The Hindu Business Line : Winner doesn't take it all

DAY in and day out, one sees prizes being announced for caption writing, slogan mongering and spotting the winner. Now, is the prize money taxable? Can it be argued that it is casual and non-recurring and given to chance? Can it be said that it is a capital receipt and not liable to tax?

Wg. Cdr. K. P. K. Ghose participated in a Bombay Dyeing contest, which was on writing a caption about the company's fabrics. Adjudged the winner, he got a prize of Rs 30,000. This amount was treated as income by the income-tax officer (ITO) and included as part of the assessee's income.

With the first two appellate authorities having dismissed the assessee's appeal, the matter was taken to the Allahabad High Court. It was pleaded that the Rs 30,000 was a casual and non-recurring income and exempt under Section 10(3) of the Income-Tax Act. The rulings of several authorities were cited to show that receipts from the profession to a lawyer arising after his elevation to the Bench and arbitration fees received by a judge were all considered casual and non-recurring. The Allahabad High Court was not impressed with these citations. It pointed out that casual and non-recurring income was exempt, but the Act never defines the term.

The words "casual" and "non-recurring" have not been defined in the Act and they must, therefore, receive their plain and ordinary meaning. In the Oxford Universal Dictionary, the word "casual" has been defined as meaning:

"(i) Subject to or produced by chance; accidental, fortuitous; (ii) coming at uncertain times, not to be calculated on, unsettled... ."

In the context of the statute, "unsettled" seems to be the most apt meaning to be applied in such cases. Starting from the plain dictionary meaning, judicial decisions have attempted to delineate the true significance and scope of these terms. Each case has, however, ultimately turned on its own facts. But the aspect which has been most stressed as providing an important guiding factor in the absence of any contract, is stipulation or understanding, obliging the giver to make the payment.

Considering the aforesaid facts and circumstances of the case, the Allahabad High Court said: "We find ourselves in agreement with the view taken by the Tribunal, since the receipt of Rs 30,000 was a result of winning the caption contest held by Bombay Dyeing and Manufacturing Co. Ltd, being out of effort and skill of the assessee. There cannot be any two opinions about the fact that it was income within the definition under Section 2(24)(ix) of the Act. We find that the payment of Rs 30,000 was made to the assessee under the stipulated contract. It was not a payment in the absence of any contract or understanding obliging the giver to make the payment.

"Since the assessee was adjudged as the best, Bombay Dyeing, who held the contest, was obliged under the stipulated contract to make the payment of Rs 30,000 to the winner (assessee).

"Thus, the instant payment cannot be said to be in the nature of a casual and non-recurring receipt. We feel that none of the rulings referred to above gives any assistance to the assessee on any of the questions referred to in this reference. The receipt of the amount in question is definitely an income.

"The assessee is required to show under which head he is entitled to exemption of tax. Learned counsel for the assessee could not show any specific provision under which the assessee could be granted exemption from tax."

The decision related to the old law on the subject. Finance Act 2002 deleted Section 10(3) from the Act with effect from April 1, 2003.

Two questions emerge in this context. It does not always happen that any entry in a competition of this type is always sure of getting a prize. Quite often, the winner is selected by lots. Even then, probably, because of Section 2(24)(ix), the receipts will become taxable.

What happens if the receipt is absolutely capital in nature and does not have the characteristic of income? Instead of cash, the winner may be given property by lots.

Probably, the Revenue will contend that such receipt of property will have to be taxed as income. But then, even the amendment to Sections 2(24) and 56 made by the Finance (No. 2) Act, 2004 exempts gifts from non-relatives from taxation if such gifts are in a mode other than money.

Strangely, the Allahabad HC decision in the K. P. K. Ghose (268 ITR 260) case does not refer to CIT vs G. R. Karthikeyan (1993 201 ITR 866), the leading Supreme Court ruling.

(The author is a former chief commissioner of income-tax.)

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