My betting income is being taxed at the special rate on the gross figure. I have a business loss the same year. Can I set the business loss off first and pay the special rate only on the net?
No. The Madras High Court held that s.115BB is a standalone special provision and the entire winnings from betting are taxed at the special rate, without set-off of losses. The court also held that s.58(4) did not come into play at all, because the income being assessed was not income from the activity of owning and maintaining race horses — the activity that its proviso, and s.115BB itself, carve out.
Decided by the High Court (R. Sudhakar J and R. Karuppiah J (judgment delivered by R. Sudhakar J)) on 2014-12-10, reported as T.C. (A) No. 649 of 2006 (Madras High Court). It bears on section 58(4), section 58, section 115BB, section 2(24)(ix), section 74A, section 260A of the Income Tax Act 1961, in Deductions & Disallowances, Assessment & Scrutiny and How Tax Law Is Read matters.
This is the authority behind the practical rule that a s.115BB assessment allows nothing. s.58(4) denies any deduction for expenditure or allowance against winnings from lotteries, crossword puzzles, races including horse races, card games and gambling or betting; s.115BB then taxes those winnings at the flat special rate; and s.74A(1) and (2) were deleted by the same Finance Act 1986 that inserted both, so the loss route is closed as well. The court also refused to let CBDT Circular No. 721, on the computation of tax on long-term capital gains under s.112, be carried across to a different special provision. The one real opening is the proviso: an assessee who owns and maintains horses for running in horse races is outside s.58(4) for that activity, and s.115BB itself excludes income from the activity of owning and maintaining race horses — but the assessee must actually be assessed on that activity, not merely be a person who happens to own horses.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee was a breeder and owner of race horses. For AY 1998-99 he returned a total income of Rs 28,01,55,597. He had shown betting income of Rs 31,24,28,980 and, in computing total income, set off losses under the head business against income under other heads including betting income, offering the resulting Rs 28,52,18,347 to tax at the flat rate of 40 per cent under s.115BB. The Assessing Officer refused that computation and brought the whole of the winnings from betting to tax at 40 per cent, holding that losses could not be set off. The Commissioner (Appeals) held that only the net betting receipts after adjustment against the business loss could be taxed at 40 per cent and directed accordingly. The Tribunal, in ITA No. 1275/Mds/2001 decided 28 September 2005, confirmed the Commissioner (Appeals), observing that s.58(4) with its proviso did not apply because the assessee was the owner of horses maintained for running in horse races, and relying on a combined reading of s.115BB, the proviso to s.58(4) and CBDT Circular No. 721 dated 13 September 1995. The Revenue appealed under s.260A.
The appeal was allowed, the question of law answered in favour of the Revenue and against the assessee, and the Tribunal's order set aside, with no order as to costs. The total winnings from betting are to be brought to tax at the rate of 40 per cent under s.115BB, and losses from the same source cannot be set off against that income. Because the income assessed was not from the activity of owning and maintaining race horses, the provisions of s.58(4) did not come into play.
The court set out s.58(4) with its proviso and s.115BB, and recorded that s.58(4) was inserted by the Finance Act 1986 with effect from 1 April 1987 to disallow any expenditure against winnings deemed to be income under s.2(24)(ix), and that the same Finance Act which inserted s.115BB deleted s.74A(1) and (2). It set out CBDT Circular No. 461 dated 9 July 1986, which states that apart from the then general exemption of Rs 5,000 under s.10(3) no further allowances or deductions are admissible against the gross winnings except where there is a diversion by overriding title, and Circular No. 14 of 2001 explaining the reduction of the rate from 40 to 30 per cent from AY 2002-03. From these the court concluded that s.115BB taxes the total amount of winnings at the flat rate and that losses from the same source cannot be set off. It then held that s.115BB, sitting in Chapter XII, is a standalone special provision, that where tax is levied under a special provision the method of calculation must follow that provision strictly, and that the special rate applies to the entire income of winnings from horse racing. Since it was not the assessee's case that the income assessed was earned from owning and maintaining horses, s.58(4) did not come into play. Reliance on Circular No. 721, dealing with the computation of tax on long-term capital gains under s.112, was held misconceived, because to apply it would give a go-by to the statute and render the special provision a futile exercise.
Section 115BB of the Act envisages taxation at the flat rate of 40% on the total amount of winnings from betting etc., and the losses from the same source also cannot be set off against such income.
