S. 28(i) read with S. 56 of the Income-tax Act — Whether the amount received by licensed bookmaker from hedge bets placed with another bookmaker was integral part of his business activity as a bookmaker and was not liable to be taxed u/s.115BB — Held, Yes

ACIT v. Raghunath B. Taware

The assessee was a licensed bookmaker operating at the Pune
race course, under the terms and conditions for a bookmaker’s licence formulated
by Royal Western India Turf Club (RWITC). The assessee used to accept bets for
‘win’ or ‘place’ from the punters on the horse races as per the guidelines
formulated by RWITC. To minimise losses, a bookmaker, under the club rules, is
permitted to make a hedge bet with another bookmaker, subject to the condition
that total amount of such hedge bet laid over by one bookmaker should not exceed
the total amount of the bets accepted by him on a particular horse, at the time
of such lay-over. In case, the amount of laid-over bet exceeds the total amount
of bets accepted, then the last laid-over bet will be treated as independent
bet. Winnings from such hedge bets was called ‘Tote Winnings’.

During the relevant assessment years, the assessee had earned
income from tote winnings. The AO was of the view that such income was taxable
under the head ‘Income from Other Sources’ u/s.56(2)(ib), and not as business
income.

On appeal, the CIT(A) held that hedge betting was a part of
the business transactions in respect of business of bookmaking, inasmuch as
hedging was permitted, and such tote winnings was to be brought to tax as
business income.

On Revenue’s appeal, the Tribunal held as under :

1. The bookmaker is allowed to make hedge bet with another
bookmaker to the extent of total amount of bets collected by him on horsewise
basis and not with reference to aggregate total amount of bets collected by him
on all the horses. Thus, hedge betting by one bookmaker with another in respect
of the bets already accepted by him on a particular horse is an integral part of
the activity of a bookmaker accepting bets on horse races from others. The
position of the assessee-bookmaker is distinct and different from that of a
punter, and he cannot be deemed to have stepped in the shoes of the punter while
making a hedge bet.

2. Taking reference to CBDT Circular No. 461, dated 9-7-1986,
the Tribunal observed that where there is an integral relation of any payment as
to the very source of activity, the same should be treated as a part of the same
primary transaction or activity, and cannot be viewed independently so as to
divorce the same from its source. Thus, as is in the case of gross winnings from
lotteries and certain percentage deducted therefrom by the Government or lottery
agencies conducting the lottery, hedge betting by a bookmaker will also be
considered to be an integral part of the same activity.

3. The receipts from hedge betting cannot be considered in
isolation from the receipts and payments made by the assessee as a bookmaker on
bets accepted by him, so as to permit the revenue authority to tax the same
independently, at the rates specified u/s.115BB. Therefore, the same were
chargeable to tax as business income, and not income from other sources.