2023 (11) TMI 438 - AT - Income Tax

Determination of cost of Acquistion of assets - reduction of amount subsidy from cost - Nature of receipt - Entertainment tax collected and retained by assessee as incentive / subsidy given by state Governments on account of development of new Multiplexes in the state - capital or revenue receipt - HELD THAT - The issue is squarely covered by the decision of the coordinate Bench A.Y. 2006-07 2013 (8) TMI 548 - ITAT DELHI as held that Entertainment tax subsidy was not given to meet the cost of any specific asset. Our view is further fortified by the coordinate Bench judgment in the case of Sasisri Extractions Ltd. 2008 (1) TMI 485 - ITAT VISAKHAPATNAM in which case incentive subsidy received for setting up of new unit for manufacture of edible oils was held to be not meant to directly or Indirectly reduce the cost of any asset was linked with the capital , only because the amount of subsidy cost of assets. In view of case of Chemicals Ltd 2008 (9) TMI 14 - SUPREME COURT ;Sasisri Extractions Ltd. 2008 (1) TMI 485 - ITAT VISAKHAPATNAM and the department itself proposed that there was no obligation on assessee to utilize it for any specific purpose will not be hit by Explanation 10 to Sec. 43(1). We are, therefore, of the view that 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). This ground of the assessee is allowed. Nature of expenses - expenses on account of ESOP and ESPS schemes - whether is a contingent liability not allowable as revenue expenses? - HELD THAT - We find that this issue was decided by the coordinate Bench against the assessee in 2013 (8) TMI 548 - ITAT DELHI A.Y.2006-07 but when the matter was agitated before the Hon ble High Court H.C set aside the issue in favour of the assessee in.. 2022 (8) TMI 1234 - DELHI HIGH COURT held that assessee is of ESOPs is not a contingent liability but is an ascertained liability. entitled to claim deduction under the aforesaid provision if the expenditure has been incurred. The expression expenditure' will also include a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which it is issued and the market value of the shares would also be expenditure incurred for the purposes of section 37(1). Disallowance u/s.14A as per rule 8D - AO has disallowed considering all investments including those which do not yield any exempt income - HELD THAT - We find that the assessee has computed the disallowance suo-moto as per rule 8D. On careful consideration we are of the considered view that rule 8D is not applicable for the year under consideration as held in the case of Godrez Boyce Manufacturing Company 2017 (5) TMI 403 - SUPREME COURT Only those investments need to be considered which give exempt income as held in the case of Caraf Builders and Constructions 2020 (1) TMI 135 - SC ORDER , ACB India Ltd. Vs. ACIT 2015 (4) TMI 224 - DELHI HIGH COURT - we direct the AO to delete the impugned disallowance. Disallowance of depreciation under normal provisions permitted to be adjusted in book profit u/s.115JB - HELD THAT - As relying on Apollo Tyres 2002 (5) TMI 5 - SUPREME COURT and Malayala Manorama Co. Ltd 2008 (4) TMI 20 - SUPREME COURT we direct the AO not to consider the impugned disallowance of depreciation for the computation of book profit u/s. 115JB of the Act. Similar would be the fate of disallowances u/s. 14A read with rule 8D though we have deleted the same above.

Issues Involved:
1. Nature of Entertainment Tax (E Tax) subsidy - capital or revenue receipt.
2. Allowability of E Tax as an expense under Section 43B.
3. Reduction of E Tax subsidy from the actual cost of fixed assets for computing depreciation.
4. Disallowance of loss/expenditure under ESOP and ESPS schemes.
5. Disallowance under Section 14A read with Rule 8D.
6. Adjustments for computing book profit under Section 115JB.

Summary:

1. Nature of Entertainment Tax (E Tax) Subsidy:
The primary issue was whether the Entertainment Tax collected and retained by the assessee as an incentive/subsidy given by state governments for the development of new multiplexes is a capital or revenue receipt. The Tribunal found that this issue had been previously decided in favor of the assessee in A.Y. 2006-07. The Tribunal reiterated that the subsidy was capital in nature, based on the purpose of the scheme, which was to promote the cinema industry by constructing new multiplexes. The decision was supported by precedents from the Supreme Court and High Courts, emphasizing that the mode of payment of the subsidy and its linkage to entertainment tax collection did not alter its capital nature.

2. Allowability of E Tax as an Expense under Section 43B:
Given that the E Tax subsidy was deemed a capital receipt, the alternative claim under Section 43B did not survive. The Tribunal did not need to address this issue separately as the primary contention was resolved in favor of the assessee.

3. Reduction of E Tax Subsidy from Actual Cost of Fixed Assets:
The Tribunal held that the E Tax subsidy was not intended to meet the cost of any specific asset and thus, should not reduce the actual cost of assets under Section 43(1) Explanation 10. This conclusion was drawn from the Supreme Court judgment in CIT vs. P.J. Chemicals Ltd. and other relevant case law.

4. Disallowance of Loss/Expenditure under ESOP and ESPS Schemes:
The Tribunal followed the binding decision of the Jurisdictional High Court, which had set aside the previous disallowance, holding that the discount on issue of ESOPs is not a contingent liability but an ascertained liability. The expenditure was deemed allowable under Section 37(1) of the Act.

5. Disallowance under Section 14A read with Rule 8D:
The Tribunal found that the AO had erroneously considered all investments, including those not yielding exempt income, for disallowance under Rule 8D. Citing the Supreme Court and Delhi High Court rulings, the Tribunal directed the AO to delete the disallowance, limiting it only to investments generating exempt income.

6. Adjustments for Computing Book Profit under Section 115JB:
The Tribunal held that the AO lacks jurisdiction to go beyond the net profit shown in the P&L account except as specified in the explanation to Section 115JB. Following the Supreme Court's decisions, the Tribunal directed the AO not to consider the disallowance of depreciation and Section 14A adjustments for computing book profit under Section 115JB.

Conclusion:
The appeal was allowed in favor of the assessee, with all grounds decided accordingly. The Tribunal's decision was pronounced in the open court on 07.11.2023.

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