Financial Daily from THE HINDU group of publications
Saturday, May 06, 2006
Columns - Detaxfication
Lottery draw without a chance to win is meaningless
Forget the lottery, bet on yourself! Thus urges Brian Koslow. And Brian May would agree, saying: "I despise the lottery. There's less chance of you becoming a millionaire than there is of getting hit on the head by a passing asteroid."
Yet, to remind us of lottery, here is a recent judgment of the apex court: Sunrise Associates vs Government of National Capital Territory of Delhi and Others, decided on April 28, by Justices Ruma Pal, B. N. Srikrishna, S. H. Kapadia, Tarun Chatterjee and P. P. Naolekar. And the long line-up of counsels begins with names such as H. N. Salve and K. K. Venugopal.
The Anraj case
The case arose from a 1999 reference of the apex court, for a reconsideration of a 1985 decision: H. Anraj vs Government of Tamil Nadu. "The question in H. Anraj was whether sales tax can be levied by States on the sale of lottery tickets," narrates the 8,500-word judgment. In that case, a two-judge Bench had held that a lottery involved (i) the right to participate in the lottery draw, and (ii) the right to win the prize, depending on chance.
"The learned judges were of the opinion that while the second right was a `chose in action' and therefore not `goods' for the purposes of the levy of sales tax, the first was a transfer of a beneficial interest in moveable goods and was a sale within the meaning of Article 366(29A)(d) of the Constitution and consequently subject to sales tax," informs the text.
Article 366 has definitions of words and phrases, such as `tax on the sale or purchase of goods' that Clause 29A explains as including, among other things, "(d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration." (Check http://lawmin.nic.in for the other sub-clauses.)
A quick backgrounder
"Entry 54 of List II of the Seventh Schedule read with Article 246(3) of the Constitution gives the States power to make laws with respect to `taxes on the sale or purchase of goods other than newspapers subject to the provisions of Entry 92(A) of List I'," is a backgrounder you can find in the text. Also, rewind in time by about half a century, to read about the landmark judgment of a Constitution Bench in The State of Madras vs Gannon Dunkerley & Co, on the meaning of the expression `sale of goods'. A contract for the sale of goods, according to Section 4(1) of the Sale of Goods Act, 1930, was "a contract whereby the seller agrees to transfer the property in goods to the buyer for a price." Applying this `classical concept of sale', the decision in Gannon Dunkerley was that there had to be three essential components to constitute a transaction of sale before tax could be imposed,namely, "(i) an agreement to transfer title (ii) supported by consideration, and (iii) an actual transfer of title in the goods."
But such a definition of sale was narrow, it was realised. Because, seen thus, sale didn't include transactions such as hire purchase and long leases, where one or more of the three components of sale were absent. "Consequently, Article 366 of the Constitution was amended by introduction of Clause 29A which is to the effect that "tax on the sale or purchase of goods" for the purposes of the Constitution would include six particular transactions which were, by virtue of judicial decision, excluded from the phrase," explains the April 28 judgment.
The court studied the first class of transaction, outlined in 29A(a): "A tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration."
The contention of lottery dealers, in H. Anraj, was that a lottery ticket was only a slip of paper or memorandum evidencing the right of the holder to share in the prize or the distributable funds. And that the ticket was merely a convenient mode for ascertaining the identity of the winner. They contended that a sale of a lottery ticket was nothing more than a sale of a chance to win a prize, and therefore, it was merely a contingent interest in money. Alternatively, they submitted that the lottery tickets were `actionable claims' within the meaning of Section 3 of the Transfer of Property Act, 1882, and therefore, outside the definition of `goods' under the Sales Tax Acts.
What is the right that the lottery ticket represents? To this poser, the five-judge Bench had this to say: "On purchasing a lottery ticket, the purchaser would have a claim to a conditional interest in the prize money which is not in the purchaser's possession. The right would fall squarely within the definition of an actionable claim and would therefore be excluded from the definition of `goods' under the Sale of Goods Act and the Sales Tax statutes."
The distinction drawn in H. Anraj between the chance to win and the right to participate in the draw was unwarranted, said the apex court in the April 28 verdict. "A lottery having been held to be in essence a chance for a prize, the sale of a lottery ticket can only be a sale of that chance. There is no other element." The court added, "The separation is specious since neither of the rights can stand without the other. A draw without a chance to win is meaningless and one cannot claim a prize without participating in the draw." What about the dichotomy that H. Anraj mentioned, between the present and the future? In H. Anraj, the court had said that the chance to win was a right in futuro, and the right to participate was in praesenti. Differing from such a reasoning, the apex court's decision on hand said, "Both the rights are in fact in futuro. In any event the distinction is immaterial to the question as to whether the subject matter of the transfer is an actionable claim, since an actionable claim may be existent, accruing, conditional or contingent."
In conclusion, the court ruled, "We are therefore of the view that the decision in H. Anraj incorrectly held that a sale of a lottery ticket involved a sale of goods."
A sobering thought on lottery from Fran Lebowitz, to wrap: "I figure you have the same chance of winning the lottery whether you play or not."
"I paid more service tax... "
"That what you paid last year?"
"More tax than what I paid for the service!"
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