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January 2009

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

By C. N. Vaze, Shailesh Kamdar, Chartered Accountants
Reading Time 4 mins
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23 (2008) 114 ITD 638 (Pune)

ACIT v. Raghunath B. Taware

A.Ys. : 1991-92, 1992-93, 1994-95

Dated : 31-5-2007

S. 28(i) read with S. 56 of the Income-tax Act — Assessee was a licensed bookmaker who ran a business of booking races — Besides, he also used to bet on horse races to minimise his probable losses —Whether the amount so received by the assessee from hedge bets placed with another bookmaker had close nexus or link with total amount received or paid for bets accepted by him on a particular horse, and hence, same was integral part of his business activity as a bookmaker and was not liable to be taxed u/s.115BB — Held, Yes.

 

Facts :

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.

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