2013 (2) TMI 353 - HC - Income Tax

Entertainment tax exemption in respect Multiplexes - capital or revenue receipt - assessee contested that the subsidy received was after the completion of the cinema house and commencement of operation and used entirely for the business operation - Held that - Considering the provisions of the State Government Scheme it can be clearly seen that the entire purpose of granting tax exemption was for giving the boost to the terrorism sector. This was to be achieved by attracting higher investment in areas with tourism potential. In order to achieve such purpose, exemption from various taxes as may be applicable was granted. It is true that the exemption was to be computed in terms of tax otherwise payable by the industry. However, the purpose of such exemption was to meet with the capital outlay already undertaken by the assessee. Thus, the very eligibility for seeking exemption was linked with new investment being made in fixed capital. Further though the scheme envisaged a certain period spanning for 5 to 10 years during which such exemption could be availed depending on the category of the unit, such exemption would cease the moment the total incentives touched 100% of the eligible capital investments. From the combined reading of salient features of the scheme, no doubt in conluding that the incentive was being offered for recouping or covering a capital investment or outlay already made by the assessee. As decided in Sahney Steel & Press Works Ltd. (1997 (9) TMI 3 - SUPREME COURT) the character of the subsidy in the hands of the recipient whether revenue or capital will have to be determined having regard to the purpose for which the subsidy was given. The very purpose of the scheme thus was to give incentive to the multiplex units which were found to be highly capital incentive - uphold the decision of the Tribunal in this respect to treat the exemption as capital. Whether the amount set aside by the assessee to provide for meeting liabilities other than ascertained liabilities was required to be added back while computing the book profit u/s. 115JB or not? - Held that - As decided in Bharat Earth Movers v. CIT 2000 (8) TMI 4 - SUPREME COURT the amounts set apart by an assessee to meet its liability on account of leave encashment of employees is not a contingent liability. It was observed that what should be certain is the incurring of the liability which should also be estimated with reasonable certainty though the actual quantification may not be possible then. Its requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. Also see Metal Box Co. of India Ltd. v. Their Workmen 1968 (8) TMI 53 - SUPREME COURT wherein held that an assessee can while working out its net profits, provide from its gross receipts his liability to pay a certain sum towards gratuity liabilities of the employees. If such liability is properly ascertainable and it is possible to arrive at proper discounted present value. Also see Rotork Controls India (P.) Ltd. v. CIT 2009 (5) TMI 16 - SUPREME COURT OF INDIA . Thus no hesitation in upholding the Tribunal s view that though actual payment of gratuity may be made at a later point of time upon periodical release of the employees from service, it is provision having been made on actuarial basis it cannot be stated to be an uncertained liability so as to add it back in terms of Clause (c) to Explanation 1 to Section 115JB.

Summary

Issues Involved:
1. Classification of entertainment tax exemption as capital or revenue receipt.
2. Addition of provision for gratuity liability to book profit under Section 115JB of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Classification of Entertainment Tax Exemption:

The primary issue was whether the entertainment tax exemption received by the assessee for its multiplexes in Pune and Baroda should be classified as a capital receipt or a revenue receipt. The assessee argued that the exemption was a capital receipt intended to cover capital outlay, while the Assessing Officer treated it as a revenue receipt, asserting that the assistance was for business operations since it was granted post-commencement of business operations.

The CIT (Appeals) reversed the Assessing Officer's decision, holding that the receipt was capital in nature based on the provisions of the incentive schemes. The Tribunal upheld this view, relying on the Bombay High Court's decision in CIT v. Chaphalkar Bros., which treated similar receipts as capital in nature.

The High Court examined the incentive schemes of both Gujarat and Maharashtra. The Gujarat scheme aimed to boost tourism by attracting investment in tourism projects, with eligibility for incentives linked to capital investment. The Maharashtra scheme specifically aimed to support capital-intensive multiplex theaters through entertainment tax exemptions. The Court applied the "purpose test" from the Supreme Court's decisions in Sahney Steel & Press Works Ltd. v. CIT and CIT v. Ponni Sugars & Chemicals Ltd., which determine the nature of a subsidy based on its purpose. The Court concluded that the incentives were intended to recoup capital investments, thus classifying the receipts as capital in nature.

2. Addition of Provision for Gratuity Liability to Book Profit:

The second issue involved whether the provision for gratuity liability should be added back to the book profit under Section 115JB of the Income Tax Act. The Tribunal upheld the CIT(A)'s view that the provision, made based on actuarial valuation, was for an ascertained liability and thus should not be added back.

Section 115JB pertains to the minimum alternative tax (MAT) and requires companies to prepare their profit and loss account per Schedule 6 of the Companies Act. Explanation 1 to Section 115JB specifies that provisions for unascertained liabilities should be added back to the book profit. However, provisions for ascertained liabilities, such as those based on actuarial valuations, are excluded from this requirement.

The Tribunal relied on the Bombay High Court's decision in CIT v. Echjay Forgings (P.) Ltd., which held that provisions for gratuity based on actuarial calculations are ascertained liabilities. The Court also referred to the Supreme Court's rulings in Bharat Earth Movers v. CIT and Metal Box Co. of India Ltd. v. Their Workmen, which supported the view that provisions for liabilities, if properly ascertainable, should not be considered contingent. The Court upheld the Tribunal's decision, affirming that the provision for gratuity was an ascertained liability and should not be added back to the book profit under Section 115JB.

Conclusion:

The High Court dismissed all the tax appeals, affirming the Tribunal's decisions on both issues. The entertainment tax exemptions were classified as capital receipts, and the provision for gratuity liability was not added back to the book profit under Section 115JB.