2014 (9) TMI 255 - AT - Income Tax

Collection of Entertainment tax is a trading receipt or not - exemption of multiplexes Subsidy received after completion of cinema house and commencement of operation - Capital or revenue in nature Held that - In respect of Pune multiplex the subsidy was granted by an amendment of section-3 of Bombay Entertainment Duty Act 1923 vide Maharashtra Ordinance No.XXIV of 2001 dated 17/08/2001 in respect of Bombay Entertainments Duty (Amendment) Ordinance, 2001 - In respect of Vadodara Multiplex, the subsidy was granted by Government of Gujarat through New tourism policy 1995 as spelt out by Resolution No.NTP-1095/1983-C dated 20/12/1995 - Both the schemes were identically worded as explained to us and the very purpose was to promote the Cinema Industry relying upon M/s.Chaphalkar Brothers vs. ITO 2013 (6) TMI 73 - BOMBAY HIGH COURT - it was a benevolent scheme for the benefit to the exhibitors/ multiplex owners - The subsidy was meant to grant economic assistance to set up a multiplex - The subsidy was collected as entertainment duty on sale of tickets - collection was not a trade receipt of the assessee because the entertainment duty was collected on behalf of the Government. It was collected under a specific direction and it was also utilized under those directions - The collection of duty had no nexus with the day-to-day function or running of the multiplex - The collection of the duty was not with an objective to supplement the trade receipt - The subsidy was meant for the recoupment of a capital expenditure already incurred by the assessee - the subsidy was for the promotion of the construction of multiplex theatres, hence it was granted on capital account - the subsidy was not meant for repaying any loan taken for construction of multiplexes - it was to promote cinema houses to construct multiplex theatres - irrespective of the fact that the multiplexes have been constructed out of own funds or borrowed funds the receipt of subsidy would be on capital account Decided against Revenue. Expenses on professional fees for registration of trade mark - Stamp duty on documentation for loans taken from banks Capital expenses or not Held that - Following the decision in Commissioner of Income-Tax, Bombay City I Versus Ciba of India Limited 1967 (12) TMI 3 - SUPREME Court - the professional fees, etc. paid for trade-mark is an expenditure of Revenue nature following the decision in Orissa Cement Ltd. vs. CIT 1968 (10) TMI 18 - DELHI High Court - the amount spent on obtaining loan is an expenditure laid out wholly and exclusively for the purpose of the business - the object for which a loan is taken is an irrelevant consideration Decided against Revenue. Enhancement of book profit u/s 115JB cancelled - Provision for gratuity Held that - Following the order in Commissioner of Income Tax. Versus Echjay Forgings (P) Ltd. 2001 (2) TMI 56 - BOMBAY High Court it has been held that the provisions for gratuity and leave encashment were made on actuarial basis - If a provision is made on the basis of an actuarial valuation, then the liability is nothing but an ascertained liability, therefore, should not be added in the computation of book profit for the purpose of the provisions of section 115JB of the Act Decided against Revenue. Loss from cross currency swap transaction treated as speculative loss Held that - It was not an independent transaction of swapping in foreign currency but the transaction was connected with the bank loan - The purpose of loan from UTI Bank as per sanction of loan term dated 22/04/2002, it was for setting up multiplex project at Baroda following the decision in CIT vs. Wood Ward Governor India 2007 (4) TMI 118 - HIGH COURT , DELHI the judgement were not available before AO thus, this ground is required to be reconsidered at the stage of investigation, so that the purpose and nature of loan is first to be ascertained and then accordingly to treat the admissibility of loss as claimed by the assessee Decided in favour of Assessee. Abandoned project at Gurgaon Held that - For both the years, the assessee has not claimed the expenditure in its computation of income but made a claim through notes annexed to the computation of income - the assessee wanted to pursue the like nature business already in existence, i.e. running of a multiplex and exhibition of cinematic films - the expenditure was towards technical reports and financial feasibility of the project and those project reports were obtained from the experts - the assessee is running a multiplex cinema theatre and the expenditure was in respect of a new project for the same line of business of running of multiplex and cinema theatre relying upon CIT vs. Priya Village Roadshows Ltd. 2009 (8) TMI 765 - Delhi High Court - the assessee was also involved in the business of running cinemas - the revenue authorities is directed to allow the claim Decided in favour of Assessee.

