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2013 (8) TMI 548 - AT - Income TaxCapital receipt or Revenue receipt - Entertainment tax subsidy - CIT held it as capital receipt - Held that - Ld. CIT (A) in the year before us, has deleted the disallowance by observing that similar additions for Assessment Year 2006-07 and 2007-08 were deleted by the CIT (A) by referring to, inter alia, Ponni Sugar (2008 (9) TMI 14 - SUPREME COURT) and that the facts and circumstances in the years under consideration were similar to those in the earlier years. This has not been disputed - Decided against Revenue. Applicability of Explanation 10 to sec. 43(1) - Held that - Central Government granted subsidy to assessee as incentive for setting up industry in backward areas - subsidies granted to industries on a percentage of the capital cost are not deductible from the actual cost under section 43(1) of the Act for the purpose of calculation of depreciation, etc. - 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) - Decided in favour of assessee.
Issues Involved:
1. Treatment of Entertainment Tax Subsidy: Capital vs. Revenue Nature 2. Reduction of Cost of Assets and Depreciation Claim 3. Disallowance of ESOP and ESPS Expenses 4. Disallowance under Section 14A Detailed Analysis: 1. Treatment of Entertainment Tax Subsidy: Capital vs. Revenue Nature Facts and Arguments: - The assessee, a listed public company engaged in the exhibition of films in multiplexes, received an Entertainment Tax (E Tax) subsidy from the UP State Government. - The subsidy was initially treated as a revenue receipt in the original return but later claimed as a capital receipt during assessment. - The Assessing Officer (AO) accepted the subsidy as a capital receipt, but the Commissioner of Income Tax (Appeals) [CIT(A)] treated it as a revenue receipt. - CIT(A) issued an enhancement notice under Section 251(2) of the Income Tax Act, holding the subsidy as revenue in nature, arguing that the subsidy was not related to any asset or capital outlay and was quantified based on the cost of the multiplex and the amount of E Tax collected. Judgment: - The ITAT held that the subsidy should be treated as a capital receipt, aligning with the purpose test established by the Supreme Court in CIT v. Ponni Sugars and Chemicals Ltd. (306 ITR 392). - The purpose of the subsidy was to promote the cinema industry by setting up multiplexes, which qualifies it as a capital receipt. - The method of payment (linked to E Tax collection) and the source of the subsidy were deemed irrelevant in determining its nature. - The ITAT relied on the Bombay High Court judgment in CIT v. Chaphalkar Brothers, which held similar subsidies as capital receipts. 2. Reduction of Cost of Assets and Depreciation Claim Facts and Arguments: - The AO reduced the actual cost of the multiplex assets by the amount of the E Tax subsidy, thereby reducing the depreciation claim. - The CIT(A) reversed this, holding the subsidy as revenue in nature, making Explanation 10 to Section 43(1) inapplicable. Judgment: - The ITAT held that the subsidy was not intended to meet the cost of any specific asset directly or indirectly, thus should not reduce the actual cost of the assets. - This decision was supported by the Supreme Court judgment in CIT v. P.J. Chemicals Ltd., which emphasized a liberal interpretation of "actual cost." 3. Disallowance of ESOP and ESPS Expenses Facts and Arguments: - The AO disallowed the ESOP and ESPS expenses, treating them as notional, capital expenses, and contingent liabilities. - The CIT(A) upheld this disallowance. Judgment: - The ITAT upheld the disallowance, aligning with the Delhi ITAT judgment in DCIT v. Ranbaxy Laboratories Ltd. and Mumbai ITAT judgment in H.P. Industry, which held that provisions made without actual payment to employees cannot be allowed as deductions. 4. Disallowance under Section 14A Facts and Arguments: - The AO disallowed expenses under Section 14A related to income not forming part of total income, applying Rule 8D. - The CIT(A) confirmed this disallowance. Judgment: - The ITAT set aside the issue back to the AO for fresh adjudication, noting that Rule 8D is prospective from A.Y. 2008-09, and the AO must scientifically establish the direct or indirect nexus of expenses attributable to the exempt income. Conclusion: - The appeal was partly allowed, with the ITAT holding the E Tax subsidy as a capital receipt and directing the AO to reconsider the Section 14A disallowance. The disallowance of ESOP and ESPS expenses was upheld.
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