2004 (8) TMI 65 - HC - Income Tax

Grant-in-aid received by the assessee under the scheme of the State of U.P. introduced with the object to promote the construction of permanent cinema buildings in the backward areas - Whether Tribunal was justified in law in holding that the grant-in-aid of Rs. 3,06,711 received by the assessee under the scheme of the State of U.P. introduced with the object to promote the construction of permanent cinema buildings in the backward areas as revenue receipt in the hands of the assessee? Held that the grant-in-aid received by the applicant was a capital receipt and not a trade receipt

Summary

Issues Involved:
1. Whether the grant-in-aid received by the assessee for constructing a permanent cinema building in a backward area is a capital receipt or a revenue receipt.

Detailed Analysis:

Issue 1: Nature of Grant-in-Aid (Capital vs. Revenue Receipt)
The central issue revolves around the classification of a grant-in-aid of Rs. 3,06,711 received by the assessee under a scheme by the State of U.P. aimed at promoting the construction of permanent cinema buildings in backward areas. The Income-tax Appellate Tribunal held this grant as a revenue receipt, whereas the assessee contended it was a capital receipt.

Facts and Arguments:
- The assessee, a registered partnership firm engaged in cinema exhibition, completed a cinema building in the assessment year 1990-91 and received the grant-in-aid.
- The Income-tax Officer initially treated the grant as a revenue receipt, which was contested by the assessee.
- The Commissioner of Income-tax (Appeals) reversed this decision, treating the grant as a capital receipt.
- The Tribunal, however, reinstated the Income-tax Officer's view, considering it as a revenue receipt.

Legal Precedents and Submissions:
- The assessee relied on the Supreme Court ruling in Sahney Steel and Press Works Ltd. v. CIT [1997] 228 ITR 253 (SC), arguing that the grant was for establishing a new cinema building, thus a capital receipt.
- The Revenue argued that the grant was correlated with entertainment tax, making it a trade receipt, also citing Sahney Steel and Press Works Ltd..

Court's Analysis:
- The Court examined the Government order dated July 21, 1986, which aimed to encourage the construction of cinema halls in small towns with a population up to one lakh.
- The Court referred to the principle laid down by the Supreme Court in Sahney Steel and Press Works Ltd., which differentiates between subsidies for setting up industries (capital receipt) and operational subsidies (revenue receipt).
- In Sahney Steel, the subsidies were operational as they were given only after production commenced and were aimed at making the business more profitable.

Conclusion:
- The Court found that the grant-in-aid in question was intended to promote the construction of cinema buildings, thus aiding in the establishment of new cinema halls.
- The correlation with entertainment tax was deemed inconsequential to the nature of the grant.
- Citing Balarampur Chini Mills Ltd. [1999] 238 ITR 445 (Cal) and Meat Products of India Ltd. [1999] 238 ITR 987 (Ker), the Court held that the grant was for setting up the cinema halls, making it a capital receipt.

Judgment:
- The Court concluded that the grant-in-aid received by the assessee was a capital receipt.
- Consequently, the Tribunal's order was set aside, and the appeal was allowed in favor of the assessee.

Summary:
The High Court of Allahabad ruled that the grant-in-aid received by the assessee for constructing a permanent cinema building in a backward area is a capital receipt and not a revenue receipt. This decision was based on the principle that the grant was intended for setting up new cinema halls, despite its correlation with entertainment tax. The Court set aside the Tribunal's order and allowed the appeal in favor of the assessee.