2020 (3) TMI 1145 - HC - Income Tax

Subsidy pursuant to a scheme formulated and implemented by the Government for promotion of construction of Cinema Halls and support the film industry - revenue or capital subsidy - character of the receipt - HELD THAT - As decided in SAHNEY STEEL AND PRESS WORKS LIMITED AND OTHERS VERSUS COMMISSIONER OF INCOME-TAX 1997 (9) TMI 3 - SUPREME COURT if the monies are given to an assessee for assisting him for carrying out the business operation and the money is given only after and conditional upon commencement of the production, such subsidies must be treated as assistance for the purpose of trade. Applying the said legal position to the given case, the purpose of the scheme as evident from Annexure A/2, and in particular Rule 1, is obviously for promoting the construction of new Cinema Theaters. The effective date is given under Rule 3, as 14.01.1980 . The eligibility conditions are mentioned in Rule 4 and Rule 5 stipulates the measure of subsidy , which could be aspired by the assessee. Going by the said Rules, it is quite clear that the extent of benefit payable to an Assessee by way of subsidy is quantified with reference to the entertainment tax as specified under Rule 5( k). But for fixing the extent of benefit payable, Annexure A/2 does no where mention that the purpose of subsidy is to promote the trade or business. On the other hand, it is explicitly clear that the said scheme was introduced by the Government to promote the construction of new cinema theaters in the State and as such, the contention raised by the learned Standing Counsel for the Department to the contrary can only be repelled. Subsidy in the given circumstance will definitely constitute capital subsidy and it is to be excluded from assessment of tax under the provisions of the Income Tax Act.

Summary

Issues:
1. Treatment of subsidy as 'capital subsidy' or 'revenue subsidy' for assessment purposes.

Detailed Analysis:
The judgment by the Chhattisgarh High Court revolves around the treatment of a subsidy paid to an Assessee under a government scheme for promoting the construction of Cinema Halls and supporting the film industry. The primary issue is whether the subsidy should be classified as a 'capital subsidy' or a 'revenue subsidy' for assessment. The Appellant-Assessee claimed that the subsidy, received in accordance with the scheme's requirements, should be considered a 'capital subsidy' as it was provided to promote the construction of Cinema Halls. However, the Income Tax Department argued that the subsidy was meant to promote the Assessee's business and should be treated as a 'revenue subsidy.'

The sequence of events revealed that the Assessee, engaged in transportation business, ventured into the cinema field by constructing a theater named "Swaroop Theater." The subsidy was sanctioned under the scheme for specific assessment years. The Assessing Officer considered it a 'revenue subsidy,' leading to a series of appeals and reversals by different authorities. The matter was eventually brought before the High Court due to conflicting decisions by the Tribunal.

In the High Court, substantial questions of law were raised regarding the treatment of the subsidy as directly linked to the revenue business, compliance with previous court directions, and the application of the purpose test for determining the subsidy's character. The arguments presented by both parties focused on the nature and purpose of the scheme, as well as relevant provisions in the rules governing the subsidy.

The Court analyzed the provisions of the scheme and emphasized the need to consider the purpose of the subsidy in determining its classification. Referring to precedents such as the Sahney Steel case, the Court highlighted that the purpose test is crucial in distinguishing between 'capital subsidy' and 'revenue subsidy.' It was noted that the scheme aimed to promote the construction of new cinema theaters, indicating that the subsidy should be treated as a 'capital subsidy' and excluded from tax assessment.

Ultimately, the Court found that the Tribunal's decision to treat the subsidy as a 'revenue subsidy' was incorrect and not supported by reasoning. The judgment set aside the Tribunal's decision, allowing the appeals in favor of the Assessee. No costs were awarded in the matter.

In conclusion, the judgment clarifies the importance of considering the nature and purpose of a subsidy in determining its tax treatment, emphasizing the need to apply the purpose test as established in relevant legal precedents.