2014 (5) TMI 319 - HC - Income Tax

Disallowance of entertainment tax capitalized - Addition as subsidy - Capital or revenue in nature Whether the Tribunal was justified in confirming the order of the Tribunal deleting the addition made on account of disallowance of entertainment tax capitalised as subsidy 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. 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 - it would also not matter if the grant would be available after the business has been set up the observations of the ITAT was correct that the remission had been granted by way of incentive of capital receipts in the construction of cinema building Following Kalpana Palace Versus Commissioner of Income-Tax 2004 (8) TMI 65 - ALLAHABAD High Court - the Tribunal was justified in affirming the deletion of addition being the amount of entertainment tax capitalized as subsidy Decided against Revenue.

Summary

Issues Involved:
1. Justification of ITAT's order deleting the addition of Rs. 9,13,143/- made on account of disallowance of entertainment tax capitalized as subsidy.
2. Interpretation of the nature of entertainment tax subsidy as capital or revenue receipt.
3. Applicability of the principles laid down in the cases of Sahney Steel and Press Works Ltd. v. CIT and CIT v. Rajaram Maize Products.

Detailed Analysis:

1. Justification of ITAT's Order:
The core issue was whether the ITAT was justified in confirming the deletion of Rs. 9,13,143/- added by the Assessing Officer (AO) as income, which was claimed by the assessee as a capital subsidy. The AO had treated the entertainment tax collected by the assessee as income, while the CIT(A) and ITAT considered it a capital subsidy. The ITAT relied on the State Government's notification and the Supreme Court decision in CIT v. P.J. Chemicals Ltd., concluding that the subsidy was a capital receipt.

2. Interpretation of the Nature of Entertainment Tax Subsidy:
The ITAT and CIT(A) viewed the entertainment tax exemption as a capital subsidy aimed at promoting the construction of new cinema halls. The ITAT noted that the subsidy was intended to assist with the expenditure incurred in constructing new cinema halls, thus treating it as a capital receipt. This interpretation was supported by the exemption notification under the Rajasthan Entertainments and Advertisements Tax Act, 1957, which exempted new cinema halls from paying entertainment tax for five years, treating the collected amount as a liability under "Capital Subsidy Reserve."

3. Applicability of Principles from Sahney Steel and Rajaram Maize Products:
The Revenue argued that the principles from Sahney Steel and Rajaram Maize Products, where subsidies were considered revenue receipts, should apply. However, the court distinguished these cases, noting that in Sahney Steel, the subsidies were for carrying on business rather than creating new assets. In contrast, the subsidy in the present case was for constructing new cinema halls, aligning with the purpose test established in Ponni Sugars & Chemicals Ltd. The court emphasized that the purpose of the subsidy, not the form or timing, determines its nature. The court found that the entertainment tax exemption was intended to promote new cinema halls, making it a capital receipt.

Conclusion:
The court upheld the ITAT's decision, affirming that the entertainment tax exemption was a capital subsidy. The formulated question was answered in favor of the assessee, confirming that the ITAT was justified in deleting the addition of Rs. 9,13,143/-. The appeal by the Revenue was dismissed, concluding that the referred decisions did not operate against the assessee. The court concurred with the observations in Kalpana Palace v. CIT, where similar subsidies were treated as capital receipts.