2014 (3) TMI 1133 - HC - Income Tax

Disallowance of entertainment tax capitalized as subsidy - nature of subsidy receipt - revenue or capital receipt - Held that - In the present case it is more than apparent 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 in our view the object was clearly to promote the construction of new cinema halls. 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. Particularly looking to the scheme of the Act of 1957 as also the object and purport of the exemption notification the assistance in question cannot be said to be an operational subsidy so as to be taken as a revenue receipt. We find correct the observations by ITAT that the remission had been granted by way of incentive of capital receipts in the construction of cinema building. The submission that once the assessee has collected the entertainment tax from the persons admitted to the entertainment and has not deposited the same with the Government it is required to be treated as revenue receipt remains devoid of substance. The remission by the Government had been to the proprietor of the entertainment and not to the person admitted to the entertainment. Tribunal was justified in affirming the deletion of addition being the amount of entertainment tax capitalized as subsidy - Decided against revenue.

Issues Involved:
1. Justification of ITAT in deleting the addition of Rs. 9,13,143/- made on account of disallowance of entertainment tax capitalized as subsidy.
2. Classification of the entertainment tax subsidy as capital or revenue receipt.

Detailed Analysis:

Issue 1: Justification of ITAT in Deleting the Addition of Rs. 9,13,143/-
The appeal by the Revenue against the ITAT's order dated 21.02.2007 revolved around the substantial question of law: "Whether the Tribunal was justified in confirming the order deleting the addition of Rs. 9,13,143/- made on account of disallowance of entertainment tax capitalized as subsidy?" The Assessing Officer (AO) had treated the entertainment tax collected by the assessee as income, whereas the assessee claimed it as a capital subsidy under a scheme by the Government of Rajasthan to promote new cinema halls. The CIT(A) accepted the assessee's plea, treating the entertainment subsidy as a capital receipt, which the ITAT endorsed, stating the amount was a grant-in-aid and should be treated as a capital receipt.

Issue 2: Classification of the Entertainment Tax Subsidy as Capital or Revenue Receipt
The core issue involved the classification of the entertainment tax subsidy as either a capital or revenue receipt. The ITAT examined the exemption notification issued under the Rajasthan Entertainments and Advertisements Tax Act, 1957, and concluded that the subsidy was meant to assist in the construction of new cinema halls, thus qualifying as a capital receipt. The ITAT's decision was challenged by the Revenue, citing Supreme Court cases (Sahney Steel & Press Works Ltd. v. CIT and CIT v. Rajaram Maize Products) to argue that the subsidy should be treated as a revenue receipt since it was collected as entertainment tax.

The assessee's counsel argued that the financial assistance for constructing new cinema halls remained a capital receipt, referring to the Supreme Court's decision in CIT v. Ponni Sugars & Chemicals Ltd., which emphasized the "purpose test" to determine the nature of the subsidy. The Court noted that the subsidy aimed to promote the construction of new cinema halls and was not intended to supplement trade receipts, thereby classifying it as a capital receipt. The Court also referenced similar judgments from the Allahabad High Court in Kalpana Palace v. CIT and the Gujarat High Court in Inox Leisure Ltd., which supported the classification of such subsidies as capital receipts.

The Court examined the relevant provisions of the Rajasthan Entertainments and Advertisements Tax Act, 1957, particularly Sections 4 and 5, which outline the levy and manner of payment of entertainment tax. It also considered the exemption notification issued by the State Government, which exempted new cinema halls from entertainment tax for five years, provided they commenced commercial exhibition by 31.03.2000. The Court concluded that the exemption's purpose was to promote new cinema hall construction, thus qualifying the subsidy as a capital receipt.

The Court dismissed the Revenue's argument that the collected entertainment tax should be treated as a revenue receipt, stating that the remission was a subsidy to the proprietor of the cinema hall, not to the persons admitted to the entertainment. The remission was a method of providing government assistance to new cinema halls and was essentially a capital subsidy.

Conclusion:
The formulated question was answered in the affirmative, confirming that the Tribunal was justified in affirming the deletion of the addition of Rs. 9,13,143/- as the entertainment tax capitalized as subsidy. The appeal was dismissed, upholding the classification of the subsidy as a capital receipt.

← Previous Next →