As per Section 194B read with Section 115BB of the Income-tax Act, 1961 (‘ITA’), the person responsible for paying to any person any income by way of winnings from any lottery, crossword puzzle or card game and any other game of any sort, in an amount exceeding ten thousand rupees, shall, at the time of payment thereof, deduct 30% (as increased by applicable surcharge and cess) as income-tax. The language of Section 194B of the ITA is markedly different from the other provisions relating to tax-deduction of source (‘TDS’), which potentially raises various contentious issues around its applicability and scope.

One of the issues that arises is whether the TDS under Section 194B should be effected on the gross receipts or the net receipts. Take for example that a player bets INR 1,000 while playing poker and ends up winning INR 11,000. Question arises as to whether TDS obligation under Section 194B of the ITA will become applicable on INR 11,000, i.e., gross receipts, or INR 10,000, i.e., net receipts. One may argue that since the term ‘income by way of winnings’ is not defined in the ITA, an interpretation may be taken that it means gross amount of receipts of a player. However, having regard to the scheme of Chapter XVII of the ITA, of which Section 194B of the ITA is a part, it may be argued that wherever the Legislature intended to make TDS obligation applicable on the gross value of a transaction, the same has specifically been done^[1]. It may also be argued that Section 194B of the ITA uses the phrase ‘income-tax’, which is chargeable on the ‘income’ portion of receipts of a player, i.e., amount received by a player in excess of the investments made by the player towards securing the prize^[2].

Similarly, another issue that requires consideration is at what time should TDS be effected or the scope of the term ‘payment’. Since the term ‘payment’ is not defined in the ITA, an interpretation may be taken that it means passing of a credit entry in the favour of a payee by a payer in the books of account. However, it may be argued that as per its ordinary meaning, mere accrual of an amount in the books of account should not tantamount to ‘payment’^[3]. Further, having regard to the scheme of Chapter XVII of the ITA, of which Section 194B of the ITA is a part, it may be argued that wherever the Legislature intended to make TDS obligation applicable at the time of accrual or payment, whichever is earlier, the same has specifically been done.^[4] Therefore, it may be argued that there is no scope for importing anything further to Section 194B of the ITA, so as to impose TDS obligation at the time of passing of a credit entry^[5]. ‘Payment’ may be deemed to have taken place when receipts are put at the disposal or control of the payee^[6].

Section 194B of the ITA is also silent on the applicability of the threshold of INR 10,000, specifically, whether the threshold of INR 10,000 is applicable per payment basis or financial year (‘FY’) basis or one-time basis. As per Section 194B of the ITA, as soon as amount representing ‘income by way of winnings’ is paid to a payee, the person responsible for making the payment is required to deduct tax thereon at applicable rates. However, tax is only required to be deducted in the event ‘income by way of winnings’ represent an amount that is in excess of INR 10,000. As far as continuous gaming sessions are concerned, there are three possible arguments for applicability of the INR 10,000 threshold. It may be argued that:

i.     each payment of ‘income by way of winnings’, not representing an amount in excess of INR 10,000, does not warrant TDS under Section 194B of the ITA;

ii.    if payment of ‘income by way of winnings’ does not exceed INR 10,000 during a FY^[7] no TDS under Section 194B of the ITA is warranted. The threshold of INR 10,000 stands revived each FY for a payee. This is the correct position as per the ‘FAQs on Tax Deducted at Source (TDS)’ issued by the Income-tax Department (‘ITD’); and

iii.   Once payment of ‘income by way of winnings’ breach the INR 10,000 threshold, TDS under Section 194B of the ITA is warranted on each subsequent payment of ‘income by way of winnings’. The threshold of INR 10,000, once breached, does not revive for a payee.

There is little guidance on the manner in which the threshold of INR 10,000 should be applied in connection with continuous gaming sessions. It may be argued that the FAQs issued by the ITD clarifying the legal position are not binding on judicial/ quasi-judicial bodies^[8]. It may also be argued that wherever the Legislature intended to make threshold applicable on FY basis, the same has specifically been done^[9].

The relevance of Section 194B of the ITA is required to be seen against the context of an exponential surge in the users engaged in online gaming, particularly since failure to comply with TDS obligations may expose the payer to penal consequences.

[1]  Refer Sections 194C, 194J, 194N, 194O and 194Q of the ITA, applicable on gross value of transaction.

[2]  Tirunelveli District Central Cooperative Bank Ltd. v. JCIT, [2020] 119 taxmann.com 21 (Madras High Court).

[3]  CIT v. Tej Quebecor Printing Ltd., [2006] 281 ITR 170 (Delhi High Court); Director of State Lotteries v. ACIT, [1999] 238 ITR 1 (Gauhauti High Court); and CIT v. Shoorji Vallabhdas & Co., [1962] 46 ITR 114 (Supreme Court). Support in this regard may also be drawn from precedents on the term ‘paid’ appearing in Double Taxation Avoidance Agreements qua ‘Royalty’ and ‘Fees for Technical Services’ taxation.

[4]  Refer Sections 193, 194C and 195 of the ITA, imposing TDS obligation at the time of credit or payment, whichever is earlier.

[5]  Smt. Tarulata Shyam v. CIT, [1977] 108 ITR 345 (Supreme Court); Commissioner of Customs v. Dilip Kumar Company & Ors., [2018] 9 SCC 1 (Supreme Court); and Institute of Chartered Accountants of India v. Price Water House & Ors., [1997] 6 SCC 312 (Supreme Court).

[6]  CIT v. Toshoku Ltd., [1980] (Supp.) SCC 614 (Supreme Court).

[7]  Refer in this regard ‘FAQs on Tax Deducted at Source (TDS)’ on the ITD website at https://incometaxindia.gov.in/Pages/faqs.aspx?k=FAQs on Tax Deducted at Source (TDS), wherein the ITD has clarified that there is no TDS obligation under Section 194B of the ITA, if payment of ‘income by way of winnings’ does not exceed INR 10,000 during a FY.

[8]  Bengal Iron Corporation & Ors. v. Commercial Tax Officer & Ors., [1993] SCR (3) 433 (Supreme Court).

[9]  Refer Sections 194C, 194D, 194DA, 194EE, 194H, 194I, 194J, 194K, 194M, 194R and 194S of ITA, all of which make TDS threshold applicable FY basis.