2017 (2) TMI 1491 - AT - Income Tax

Characterization of income - Entertainment tax receipt - revenue receipt OR capital receipt - HELD THAT - We find that the claim of subsidy at various Multiplexes from Serial No. 1 to 9 above have been accepted as capital receipt in earlier years. This has not been disputed by any of the lower authorities. The only dispute relates to the subsidy received from the Government of Rajasthan . It is also not in dispute that in pursuance of the terms of scheme introduced by the Government of Rajasthan to encourage construction of new cinema halls, assessee was running a cinema hall. It is also not in dispute that the assessee could receive the subsidy only after the fulfillment of the mandatory conditions. These facts have not been controverted by any of the lower authorities. Thus we direct the A.O. to treat the amount as a capital receipt. Disallowance u/s 14A r.w.r. 8D - HELD THAT - It is not in dispute that the assessee has not received any exempt income during the year under consideration. The disallowance has been made on finding of the fact that the assessee has made certain investments out of borrowed funds. In our considered opinion, since the assessee has not earned any exempt income, no disallowance u/s. 14A read with Rule 8D is called for. Our view is also fortified by the decision of the Hon ble High Court of Gujarat in the case of Corrtech Energy Ltd. 2014 (3) TMI 856 - GUJARAT HIGH COURT held that the Tribunal had recorded the finding of fact that the assessee did not make any claim for exemption of any income from payment of tax. Hence, no disallowance could be made u/s. 14A. Deduction of amortization of value of stock options to employees - HELD THAT - As relying on First Appellate Authority derive support from the findings of the Special Bench of the Tribunal in the case of Biocon Ltd 2013 (8) TMI 629 - ITAT BANGALORE amount being remuneration to employees by way of Employees' Stock Option Plan debited to profit and loss account is an allowable expenditure u/s 37(1).

Summary

Issues Involved:
1. Treatment of entertainment tax subsidy as capital receipt or revenue receipt.
2. Disallowance under Section 14A read with Rule 8D.
3. Deduction of Employees’ Stock Option Plan (ESOP) expenses.

Issue-wise Detailed Analysis:

1. Treatment of Entertainment Tax Subsidy as Capital Receipt or Revenue Receipt:

The primary issue concerns the classification of entertainment tax subsidies received by the assessee for its multiplexes in various states, including Gujarat, Maharashtra, West Bengal, Rajasthan, Madhya Pradesh, and Uttar Pradesh. The Assessing Officer (A.O.) treated these subsidies as revenue receipts, while the assessee claimed them as capital receipts.

The CIT(A) had previously ruled in favor of the assessee for the years 2003-04 to 2009-10, treating these subsidies as capital receipts. The Tribunal upheld this decision for the years 2003-04 to 2005-06. However, for the subsidy received for the multiplex in Rajasthan (Crystal Palm), the CIT(A) treated it as a revenue receipt due to the lack of documentation proving compliance with the Rajasthan Investment Promotion Scheme of 2003.

Upon appeal, the Tribunal considered the arguments and evidence presented. The Tribunal noted that the Hon'ble High Court of Rajasthan had previously ruled that such subsidies aimed to promote the construction of new cinema halls and were to be treated as capital receipts. Following this precedent, the Tribunal directed the A.O. to treat the amount of ?57,31,329/- received for Crystal Palm (Rajasthan) as a capital receipt.

2. Disallowance under Section 14A read with Rule 8D:

The second issue pertains to the disallowance of ?83,58,340/- under Section 14A read with Rule 8D. The A.O. made this disallowance on the grounds that the assessee had made significant investments in Fame India Ltd. using borrowed funds, which would generate exempt dividend income.

The assessee contended that no exempt income was received during the year under consideration, and thus, no disallowance should be made. The Tribunal agreed with the assessee, citing the decision of the Hon'ble High Court of Gujarat in Corrtech Energy Ltd., which held that if no exempt income is earned, no disallowance under Section 14A is warranted. Consequently, the Tribunal directed the A.O. to delete the disallowance of ?83,58,340/-.

3. Deduction of Employees’ Stock Option Plan (ESOP) Expenses:

The third issue involves the disallowance of ?16,21,904/- claimed by the assessee as ESOP expenses. The A.O. disallowed this expense, following the precedent set in the assessee's case for A.Y. 2008-09.

The CIT(A) allowed the deduction, referencing the Special Bench decision of the Bangalore ITAT in Biocon Ltd., which held that ESOP expenses are a form of employee remuneration and thus deductible under Section 37(1) of the Act. The Tribunal upheld the CIT(A)'s decision, finding no contrary decision presented by the revenue.

Conclusion:

The Tribunal ruled in favor of the assessee on all counts:
1. The entertainment tax subsidy for Crystal Palm (Rajasthan) was to be treated as a capital receipt.
2. The disallowance under Section 14A read with Rule 8D was to be deleted as no exempt income was earned.
3. The ESOP expenses were to be allowed as a deductible expense under Section 37(1).

The appeals filed by the assessee were allowed, while the appeals filed by the revenue were dismissed.