2017 (12) TMI 816 - SC - Income Tax

Nature of receipt under the subsidy scheme - whether was not in the nature of a helping hand to the trade but was capital in nature - subsidy scheme of the State Government took the form of an exemption of entertainment duty in Multiplex Theatre Complexes newly set up, for a period of three years, and thereafter payment of entertainment duty @ 25% for the subsequent two years Held that - As stated in the statement of objects and reasons, of the amendment ordinance was that since the average occupancy in cinema theatres has fallen considerably and hardly any new theatres have been started in the recent past, the concept of a Complete Family Entertainment Centre, more popularly known as Multiplex Theatre Complex, has emerged. These complexes offer various entertainment facilities for the entire family as a whole. It was noticed that these complexes are highly capital intensive and their gestation period is quite long and therefore, they need Government support in the form of incentives qua entertainment duty. It was also added that government with a view to commemorate the birth centenary of late Shri V. Shantaram decided to grant concession in entertainment duty to Multiplex Theatre Complexes to promote construction of new cinema houses in the State. The aforesaid object is clear and unequivocal. The object of the grant of the subsidy was in order that persons come forward to construct Multiplex Theatre Complexes, the idea being that exemption from entertainment duty for a period of three years and partial remission for a period of two years should go towards helping the industry to set up such highly capital intensive entertainment centers. This being the case, it is difficult to accept Mr. Narasimha s argument that it is only the immediate object and not the larger object which must be kept in mind in that the subsidy scheme kicks in only post construction, that is when cinema tickets are actually sold. We hasten to add that the object of the scheme is only one -there is no larger or immediate object. That the object is carried out in a particular manner is irrelevant, as has been held in both Ponni Sugar 2008 (9) TMI 14 - SUPREME COURT and Sahney Steel 1997 (9) TMI 3 - SUPREME Court . Since the subsidy scheme in the West Bengal case is similar to the scheme in the Maharashtra case being to encourage development of Multiplex Theatre Complexes which are capital intensive in nature, and since the subsidy scheme in that case is also similar to the Maharashtra cases, in that the amount of entertainment tax collected was to be retained by the new Multiplex Theatre Complexes for a period not exceeding four years, we are of the view that West Bengal cases must follow the judgment that has been just delivered in the Maharashtra case. - Decided against revenue

Issues Involved:
1. Nature of the subsidy provided to Multiplex Theatre Complexes (capital or revenue receipt).
2. Applicability of the "purpose test" in determining the nature of subsidy.
3. Analysis of relevant case laws (Sahney Steel & Press Works Ltd., Commissioner of Income Tax vs. Ponni Sugars and Chemicals Limited).
4. Application of the judgment to similar subsidy schemes in Maharashtra and West Bengal.

Issue-wise Detailed Analysis:

1. Nature of the Subsidy Provided to Multiplex Theatre Complexes (Capital or Revenue Receipt):
The primary issue was whether the subsidy provided by the State Government to Multiplex Theatre Complexes in Maharashtra and West Bengal was a capital receipt or a revenue receipt. The subsidy scheme in Maharashtra took the form of an exemption of entertainment duty for three years, followed by a reduced rate for two years. The stated purpose was to support the construction of new multiplexes, which are capital-intensive and have a long gestation period. The Income-Tax Appellate Tribunal concluded that the subsidy was meant to cover capital expenditure, thus classifying it as a capital receipt. The High Court upheld this view, emphasizing that the subsidy was intended to promote the construction of multiplexes, making it a capital receipt.

2. Applicability of the "Purpose Test" in Determining the Nature of Subsidy:
The court applied the "purpose test" to determine the nature of the subsidy. According to this test, the character of the subsidy in the hands of the recipient is determined by the purpose for which it is given. If the subsidy is meant to assist in setting up a business or capital expenditure, it is considered a capital receipt. Conversely, if it is meant to assist in the day-to-day operations of a business, it is considered a revenue receipt. The court found that the subsidy in question was intended to promote the construction of new multiplexes, making it a capital receipt.

3. Analysis of Relevant Case Laws:
The court analyzed two significant Supreme Court judgments: Sahney Steel & Press Works Ltd. vs. Commissioner of Income-Tax and Commissioner of Income Tax vs. Ponni Sugars and Chemicals Limited. In Sahney Steel, the subsidy was considered a revenue receipt because it was given to assist in the day-to-day operations of the business. However, in Ponni Sugars, the subsidy was deemed a capital receipt because it was meant to repay loans for setting up new units or expanding existing ones. The court in the present case found that the purpose of the subsidy was to promote the construction of new multiplexes, aligning more closely with the Ponni Sugars case.

4. Application of the Judgment to Similar Subsidy Schemes in Maharashtra and West Bengal:
The court extended its analysis to similar subsidy schemes in West Bengal. The West Bengal Finance Act, 2003, provided a subsidy by allowing proprietors of new multiplexes to retain entertainment tax collected for up to four years. The court found that the purpose of this subsidy was similar to that in Maharashtra—to encourage the development of capital-intensive multiplexes. Therefore, the court concluded that the subsidy in West Bengal should also be considered a capital receipt.

Conclusion:
The court dismissed the appeals filed by the Department, holding that the subsidies provided under the schemes in Maharashtra and West Bengal were capital receipts. The judgment emphasized the importance of the "purpose test" in determining the nature of subsidies and aligned with the principles laid down in Ponni Sugars and Chemicals Limited.

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