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Handle my notice → Ask a CA on WhatsAppNo. The Madras High Court held that s.115BB is a standalone special provision and the entire winnings from betting are taxed at the special rate, without set-off of losses. The court also held that s.58(4) did not come into play at all, because the income being assessed was not income from the activity of owning and maintaining race horses — the activity that its proviso, and s.115BB itself, carve out. This was decided by the High Court (R. Sudhakar J and R. Karuppiah J (judgment delivered by R. Sudhakar J)) and bears on section 58(4), section 58, section 115BB, section 2(24)(ix), section 74A, section 260A of the Income Tax Act 1961. It is reported as T.C. (A) No. 649 of 2006 (Madras High Court). This is the authority behind the practical rule that a s.115BB assessment allows nothing. s.58(4) denies any deduction for expenditure or allowance against winnings from lotteries, crossword puzzles, races including horse races, card games and gambling or betting; s.115BB then taxes those winnings at the flat special rate; and s.74A(1) and (2) were deleted by the same Finance Act 1986 that inserted both, so the loss route is closed as well. The court also refused to let CBDT Circular No. 721, on the computation of tax on long-term capital gains under s.112, be carried across to a different special provision. The one real opening is the proviso: an assessee who owns and maintains horses for running in horse races is outside s.58(4) for that activity, and s.115BB itself excludes income from the activity of owning and maintaining race horses — but the assessee must actually be assessed on that activity, not merely be a person who happens to own horses. If it applies to you, the first step is this: Identify precisely which activity produced the receipt. Winnings from betting are one thing; income from the activity of owning and maintaining race horses is another and is outside both s.115BB and s.58(4).
The assessee was a breeder and owner of race horses. For AY 1998-99 he returned a total income of Rs 28,01,55,597. He had shown betting income of Rs 31,24,28,980 and, in computing total income, set off losses under the head business against income under other heads including betting income, offering the resulting Rs 28,52,18,347 to tax at the flat rate of 40 per cent under s.115BB. The Assessing Officer refused that computation and brought the whole of the winnings from betting to tax at 40 per cent, holding that losses could not be set off. The Commissioner (Appeals) held that only the net betting receipts after adjustment against the business loss could be taxed at 40 per cent and directed accordingly. The Tribunal, in ITA No. 1275/Mds/2001 decided 28 September 2005, confirmed the Commissioner (Appeals), observing that s.58(4) with its proviso did not apply because the assessee was the owner of horses maintained for running in horse races, and relying on a combined reading of s.115BB, the proviso to s.58(4) and CBDT Circular No. 721 dated 13 September 1995. The Revenue appealed under s.260A. The matter was decided on 2014-12-10 by the High Court (R. Sudhakar J and R. Karuppiah J (judgment delivered by R. Sudhakar J)). On those facts the High Court held as follows. The appeal was allowed, the question of law answered in favour of the Revenue and against the assessee, and the Tribunal's order set aside, with no order as to costs. The total winnings from betting are to be brought to tax at the rate of 40 per cent under s.115BB, and losses from the same source cannot be set off against that income. Because the income assessed was not from the activity of owning and maintaining race horses, the provisions of s.58(4) did not come into play.
The court set out s.58(4) with its proviso and s.115BB, and recorded that s.58(4) was inserted by the Finance Act 1986 with effect from 1 April 1987 to disallow any expenditure against winnings deemed to be income under s.2(24)(ix), and that the same Finance Act which inserted s.115BB deleted s.74A(1) and (2). It set out CBDT Circular No. 461 dated 9 July 1986, which states that apart from the then general exemption of Rs 5,000 under s.10(3) no further allowances or deductions are admissible against the gross winnings except where there is a diversion by overriding title, and Circular No. 14 of 2001 explaining the reduction of the rate from 40 to 30 per cent from AY 2002-03. From these the court concluded that s.115BB taxes the total amount of winnings at the flat rate and that losses from the same source cannot be set off. It then held that s.115BB, sitting in Chapter XII, is a standalone special provision, that where tax is levied under a special provision the method of calculation must follow that provision strictly, and that the special rate applies to the entire income of winnings from horse racing. Since it was not the assessee's case that the income assessed was earned from owning and maintaining horses, s.58(4) did not come into play. Reliance on Circular No. 721, dealing with the computation of tax on long-term capital gains under s.112, was held misconceived, because to apply it would give a go-by to the statute and render the special provision a futile exercise. In the words reproduced by the source cited on this page: "Section 115BB of the Act envisages taxation at the flat rate of 40% on the total amount of winnings from betting etc., and the losses from the same source also cannot be set off against such income." The decision followed or applied CBDT Circular No. 461 dated 9 July 1986 — relied on; CBDT Circular No. 14 of 2001 dated 12 December 2001 — relied on; CBDT Circular No. 721 dated 13 September 1995 — held inapplicable.
