TMI Blog2015 (2) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... pondent : Mr. Ajay Vohra, Sr. Advocate with Ms. Kavita Jha and Mr. Vaibhav Kulkarni, Advocates. JUDGEMENT MR. JUSTICE R.K.GAUBA 1. These four income tax appeals under Section 260-A of Income Tax Act, 1961 (hereinafter referred to as the Act ) give rise to common question of law and, therefore, have been heard together and are being decided through this common judgment. 2. The respondent assessee is engaged in the business of running of multiplex cinema halls and shopping malls in the name and style of Spice World situated at 1-2, Sector 25A, Noida, Gautam Budh Nagar, (Uttar Pradesh), and has been the beneficiary of a scheme promulgated by the State Government with the objective of encouraging setting up of such multiplex cinema halls where under it has been granted exemption from entertainment tax payment. It claimed deduction to the extent of entertainment tax collected in the corresponding financial years terming the amounts as capital receipts. The Assessing Officer disallowed the said claims but, on appeal, the Commissioner Income Tax (Appeals) [CIT(A)] rejected the contention of the Revenue and allowed the deduction claimed by the assessee. The appeal of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inment tax in the sum of ₹ 6,75,56,204/- from the total income. The income was assessed at Rs. 7,74,86,970/- (inclusive of advertisement expense) whereupon a tax demand (including penalty) was raised in the sum of ₹ 3,00,28,647/-. The CIT(A) in appeal No. 149/2010-2011 rejected the view of the Assessing Officer restoring the deduction vide order dated 18.10.2011. 9. In ITA No. 161/2014, the dispute relates to assessment year 2009-2010. The assessment order under Section 143(3) of the Act was passed on 28.11.2010, inter alia, declining the deduction on account of entertainment tax in the sum of ₹ 5,60,49,044/- from the total income. The income was assessed at ₹ 3,91,69,316/- whereupon a tax demand (including penalty) was raised in the sum of ₹ 3,00,28,647/-. The CIT(A) in appeal No. 149/2010-2011 rejected the view of the Assessing Officer restoring the deduction vide order dated 18.10.2011. 10. The orders of CIT(A) concerning the assessment years 2008-2009 and 2009-2010 were challenged by the Revenue by way of income tax appeal Nos. 146 and 2164/Del/2012 which were heard with cross objection Nos. 43 and 243/Del/2012 filed by the assessee. Both th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es under the promotional scheme under which the grant is available for a period of three years for opening cine halls in the area inhabited by a population of more than three lacs. 2. In pursuance of the same it has been experienced that in spite of various promotional schemes, the new cine multiplexes are not opening in large numbers as expected and viewer ship in the cine halls has also been declining. Therefore, the Govt. after due consideration has decided for setting up of multiplexes fully developed in keeping with the modern ways and techniques and such multiplexes cine halls which have an investment of more than Rs. 1.4 Crores and which have at least three cine halls; shall be entitled exemption of Entertainment Tax 100% for the first year and 75% for second and third years.‖ 15. The Government of Uttar Pradesh promulgated on 12.11.2001, bringing into effect a modified scheme, extending the benefits available under the scheme issued on 13.07.1999, in furtherance of incentives to promote setting up of multiplexes exhibiting cinema through another order, English translation of the relevant portion whereof is provided as under:- Sub. Amendme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tiplex Cinema Halls, who have completed construction of Multiplex Cinema Halls by obtaining prior permission for construction by 31.03.2004 from District Magistrate under the Rules as provided in Uttar Pradesh Films Rules, 1951 and have obtained Licence by 31.03.2005. 4. Benefit of this Encouragement Scheme will be also available to such Multiplexes at present under construction, who have obtained permission for construction under the Scheme of Government Order, dated 12.11.2001, but could not obtained licence up to 31.03.2005. 5. Apart from above, this ‗Encouragement Scheme will be applicable on those Multiplexes, who have got constructed after demolition of old Cinema Halls, subject to, they fulfill standards as prescribed for construction of Multiplexes and guidelines. 6. Following Grant will be allowed to Multiplex Cinema Halls, too being constructed under present -Encouragement Scheme‖ violating Government Orders issued earlier relating to encouragement of Multiplex Cinema Halls, i.e. Government Order No. 1161/11 TRS-6-99-Twenty-R(12)/98, Dated 13th July, 1999; Government Order No. 2532/11 TRS-6-2000-Twenty-R(12)/98, Dated 17th Janu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les, 1981 and amount of payable tax in the period of Grant shall be shown separately. Compliance of conditions of section 8 of U.P. Entertainment and Betting Act, 1979 shall be necessary for Multiplex Owner. (j) It won t be necessary to deposit tax amount in cash equivalent to Grant by Multiplex Owner and it will be presumed in this regard that according to directions issued under Rule-24 of Uttar Pradesh Entertainment and Betting Rules, 1981, amount equivalent to Grant is deposited, but it will be required for necessary adjustment in accounts, but Multiplex Owner shall submit details of total amount of permissible Grant of that month along with aforesaid Bill, which shall be counter-signed by District Magistrate. Thus, on the basis of counter-signed Bill, the Treasury Officer instead of making payment of Grant in cash, shall get it deposited under the Head of Accounts ―2045 Miscellaneous tax on goods and services‖ in Grant No.90 and under the head of ―Establishment-20-Additional Charge/Contribution/State Aid‖ related to Fee - Ayojanettar - 101 Collection Charge - Entertainment Tax - 03. Verified Counter-signed statement along with Bill shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , necessary adjustment of accounts being monitored by the District Magistrate who would countersign the corresponding bills. 19. It is the contention of the assessee that the object and purpose of the scheme is to extend the incentive to multiplex industry and not for reimbursing the cost of any specific asset used therein and further that the grant of subsidy by the State Government depends not only on the commencement of the multiplex but also is linked to its operation since the ultimate aim is to promote cinema industry by establishing permanent and long-term operational multiplex. 