TDS ON PRIZE AWARDED ON COMPETENCE AND MERIT

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1 TDS ON PRIZE AWARDED ON COMPETENCE AND MERIT CA. Laksh Gala The famous KBC show brought not only good fortune to Mr. Amitabh Bachchan and the winners but some major disputes with respect to the ambit of section 194B i.e. whether prize money won in a game show which is not dependent wholly on chance would attract TDS under the section 194B? Generally, paying taxes is the last thing on people's mind while going to a game show. In this article we shall discuss the TDS implications on those awards which are based on chance or lottery and on Competency and Merit. THE ROAD TO LEVY OF TDS: Prior to June 2001, during KBC's first season, there was no tax deduction at source on prizes. The winner bagged the entire prize money and paid taxes later on. But the money given out by KBC changed all that - the revenue department wizened up to the money it could make there, and slapped the tax at source on such prizes won. INTRODUCTION: Section 2(24)(ix) was amended by the Finance Act, 2001 effective from the assessment year The scope of the section was broadened by insertion of two explanations. The provisions of Section 2(24)(ix) read with Section 194B of the Income Tax Act, 1961 require that TDS should be deducted against any prize money or award given to anybody for lotteries, crossword puzzles, card gamesand other game of any sort. Further the word lottery and card game and other game of any sort has been explained under section 2(24)(ix) as under:

2 Lottery includes winnings from prizes awarded to any person by draw of lots or by chance or in any other manner whatsoever, under any scheme of arrangement by whatever name called In the instant context the question arises whether the words or in any other manner whatsoever could in any way be implicated to deem that the awards given on merit are income for the purposes of Section 2(24) (ix). Card game and other game of any sort includes any game show, an entertainment programme on television or electronic mode; in which people compete to win prizes or any other similar game. TAXATION ON GAME SHOWS BASED ON MERIT: Today, game shows are offering prizes like never before. The first season of Star TVs KBC gave away prizes in crores.over the period of time, the prize monies have been doubled. All other channels have started following the same trend. Quiz shows like India s Child Genius are giving out total prize money of Rs. 50 lakh. Indian Idol, Sony s reality show gave the winner a prize of Rs. 1 crore. And the revenue department wants to be a part of all this. The definition of game is pretty clear and unambiguous. Any contest whether in entertainment programme on TV or electronic mode or otherwise has been covered in it. The thumb rule is: 1. A contest 2. Competing participants 3. Prizes to be won If the three conditions are satisfied, it is a game. Under Section 194B of the Income Tax Act, 30 per cent tax is deducted on any prize money in excess of Rs. 10,000 received by way of winnings from games, lotteries etc. The good part in it is that the recipients of prize money are not responsible for managing the liability. The onus of depositing TDS is on the payer. The tax payer will deduct TDS and pay the winner the net amount and shall also issue a TDS certificate for the same.

3 The only onus on the recipients is to disclose the said prize money under the head income from other sources at the time of filing their return of income. TAXABILITY FOR PRIZES IN KIND A multitude of game/talent shows opt for a combination of cash and kind. The tax liability on cash prizes can be arrived at by a simple calculation, but this is not the case with prizes in kind. Although the applicable tax rate is the same, that is, 30 per cent, it poses a challenge on two fronts who bears the tax liability and what is the valuation of the prize? If the prizes awarded are in kind, the channel will, before releasing the prize, ensure that tax has been paid in respect of the winnings. It will either recover it from the winner or bear the tax liability itself and deposit the TDS. But if prizes are partly in cash and partly in kind, tax is deducted on the total value of the cash and kind from the cash. And, if the cash is insufficient to meet the TDS liability, either the winner or the channel pays the deficit. This will depend entirely on the channel s terms and conditions. For Example: You win a car with a market value of Rs. 7 lakh and the conditions require you to bear the tax liability. You will have to cough up Rs. 2.1 lakh tax. Then there are registration charges, road tax, octroi and insurance, which must be borne by the winner. Rather than paying such heavy taxes and other charges, the only alternative left with you might be to forego your award. Guidelines for valuing prizes, including holidays, insurance products and even contracts awarded by channels to winners, are unclear. ADDING TO THE WEALTH If you win a car or jewellery,being in the nature of wealth assets,an appropriate valuation of these must be done to check if whether the threshold limit of Rs. 30 lakh has been exceeded. And if so then the amount in excess of Rs. 30 lakh is taxable at 1%. WHAT IS THE LIABILITY FOR NOT DEDUCTING TDS? Organisers or those responsible for the event can potentially face various liabilities for not deducting TDS and they would have to pay the amount payable, interest and other penalties from their own pockets if the amount is not deducted. Further, prosecution can be initiated for non-deduction of TDS

