commission”. For all these reasons we are of
the opinion that the disputed amounts are not hit by the provisions
of Section 10(4)(b).
9. Our answer to the first question will be in the affirmative. “We have
already answered the second question. The Commissioner to pay the
costs of the assessee-firm. There will be no order on the notice of
motion.”
20. In 1983 (139) ITR 827 (MP):139 ITR 827 (CIT Vs. Udhoji Shri
Krishnadas), the Madhya Pradesh High Court was pleased to observe as
under:-
“5. The Tribunal’s finding is that in addition to the payment of 10%
of commission to the firm of M/s. Lalchand Shyamsunder, the
assessee sold the bidis at a rate less than the market rate to enable
that firm to earn additional profit. The finding that there was a sale
of bidis by the assessee to the firm of M/s. Lalchand Shyamsunder is
a finding of fact. It is only by accepting this finding that we have to
answer the question referred. On the finding so reached, it is clear
that the amount of profit earned by M/s. Lalchand Shyamsunder on
the sale of bidis cannot be taken to be an expenditure incurred by
the assessee within the meaning of Section 40A(2). The expenditure
incurred by the assessee was the commission. Even if the assessee
sold bidis to the sole selling agents at a price less than the market__________
Page16 of 20
https://www.mhc.tn.gov.in/judis
TC No. 955 of 2008rate, the difference between the market rate and the price at which
the bidis were sold cannot, in our opinion, be termed as expenditure
incurred by the assessee. On the finding reached by the Tribunal, it
has to be held that the ITO was not right in adding Rs. 6,81,987
under Section 40A(2).
6. As regards the purchase of tobacco from M/s. Mohanlal &
Company, the finding of the Tribunal is that there is no adequate
material to hold that the purchase was not made at the market rate.
In view of this finding it cannot be held that the payment of price
made by the assessee to this firm was either excessive or
unreasonable. Section 40A(2)(a) is, therefore, clearly not attracted.
7. For the reasons given above, we answer the question referred to
us in the affirmative in favour of the assessee, and against the
Department. There will be no order as to costs of this reference.”
21.According to the Petitioner, the difference between the face value of the
lottery ticket and the amount, to which the lotteries were given to the
distributors/ stockists/ dealers would amount to payment of ‘Commission”
and hence, the Respondent/Assessee is liable to deduct tax at source under
Section 194G of the Income Tax Act, which the Respondent/Assessee had
failed to do so. Hence, the Assessing Officer had rightly made the demand
with interest, as stated above.
22.According to the Respondent/Assessee, since the transactions are out right
sales, the question of payment of any Commission does not arise at all and
hence, expression “Commission” cannot be made applicable to the
transaction involving such sale and purchase. Hence, the order of demand of
the Assessing Officer is illegal. Holding so, the Tribunal had passed the
impugned order, cancelling the order of demand of the Assessing Officer,
__________
Page17 of 20
https://www.mhc.tn.gov.in/judis
TC No. 955 of 2008
which warrants no interference by this Court.
23. 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.
24.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.
25. In this case, the Assessee had purchased the lottery tickets at a reduced rate
from the State Government and sold the same to its immediate Dealers at a
profit margin. The face value of the lottery tickets is Rs.1.00 per ticket and
the sale value is Rs.0.76 or Rs.0.77. The difference between the face value
and the sale value is Rs.0.24 or Rs.0.23. 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
__________
Page18 of 20
https://www.mhc.tn.gov.in/judis
TC No. 955 of 2008
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.
26.In view of the above discussions, reasons and in the light of the decisions,
referred to above, we are not inclined to interfere with the impugned order of
the Income Tax Appellate Tribunal, D-Bench, Chennai, dated 04.08.2005,
passed in ITA.No.451/Mds/2001, as there is no illegality or perversity in the
same and we are of the view that the Respondent/ Assessee is not liable under
Section 194G of the Income Tax Act, 1961 to deduct tax at source and
consequently, the Respondent/Assessee cannot be proceeded under Sections
201(1) and 201(1A) of the Income Tax Act.
27.In the result, this Tax Case filed by the Appellant/Revenue Department is
dismissed. There is no order as to costs.
(G.J.,J.) (S.S.A.,J.)
09-04-2026
Index: Yes/No
Speaking/Non-speaking order
Neutral Citation: Yes/No
SRCM
__________
Page19 of 20
https://www.mhc.tn.gov.in/judis
TC No. 955 of 2008
DR.G.JAYACHANDRAN, J.
AND
SHAMIM AHMED, J.
SRCM
Pre-Delivery Order
TC No. 955 of 2008
09-04-2026
__________
Page20 of 20
https://www.mhc.tn.gov.in/judis
