Introduction
In 2012, the Delhi Racing Club (‘Racing Club’) lost a tax dispute. The Government of National Capital Territory demanded payment of entertainment tax which the Racing Club unsuccessfully resisted. At first glance, the Delhi High Court’s judgment in The Delhi Race Club Ltd v Government of NCT of Delhi & Ors (‘Delhi Racing Club case’) seems straightforward. It was a low stakes dispute involving a relatively small amount of entertainment tax. And the Delhi Racing Club case, cannot by any stretch of imagination, be called a ‘landmark’ case in Indian indirect tax jurisprudence. Nonetheless, the value of commenting on the Delhi Racing Club case can be underlined because of three observations of the Delhi High Court.
Firstly, any payment which is related to the entertainment or is a pre-condition for entertainment can be understood be a ‘payment for admission to any entertainment’ and subjected to entertainment tax. Since local bodies are authorized to collect entertainment tax post introduction of Goods and Services Tax (‘GST’), interpretation of the above phrase has a continued relevance.
Secondly, in Delhi Racing Club case the Delhi High Court reinforced the principle that if law requires that a certain tax shall be collected then any governmental assurance that it shall not be collected will not be binding on the state and its officers. An observation that leaves the taxpayer at the mercy of changes in the governmental attitude towards tax collection.
Thirdly, the object of entertainment tax is human beings and not the inanimate object in reference to which the tax is levied. The latter’s presence, absence or use can trigger liability to pay an entertainment tax, but it does not mean that it is the object of entertainment tax.
The judgment is an important reference point for understanding the taxable event for entertainment tax, and its wide scope that can extend to varied forms of payments/charges that are made in relation to an entertainment. A concept that continues to be relevant because laws under which entertainment tax is levied and collected by local bodies adopt similar expressions and phrases as used in relevant entertainment tax legislations in vogue before introduction of GST.
Facts and Background
The Racing Club charged entry fees from those who visited its premises to place bets on horse races or otherwise watch the races. The Racing Club became concerned with the nuisance value of mobile phones and introduced an additional entry charge for permitting carrying of mobile phones into its premises. While the Racing Club was collecting and remitting entertainment tax of 25% on the entry fees, the issue was if entertainment tax was also payable on charges levied for carrying mobile phones.
In February 2002, the Entertainment and Betting Tax Officer under the Delhi Entertainment and Betting Tax Act, 1996 issued a notice to the Racing Club demanding payment of entertainment tax of 25% on charges collected for carrying mobile phones. The Racing Club resisted the demand of tax and argued that mobile phones were not entertainment or in any manner connected to entertainment. The Commissioner of Entertainment, Betting and Luxury Tax responded by banning the use of mobile phones in the Racing Club. Why? The argument was that use of mobile phones in the Racing Club had given birth to illegal betting and the Racing Club had not maintained proper records of mobile phones in the betting ring. The ban caused immediate concern to the Racing Club as it would prove bothersome to its members and visitors. After all, one of the core activities of visiting a horse racing club was to bet on the horse races, one of the rare legal betting activities in India.
To circumvent that mobile phone ban, the Racing Club agreed to pay half of the entertainment tax demand on charges levied on mobile phones. And agreed to pay the remaining half in yearly instalments. The Commissioner agreed and thereafter rescinded the ban on mobile phones subject to the Racing Club paying entertainment tax on charges levied on mobile phones.
In 2006, the Racing Club was issued another show cause notice alleging that it had been collecting charges on mobile phones usage from Financial Year 2002-03, without permission under the Delhi Entertainments and Betting Tax Act, 1996. And Racing Club was asked to reply to the notice. The Racing Club’s reply inter alia mentioned that it had already entered a settlement reading payment of entertainment tax on mobile phone charges. But the Racing Club’s reply was found unsatisfactory and a total tax demand of Rs 1,28,03,462/- was confirmed by the Commissioner. The Racing Club approached the Delhi High Court challenging the assessment orders.
