2025 (5) TMI 1246 - HC - Income Tax

Nature of receipt - subsidies received from the State governments - revenue or capital receipts - Assessee had received the Entertainment Tax Subsidy ETS from the State Governments in respect of the multiplexes operated by it in the States of Uttar Pradesh Madhya Pradesh and Maharashtra - Assessee had collected entertainment tax but did not deposit the same with the concerned authorities; it adjusted the same towards the ETS - HELD THAT - Undisputedly the purpose of the Scheme in the present case is also to encourage the development of the multiplex theatre complexes which are capital intensive in nature. Thus the questions sought to be raised are squarely covered in favour of the Assessee by the decision of the Supreme Court in M/s Chaphalkar Brothers Pune 2017 (12) TMI 816 - SUPREME COURT

Summary

The core legal question considered by the Tribunal and the High Court was whether the subsidies received by the Assessee from various State Governments, in the form of Entertainment Tax Subsidy (ETS) for operating multiplexes, constituted capital receipts or revenue receipts for the purposes of income tax.

The issue arose because the Assessee retained entertainment tax collected on cinema tickets under State Government schemes aimed at promoting the construction and development of multiplexes. The Assessing Officer (AO) treated these subsidies as revenue receipts, taxable as income, while the Assessee contended that these were capital receipts, not liable to tax. The Commissioner of Income Tax (Appeals) [CIT(A)] and the Income Tax Appellate Tribunal (ITAT) ruled in favor of the Assessee, holding the subsidies to be capital receipts.

Additional grounds raised by the Revenue, such as deletion of leasehold improvement expenses and disallowance under Section 14A, were not pressed during the appeal before the High Court and thus were not considered.

Issue-wise Detailed Analysis:

1. Nature of Entertainment Tax Subsidy (ETS) - Capital Receipt or Revenue Receipt?

Relevant Legal Framework and Precedents: The primary legal framework is the Income Tax Act, 1961, particularly the distinction between capital and revenue receipts. The Tribunal and High Court relied heavily on precedents including the Supreme Court decisions in CIT v. Ponni Sugar and Chemicals Ltd. and Commissioner of Income Tax-1, Kolhapur v. M/s Chaphalkar Brothers Pune, as well as High Court decisions in CIT v. Chapalkar Brothers (Bombay High Court) and DCIT v. Inox Leisure Ltd. (Gujarat High Court).

The Supreme Court in Ponni Sugar laid down the "purpose test" to determine the nature of subsidy receipts, emphasizing that the relevant consideration is the object of the subsidy rather than the timing, source, or form of the subsidy. The purpose test was reaffirmed in the Chaphalkar Brothers case and subsequent Supreme Court rulings, which clarified that subsidies given to encourage capital-intensive ventures, such as multiplex theatres, are capital receipts.

Court's Interpretation and Reasoning: The Court noted that the subsidies were granted under State Government schemes specifically designed to promote the construction and development of multiplexes, which are capital-intensive projects with long gestation periods. The subsidy allowed the Assessee to retain entertainment tax collected on ticket sales, effectively reducing the cost of setting up multiplexes.

The Court emphasized that the purpose of the subsidy was to encourage capital investment in multiplex infrastructure, and therefore, the subsidy should be treated as a capital receipt. The timing of the subsidy (post-construction, during operation) or the fact that the Assessee was not the owner of the property but a lessee did not alter the nature of the receipt.

Key Evidence and Findings: The Assessee submitted the relevant State Government subsidy schemes from Uttar Pradesh, Madhya Pradesh, and Maharashtra, which explicitly aimed to incentivize the establishment of multiplexes. The Assessee had also relied on earlier ITAT decisions in its own case for assessment years 2006-07 and 2007-08, where similar subsidies were held to be capital receipts.

Application of Law to Facts: The Court applied the purpose test from Ponni Sugar and Chaphalkar Brothers to the facts, finding that the subsidy was granted with the object of capital formation in multiplex infrastructure. The subsidy was not a mere revenue grant but was linked to the capital-intensive nature of the business and the promotion of new multiplexes.

Treatment of Competing Arguments: The Revenue's argument that the subsidy was a revenue receipt because it was linked to entertainment tax collected over time and not directly related to capital assets was rejected. The Court held that the source or manner of receipt did not override the fundamental purpose of the subsidy. The AO's observations regarding the Assessee's non-ownership of the multiplexes and the depreciation claimed by the owners were not sufficient to characterize the subsidy as revenue receipt.

Conclusion: The subsidy received under the ETS schemes was a capital receipt and therefore not taxable as income under the Income Tax Act.

2. Other Grounds Raised by Revenue (Leasehold Improvement Expenses and Section 14A Disallowance)

Although the Revenue raised additional grounds challenging the deletion of leasehold improvement expenses and disallowance under Section 14A for AY 2010-11, these issues were not pressed before the High Court and thus were not adjudicated.

Significant Holdings:

"What is important from the ratio of this judgment is the fact that Sahney Steel was followed and the test laid down was the 'purpose test'. It was specifically held that the point of time at which the subsidy is paid is not relevant; the source of the subsidy is immaterial; the form of subsidy is equally immaterial."

"The object of the grant of the subsidy was in order that persons come forward to construct Multiplex Theatre Complexes, the idea being that exemption from entertainment duty for a period of three years and partial remission for a period of two years should go towards helping the industry to set up such highly capital intensive entertainment centers."

"This being the case, it is difficult to accept Mr. Narasimha's argument that it is only the immediate object and not the larger object which must be kept in mind in that the subsidy scheme kicks in only post construction, that is when cinema tickets are actually sold. We hasten to add that the object of the scheme is only one - there is no larger or immediate object. That the object is carried out in a particular manner is irrelevant, as has been held in both Ponni Sugar and Sahney Steel."

Core principles established include the primacy of the "purpose test" in determining the nature of subsidies, the irrelevance of the timing and form of subsidy receipt, and the recognition that subsidies aimed at encouraging capital investment in capital-intensive industries are capital receipts.

Final determinations on the issues are that the ETS subsidies retained by the Assessee are capital receipts and not taxable as income. The Revenue's appeals were dismissed, and no substantial question of law arose for the High Court's consideration.