The Madras High Court has held that the difference between the face value of lottery tickets and the discounted price at which they are sold to distributors does not constitute “commission.” Consequently, the Court ruled that such transactions do not attract the liability to deduct tax at source (TDS) under Section 194G of the Income Tax Act, 1961.
The Division Bench, comprising Justice G. Jayachandran and Justice Shamim Ahmed, dismissed the appeal filed by the Revenue Department, upholding the orders of the Income Tax Appellate Tribunal (ITAT).
Background of the Case
The Respondent, M/s Martin Lottery Agencies Ltd, was engaged in the business of purchasing and selling lottery tickets sponsored by various State Governments. During the assessment year 1999-2000, the Assessee sold tickets with a face value of ₹1.00 to its immediate agents and dealers at rates of ₹0.76 and ₹0.77.
The Assessing Officer (AO) viewed the difference between the sale price and the face value as “commission” paid to the agents. On March 25, 1999, the AO raised a demand of ₹2,19,58,083 along with interest of ₹6,68,785 under Sections 201(1) and 201(1A) of the Income Tax Act for failure to deduct tax at source under Section 194G.
While an initial appeal was dismissed as non-maintainable, a subsequent appeal following an amendment to the Finance Act was allowed by the Commissioner of Income Tax (Appeals), who cancelled the demand. This was later upheld by the ITAT in August 2005, leading the Revenue Department to approach the High Court.
Arguments of the Parties
Petitioner (Revenue Department): The Revenue contended that the relationship between the Assessee and the dealer was not that of a “Seller” and “Buyer.” They argued that since dealers could return unsold tickets and only paid for the sold tickets at a rate lower than the face value, the retained “margin money” was, in reality, a commission. Thus, it attracted Section 194G.
Respondent (Assessee): The Assessee argued that the transactions were outright sales conducted on a “Principal to Principal” basis. They maintained that there was no employer-employee or principal-agent relationship. The senior counsel for the Respondent stated that a rebate allowed on the face value does not amount to “commission” within the legal meaning of the Act.
Court’s Analysis
The Court examined the statutory requirements of Section 194G, which applies to any person responsible for paying “any income by way of commission, remuneration or prize” to those stocking or selling lottery tickets. The Bench noted:
“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.”
The Court observed that the Assessee purchased tickets in bulk from the State Government at a reduced price and sold them to dealers at a profit margin. It found that the Assessee never credited any “commission” to the dealers’ accounts.
Citing the Kerala High Court’s decision in M.S. Hameed vs. Director of State Lotteries, the Bench noted:
“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… is deductible as tax.”
The Court also referenced the Supreme Court’s observations in Union of India vs. Future Gaming Solutions Private Limited, which clarified that when tickets are sold at a discounted price, purchasers cannot be taxed as agents as there is no transaction under an agency.
The Bench further remarked on the nature of taxability:
“A person is chargeable to tax not on the basis what he saves in his pocket, but what goes into his pocket… 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.”
Decision
The Court concluded that the transaction did not fall within the expression “commission” as there was a transfer of property from the seller to the buyer. Since no amount was actually paid or credited as commission by the Assessee to the dealers, the demand under Section 194G was unsustainable.
“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),” the Court held while dismissing the Revenue’s Tax Case.
Case Details:
- Case Title: The Commissioner of Income Tax, Coimbatore vs. M/s Martin Lottery Agencies Ltd
- Case No: TC No. 955 of 2008
- Coram: Justice G. Jayachandran and Justice Shamim Ahmed
- Date: April 09, 2026