The Delhi High Court Judgment
Section 6 of the Delhi Entertainment and Betting Tax Act, 1996 provided that there shall be levied and paid on all payments for admission to any entertainment an entertainment tax. Section 2(m)(iv), in turn, defined ‘payment for admission’ to mean:
any payment, by whatever name called, for any purpose whatsoever, connected with an entertainment, which a person is required to make in any form as a condition of attending, or continuing to attend the entertainment, either in addition to the payment, if any, for admission to the entertainment or without any such payment for admission;
The Delhi High Court held that the above sub-clause covered payments to the Racing Club as mobile phone charges since they were connected to the entertainment of watching/betting on horse racing. The High Court added that the manner of collecting the payment, or its purpose is irrelevant if the payment is connected to the entertainment. The High Court clarified that while the taxable event was holding an entertainment, any payment connected with the entertainment attracted a levy under Section 6(1) of the Delhi Entertainment and Betting Tax Act, 1996. And concluded that:
The only condition is that the payment should be connected with the entertainment, which is the horse races in the present case. The further condition is that the payment should be one which a person is required to make as a condition of attending the entertainment. This condition is satisfied in the case of persons who wish to carry their mobile phones inside the race club. If they want to attend the races carrying a mobile phone with them, they are obliged to make the payment for the entry of mobile phones. (para 19)
The connection between mobile phones and horse racing – the main entertainment – was obvious and proximate. And on this point, the Delhi High Court was correct in including mobile phones charges within the scope of ‘payment for admission’. This is especially since mobile phones were vital to place and track bets on the horse races.
The second crucial question the Delhi High Court had to address was if the entertainment tax was being levied on an inanimate object. In State of Karnataka v Driven Enterprises entertainment tax was levied on admission of cars into drive-in cinemas. Driven Enterprises had argued before the Supreme Court that a tax cannot be levied on inanimate objects. But the Supreme Court rejected the argument and held that entertainment tax was not levied on cars but on persons who were entertained, who took their cars inside the theatres, and enjoyed the movie while sitting in their cars. Drawing an analogy, the Delhi High Court in Delhi Racing Club case held that the entertainment tax was not on mobile phones but on persons who insisted on carrying their phones inside the Racing Club and were entertained from horse racing.
Finally, Racing Club challenged the demand for payment of entertainment tax by arguing that it had previously settled the issue with the Commissioner. The Delhi High Court rejected the Racing Club’s argument by relying on M/S Mathra Prashad and Sons v State of Punjab and held that where a law requires that a certain tax is to be collected it cannot be given up. Any governmental assurance that it will not collect the tax is not binding on the government. Thus, the government retains the discretion to collect or not to collect the tax putting the taxpayer in jeopardy. The government can, as in the Delhi Racing Club case, settle the dispute or agree to collect a certain quantum of tax but later go back on its word and decide to collect a higher amount of tax. If the law permits the government to collect the tax, the government retains the authority to collect it as per its convenience. And any agreements to the contrary with the taxpayer do not bind it. While one can argue that promissory estoppel should apply to the government, but the jurisprudence is clearly in favor of the state and its ability to withdraw any tax concessions in public interest. Even if it prejudices the taxpayer in question.
Betting, Taxes, and Present
Delhi Racing Club case was not a rare instance where taxation, betting, and entertainment coalesced and resulted in a significant burden for the taxpayer, i.e., the Racing Club. And since entertainment tax is an indirect tax, by extension members and visitors to the Delhi Racing Club were also affected. The current taxation regime relating to betting and entertainment is bifurcated into two separate taxes – GST as well as entertainment tax. Betting is remit of the former and the entire betting sector has been effectively paralyzeddue to onerous tax rates under GST.
Entertainment tax is now a de facto tax on admissions to events such as sporting events, broadcasting services, and for public exhibition of cinematographic films. And is collected by local bodies. Thus, the Delhi High Court’s interpretation of ‘payment for admission’ remains relevant even under the current entertainment tax regime. Since all entertainment tax laws still use the same phrase to delineate their scope and identify the taxable event.
However, to conclude, and to place the tax controversy in the larger context: recreational clubs including racing clubs such as the Delhi Racing Club have other legal troubles to encounter for now, onerous taxes and high tax rates form only a small piece of their ongoing existential fights.