4 and there is a maximum punishment of seven years imprisonment and fine. [See: Sections 201(1A), 221, 276B of the Income Tax Act] TAXABILITY OF INHERENT COMPETENCEANDMERIT BASED PRIZES: For instance, if an organization grants award to the best sportsperson or best employee, will such payment attract TDS provisions under Section 194B, or an educational institute is awarded prize money for being best college/school will attract TDS provisions? It is important to note that the award is given for encouraging the inherent competence or merit of an individual or organization. The receiver is eligible to receive such an award for his own capabilities and not by means of lots or chance. In our opinion, the payment made to the awardees in case of a merit based awardis a voluntary contribution, in the absence of any contractual rights on the part of the recipient. Here the issue arises should TDS be deducted on payment of grant or voluntary contributions. The issues which makes a merit based award distinct from a lottery or a game are as under: The participation is not open to all, only participants fulfilling the criteria of competence and merit can participate. The award money is provided without any consideration and the participants do not pay any participation fees. Therefore, it will be analogous to a grant or voluntary contributions. The identification of the winners is done through objective and scientific processes where all the participants do not have equal chance of winning. They have anequal opportunity of winning but the chance of winning is not equal. It is more like unraveling a pre-existing fact. A winner is declared based on a pre-existing or inherent attribute/skill. A merit based award should not be called as other game of any sort nor could it be called as lottery or crossword puzzle or card games.

5 Thus in our opinion, awards given based on merit and performance may not fall under the provisions of section 2(24) (ix) read with section 194B. The above can be justified based on the following case laws: CASE LAWS: In the case Sampanna Kuries (P.) Ltd. v. ITO [2004] 141 Taxman 615 (Ker.) the essential elements of lottery were discussed and the following was held: (i) A prize or some advantage in the nature of a prize; (ii) Distribution thereof by chance; and (iii) Consideration paid or promised for purchasing the chance. Thus, unless all the three elements are satisfied, the prize scheme cannot be considered as a lottery. A price must be charged for participating in the draw. The chance of a person getting the prize could not be treated as part of the bargain unless independent consideration was there with respect to the prize awarded. Similar views were also taken in the case Canaan Kuries & Loans (P.) Ltd. v. Income-tax Officer [2005] 142 TAXMAN249 (KER.). In the case Addl. CIT v. K.Ramabrahmam & Sons (P.) Ltd. [1978] 115 ITR 369 (AP), it was decided that any gift or voluntary payments which were not bound by any obligation were not subject to TDS. The relevant extract is as under: Payments were voluntarily made by the assessee in connection with its business. The payments represented cash receipts in the hands of the recipient and there was no contractual obligation on the part of the assessee to make payments; nor was there any right on the part of the nonresidents to receive these amounts.

6 In these circumstances, these payments could not be regarded as income chargeable under the Act. There was no obligation on the part of the payer, and no right to receive the same by the recipient. Payments did not arise out of any contract or obligation between the assessee and the recipients. There was no obligation either by virtue of a contract or in law to make these payments. Theywere made voluntarily by the assessee towards entertainment of the crew. Therefore, it was held that 195(1) was not attracted in the instant case. Drawing analogy from the above case study, we can conclude that any prize awarded to a person by way of voluntary contribution whereby, neither the payer nor the receiver are under any obligation to pay or receive the amount then, such prize would not be liable for TDS deduction u/s 194B. In Nutshell: If Prize is given to a person for winning a game show on basis of competenceandmerit then, TDS will be applicable and will have to be deducted u/s 194B by the payer of prize. If Prize is given to a person for excelling in some competition or exam other than game show in electronic mode or TV Show, based on his inherent competence and merit then, TDS will not be applicable on the same.