Summary

Issues Involved:
1. Nature of entertainment tax exemption as capital or revenue receipt.
2. Deductibility of expenditure on professional fees and stamp duty.
3. Eligibility for deduction under Section 80IB.
4. Inclusion of provisions for gratuity and leave encashment in book profit under Section 115JB.
5. Treatment of loss from cross-currency swap transactions.
6. Deductibility of expenditure on abandoned projects.
7. Inclusion of certain incomes in computing deduction under Section 80IB.

Issue-wise Detailed Analysis:

1. Nature of Entertainment Tax Exemption:
The primary issue was whether the entertainment tax exemption received by the assessee for multiplexes at Pune and Baroda should be treated as a capital receipt or a revenue receipt. The assessee argued that these exemptions were capital receipts not chargeable to tax, citing the New Package Scheme of Incentives for Tourism Projects and various supporting documents. The AO contended that since the exemption was granted after the commencement of business operations, it should be treated as a revenue receipt. The CIT(A) and ITAT, however, concluded that the subsidy was intended to promote the construction of new cinema complexes, thus qualifying as capital receipts. This conclusion was supported by the decision of the Hon'ble Bombay High Court in the case of M/s. Chaphalkar Brothers, Pune.

2. Deductibility of Expenditure on Professional Fees and Stamp Duty:
The AO disallowed the expenditure on professional fees for trademark registration and stamp duty for loans as capital expenditure. The CIT(A) allowed the deduction, referencing the Supreme Court decisions in CIT vs. Finley Mills Ltd. and India Cements Ltd. The ITAT upheld this view, noting that the expenditure on trademark registration and stamp duty for obtaining loans is revenue in nature, as established by various judicial precedents.

3. Eligibility for Deduction under Section 80IB:
The AO denied the deduction under Section 80IB, arguing that the built-up area of the multiplexes did not meet the prescribed minimum requirements. The CIT(A) reversed this decision, stating that the AO had incorrectly excluded common areas from the built-up area calculation. The ITAT remanded the issue back to the AO for fresh consideration, emphasizing the need for technical assistance from experts to ascertain compliance with the statutory requirements.

4. Inclusion of Provisions for Gratuity and Leave Encashment in Book Profit under Section 115JB:
The AO added back provisions for gratuity and leave encashment to the book profit under Section 115JB, considering them unascertained liabilities. The CIT(A) and ITAT disagreed, following the precedent set by the Bombay High Court in Echjay Forgings (P) Ltd., which held that provisions made on an actuarial basis are ascertained liabilities and should not be added back in the computation of book profit.

5. Treatment of Loss from Cross-Currency Swap Transactions:
The AO treated the loss from cross-currency swap transactions as speculative and disallowed it. The CIT(A) allowed the claim, noting that the transactions were connected to a bank loan for the Baroda unit and were not speculative in nature. The ITAT remanded the issue back to the AO for reconsideration in light of the judgments in CIT vs. Wood Ward Governor India and V.S. Dempo & Company, which were not available to the AO earlier.

6. Deductibility of Expenditure on Abandoned Projects:
The assessee claimed deductions for expenditures on abandoned projects at Gurgaon, Andheri, and Allahabad, arguing that they were revenue expenditures incurred in the course of expanding the existing business. The AO and CIT(A) disallowed the claims, treating the expenditures as capital in nature. The ITAT reversed this decision, citing the Delhi High Court's ruling in CIT vs. Priya Village Roadshows Ltd., which allowed similar expenditures as revenue expenses for abandoned projects in the same line of business.

7. Inclusion of Certain Incomes in Computing Deduction under Section 80IB:
The assessee's appeals included grounds related to the exclusion of gains from cross-currency swap transactions and interest income from the computation of deduction under Section 80IB. The assessee did not press these grounds during the hearing, and they were dismissed as academic.

Conclusion:
The ITAT provided a detailed analysis and rulings on each issue, often referencing relevant judicial precedents. The appeals resulted in a mix of affirmations, reversals, and remands for further consideration, ensuring a comprehensive and fair adjudication of the matters at hand.