It was decided by the High Court on 2014-12-10 and is reported as T.C. (A) No. 649 of 2006 (Madras High Court). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 58(4), section 58, section 115BB, section 2(24)(ix), section 74A, section 260A, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeal was allowed, the question of law answered in favour of the Revenue and against the assessee, and the Tribunal's order set aside, with no order as to costs. The total winnings from betting are to be brought to tax at the rate of 40 per cent under s.115BB, and losses from the same source cannot be set off against that income. Because the income assessed was not from the activity of owning and maintaining race horses, the provisions of s.58(4) did not come into play. It arises in Deductions & Disallowances, Assessment & Scrutiny and How Tax Law Is Read matters, on section 58(4), section 58, section 115BB, section 2(24)(ix), section 74A, section 260A of the Income Tax Act 1961, and was decided by R. Sudhakar J and R. Karuppiah J (judgment delivered by R. Sudhakar J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Do not compute the special-rate income net of business losses; the court held the special rate applies to the entire winnings. Check the rate for your year — 40 per cent applied to AY 1998-99 in this case, and the Finance Act 2001 reduced it to 30 per cent with effect from AY 2002-03, as the court itself recorded from Circular No. 14 of 2001. Do not import a circular written for another special provision; the court rejected the use of Circular No. 721, which concerns s.112, to compute tax under s.115BB. If you own race horses, keep the accounts of the owning-and-maintaining activity separate from betting receipts, because s.74A(3) carry-forward for that activity survives while s.74A(1) and (2) do not.
Still good law. Nine later decisions cite this judgment. A later Division Bench of the Madras High Court followed it in CIT v Dr M.A.M. Ramaswamy (Deceased) (5 September 2018) for a different assessment year, recording at para 5 that 'an identical question of law ... was considered by the Division Bench' and allowing the Revenue's appeal at para 7 'considering the above referred decisions where identical substantial question of law was decided in the assessee's own case'; the companion decision of 30 August 2018 is to the same effect. Practitioners should know that the Chennai Tribunal in DCIT v Pooja Marketing and DCIT v Maruti Enterprises (both 9 October 2024) distinguished it, holding the restriction on set-off to work differently as between lottery income and the income of a lottery-ticket trader - a distinction, not a disagreement with the ratio that section 115BB is a standalone charge applied to gross winnings. No Supreme Court decision cites it and no pending challenge is traceable. Nothing overruling or doubting it was found. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The judgment reproduces the Tribunal's order at its own para 2.5, and the paragraphs numbered 12 and 13 inside that block are the Tribunal's, not the High Court's; the High Court's own paragraphs run from the unnumbered opening through 2.1 to 2.6 and then 3 to 15, and the paragraph locator given for the quote is the High Court's para 9. The court itself remarks at its para 14 that it was 'at a loss to understand' how the Tribunal could concur with the Commissioner (Appeals) while simultaneously holding that s.58(4) was inapplicable. The statutory text of s.115BB reproduced in the judgment prints the rate as thirty per cent while the assessment and the court's conclusion proceed on forty per cent for AY 1998-99; the judgment explains this at its paras 10 and 11 as the Finance Act 2001 reduction taking effect from AY 2002-03. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was allowed, the question of law answered in favour of the Revenue and against the assessee, and the Tribunal's order set aside, with no order as to costs. The total winnings from betting are to be brought to tax at the rate of 40 per cent under s.115BB, and losses from the same source cannot be set off against that income. Because the income assessed was not from the activity of owning and maintaining race horses, the provisions of s.58(4) did not come into play.
TaxSphere, “CIT v Dr. M.A.M. Ramaswamy”, https://taxnotice.vittsphere.com/caselaw/case/mam-ramaswamy-115bb-winnings-no-set-off-race-horse-exception/ (validity last checked 2026-09-08)
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