20. Coming to the case of the assessee in the matters before us, it needs to be noted that it had started its business operation with effect from 02.12.2005 and on the basis of application made to the District Magistrate (the authority competent under the local entertainment tax law), it claims to have been granted exemption certificates in terms of the Government order dated 27.09.2005 in respect of the multiplex in question for each of the assessment years in question. 21. The assessee had filed its return of income for assessment year 2006-2007 on 30.11.2006, declaring an income of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibility certificate issued by the Distt. Magistrate, Bougainvillea got an entertainment tax exemption of about ₹ 134 lacs during the FY ended 31.03.06. The above amount was credited by the co. in its books of accounts as income. However, while filing the return of income, the same has been claimed to be exempt in accordance with the decision of Hon'ble Supreme Court in the cases of Sahney Steel and Press Works Ltd. us. CIT 228 ITR 253 wherein the Hon'ble SC has held that the character of receipt of a subsidy in the hands of the recipient would depend upon the purpose for which the subsidy has been granted. In case the subsidy has been granted for the purpose of setting up a business, the same would constitute a project subsidy and be capital receipt in the hands of the recipient. However, if a subsidy has been granted for carrying out business operation and is given with the view to augment the profit of the business, same would constitute to be a revenue receipt. In view of the above decision of the Hon'ble SC which has very categorically stated that any subsidy granted for setting up a business would constitute a capital receipt in the hands of the recipien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at there is no restriction here regarding the use of the exempted amount which was available to the assessee with full freedom as to its utilization. Referring to Sahney Steel (supra), the Assessing Officer further added that if subsidy is granted year after year, post setting up of the new industry and commencement of production, such receipt could only be for purposes of carrying on of the business. 24. Similar view was taken by the Assessing Officer in the subsequent three assessment years resulting in similar disallowance. 25. In appeals before the CIT(A), the assessee inter alia, referred to judgment of Supreme Court in Commissioner of Income Tax v. Ponni Sugars and Chemicals Ltd. [(2008) 306 ITR 392 (SC) : (2008) 9 SCC 337] to hold that it is the object for which subsidy/assistance is given is what determines its nature, the form of the mechanism through which the same is granted being irrelevant. The first appellate authority found that the entertainment tax subsidy availed of by the assessee was a capital receipt since it was limited by the cost of the project in excluding land and because it was linked to setting up cinema halls, profitability accruing therefrom coul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee for assisting him in carrying out the business operation and the money is given only after and conditional upon commencement of production, such subsidies must be treated as assistance for the purpose of the trade. [emphasis supplied] 29. In Ponni Sugars (supra), the assessee company had received subsidy under a similar incentive subsidy scheme wherein a manufacturer could avail a higher free sale sugar quota with permissibility to retain the excise duty collected on the sale price of free sale sugar in excess of the normal quota, paying to the Government only the excise duty collectable on the price of levy sugar. The assessee under the said scheme was obliged to utilize the subsidy only for repayment of term loans undertaken by it for setting up new units or for expansion of existing business. The assessee in that case had also claimed the incentive received to be a capital receipt not to be included in its taxable income. The Revenue had resisted the claim on the ground that incentive granted took the character of revenue receipt since it was given through price and duty differentials. 30. Supreme Court ruled as under:- 14. In our vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. The form of subsidy is immaterial. The main eligibility condition in the scheme with which we are concerned in this case is that the incentive must be utilized for repayment of loans taken by the assessee to set up new units or for substantial expansion of existing units. On this aspect there is no dispute. If the object of the subsidy scheme was to enable the assessee to run the business more profitably then the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account. Therefore, it is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy. The form of the mechanism through which the subsidy is given is irrelevant. [emphasis supplied] 31. The Revenue, however, argues in the matters at hand that the assessee cannot be allowed to treat the entertainment tax subsidy as capital receipts because the U.P. Scheme leaves it at liberty to utilize the funds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ip to recover all his investments in the five year period. 34. Seen in the above light, we are of the considered view that it was unreasonable on the part of the Assessing Officer to decline the claim of the assessee about the subsidy being capital receipt. Such a subsidy by its very nature, was bound to come in the hands of the assessee after the cinema hall had become functional and definitely not before the commencement of production. Since the purpose was to offset the expenditure incurred in setting up of the project, such receipt (subject, of course, to the cap of amount and period under the scheme) could not have been treated as assistance for the purposes of trade. 35. The facts that the subsidy granted through deemed deposit of entertainment tax collected does not require it to be linked to any particular fixed asset or that is accorded year after year do not make any difference. The scheme makes it clear that the grant would stand exhausted the moment entertainment tax has been collected (and retained) by the multiplex owner meeting the entire cost of construction (apparatus, interiors etc. included), even if it were before completion of five years . 36. As he ..... X X X X Extracts X X X X X X X X Extracts X X X X
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