2014 (8) TMI 839 - AT - Income Tax

Nature of receipt Entertainment tax Revenue or capital receipt - Incentive given to assessee for assisting him in carrying out the business operations Held that - The State Government proceeded to exempt entertainment tax for a period of 5 years payable by a new cinema hall constructed, subject to the condition that commercial exhibition of films in such cinema hall was required to be started by 31.03.2000 - In the scheme of the Act of 1957, where entertainment tax is determined and recoverable from the proprietor of the entertainment and is levied with reference to the number of admissions to the entertainment, when the State Government had exempted such proprietor of new cinema hall from payment of entertainment tax on the given condition, the object was clearly to promote the construction of new cinema halls - following the decision in ITA No. 1984, 2299, 2300/AHD/2009 order dated 09.09.2011 - Merely because the amount was not directly meant for repaying the amount taken for construction of the cinema hall, its purpose could not be considered to be other than that of promoting construction of new cinema hall - the source of funds for construction of cinema hall is irrelevant; and it would also not matter if the grant would be available after the business has been set up - the assistance cannot be said to be an operational subsidy so as to be taken as a revenue receipt - the remission had been granted by way of incentive of capital receipts in the construction of cinema building - the subsidy in respect of Multiplex located at Jaipur to be capital in nature. Applicability of Explanation 10 to sec. 43(1) Held that - E. Tax subsidy was not given to meet the cost of any specific asset - the department itself proposed that there was no obligation on assessee to utilize it for any specific purpose will not be hit by Explanation 10 to Sec. 43(1) - entertainment subsidy being for the promotion of cinema/ multiplex industry, only because the methodology adopted is to cap it to capital cost of assets will not mean to reduce the cost of asset directly or indirectly in terms of Explanation 10 to Sec. 43(1) - the subsidy received by the Assessee cannot be received from the written down value for the purpose of computing depreciation - the alternate contention of the Revenue of reducing the amount of subsidy from the block of assets cannot be accepted Decided against Revenue. Expenses in respect of abandoned project disallowed Held that - Following the decision in CIT vs. Priya Village Roadshows Ltd. 2009 (8) TMI 765 - Delhi High Court the assessee was also involved in the business of running cinemas - Revenue could not bring any material to distinguish the facts with that of earlier years nor has brought any binding decision in its support - the expenses is held to be allowable Decided in favour of Assessee. Claim of deduction u/s. 80IB Held that - As decided in assessee s own case it has been held that the capacity of cinema theatre should be atleast 900 seats and cinema theatre should not have less than 100 seats - Commercial shops should not be less than 3000 sq. ft, however, the minimum built-up area of each shop should not be less than 250 sq.ft. A multiplex is required to be centrally air-conditioned - The cinema theatre should use seat-batch not less than 20 inches - the lay out plan was in-conformity with the prescribed IT Rules the matter is remitted back to the AO for fresh adjudication Decided in favour of revenue.

Summary

Issues Involved:
1. Treatment of Entertainment Tax as Revenue or Capital Receipt.
2. Deduction under Section 80IB.
3. Disallowance of Expenses for Abandoned Projects.

Detailed Analysis:

1. Treatment of Entertainment Tax as Revenue or Capital Receipt:
The primary issue revolves around whether the entertainment tax should be treated as a capital receipt or revenue receipt. The Assessee claimed the entertainment tax as capital receipts, which was denied by the Assessing Officer (A.O) and treated as revenue receipts, relying on the Supreme Court decision in Sahney Steel Press Works Ltd. vs. CIT. The A.O argued that the entertainment tax exemption was granted after the commencement of commercial operations, thus qualifying as revenue receipts.

The CIT(A) provided a detailed analysis, noting that the entertainment tax exemptions for multiplexes in Pune, Baroda, Elgin Road, and Salt Lake were previously held as capital receipts in earlier years. The CIT(A) upheld this view, stating that the purpose of the subsidy was to help with the capital outlay for setting up multiplexes, not for supplementing operational revenue. The CIT(A) distinguished between subsidies for capital expenditure and those for operational assistance, following the Supreme Court's "purpose test" from Ponni Sugars & Chemicals Ltd. The CIT(A) also noted that the Rajasthan High Court in Samta Chavigarh held similar subsidies as capital receipts.

The ITAT upheld the CIT(A) decision, affirming that the entertainment tax subsidies for multiplexes in Maharashtra, Gujarat, West Bengal, and Madhya Pradesh were capital receipts. The ITAT also dismissed the Revenue's alternate contention to reduce the subsidy amount from the block of assets for depreciation purposes, citing decisions from the Delhi Tribunal in PVR Ltd. and the Bombay Tribunal in Godrej Agrovet Ltd.

2. Deduction under Section 80IB:
The A.O denied the Assessee's claim for deduction under Section 80IB for multiplexes at Pune and Baroda, citing deficiencies in meeting technical specifications. The CIT(A) reversed this decision, stating that the multiplexes met the prescribed conditions and directed the A.O to allow the deduction.

The ITAT noted that similar issues were remitted to the A.O in earlier years for a fresh examination with the assistance of technical experts. Following this precedent, the ITAT remitted the matter back to the A.O for a fresh decision, ensuring that the technical aspects of the multiplexes' construction were thoroughly examined.

3. Disallowance of Expenses for Abandoned Projects:
The A.O disallowed expenses incurred by the Assessee for exploring the possibility of setting up new multiplexes, treating them as capital expenditures. The CIT(A) upheld this disallowance.

The ITAT, however, reversed this decision, citing the Delhi High Court's ruling in Priya Village Roadshows Ltd., which allowed similar expenses as revenue expenditures for feasibility studies in the same line of business. The ITAT noted that the Assessee's expenses were for technical reports and consultations related to the same business of running multiplexes, not for setting up a new business. Thus, the ITAT allowed the expenses as revenue expenditures.

Conclusion:
The ITAT upheld the CIT(A)'s decision to treat the entertainment tax subsidies as capital receipts and allowed the Assessee's appeal regarding the disallowance of expenses for abandoned projects. The ITAT remitted the issue of deduction under Section 80IB back to the A.O for a fresh examination.