In a recent judgment Delhi High Court has pointed out the character of the subsidy is to be determined having regard to the purpose for which it is granted and accordingly dismissed the appeals of the Revenue against the order of ITAT holding that entertainment tax subsidy was a capital receipt. However the Court did mention that there had been no exercise by the Asessing Officer to find the expenditure incurred by the assessee in the cost of construction and setting up of the cinema hall to make it functional so as to assess the extent of capital subsidy it can claim over the assessment years in question on account of entertainment tax exemptions.

Question of Law Involved:
“Whether the ITAT has not erred in law and on facts in holding that the entertainment tax subsidy granted to the respondent during the relevant year(s) is a capital receipt?”

Case Details:
ITA 586/2013, ITA 587/2013, ITA 161/2014, ITA 204/2014
Commissioner of Income Tax-I … Appellant
vs
Bougainvillea Multiplex Entertainment Centre Pvt. Ltd … Respondent
Order Pronounced on January 30, 2015
Coram: Justice S. Ravindra Bhat, Justice R. K. Gauba

Facts of the Case:
In the present case(s) the respondent assessee was engaged in the business of running of multiplex cinema halls and shopping malls in the name and style of “Spice World” at Noida, Gautam Budh Nagar, Uttar Pradesh, and was the beneficiary of entertainment exemption scheme of the U.P. State Government.

The assessee had claimed deduction of entertainment tax collected treating it as capital receipts. T he assessee claimed that the object and purpose of the exemption scheme was to extend the incentive to multiplex industry and not for reimbursing the cost of any specific asset used therein and that the grant of subsidy by the U.P. State Government was dependent not only on the commencement of the multiplex but also was linked to its operation since the ultimate aim was to promote cinema industry by establishing permanent and long-term operational multiplex.

The Assessing Officer declined to accept the claim that the entertainment tax subsidy has been received on capital account and instead decided to treat it as receipt of revenue account on the following grounds:

(i) The Assessee had received exemption from payment of entertainment tax from the UP Government which is in the nature of subsidy;
(ii) The subsidy had been given to the assessee after commencement of its business and operationalization of the multiplex;
(iii) The subsidy is in the nature of exemption from payment of entertainment tax, which is generated during the course of running of cinema halls in the multiplex and is not linked to any of the fixed assets of the company; and
(iv) There is no stipulation in the scheme of subsidy regarding the manner in which the subsidy amount is to be utilized by the company which is left free to use it in the manner it deems fit.

However, First the Commissioner Income Tax CIT (Appeals), later Income Tax Appellate Tribunal (ITAT) and finally the High Court all held against the order of the Assessing Officer.

Case Laws Quoted:
Sahney Steel and Press Works Ltd. vs. CIT [228 ITR 253]
Commissioner of Income Tax vs Ponni Sugars and Chemicals Ltd. [(2008) 306 ITR 392 (SC) : (2008) 9 SCC 337]

Important Excerpts from the Judgment:

“The UP Scheme under which the assessee claims exemption to the extent of entertainment tax subsidy, claiming it to be capital receipt, is clearly designed to promote the investors in the cinema industry encouraging establishment of new multiplexes. A subsidy of such nature cannot possibly be granted by the Government directly. Entertainment tax is leviable on the admission tickets to cinema halls only after the facility becomes operational. Since the source of the subsidy is the public at large which is to be attracted as viewers to the cinema halls, the funds to support such an incentive cannot be generated until and unless the cinema halls become functional.”

“The State Government had offered 100% tax exemptions for the first three years reduced to 75% in the remaining two years. Thus, the amount of subsidy earned would depend on the extent of viewership the cinema hall is able to attract. After all, the collections of entertainment tax would correspond to the number of admission tickets sold. Since the maximum amount of subsidy made available is subject to the ceiling equivalent to the amount invested by the assessee in the construction of the multiplex as also the actual cost incurred in arranging the requisite equipment installed therein, it naturally follows that the purpose is to assist the entrepreneur in meeting the expenditure incurred on such accounts. Given the uncertainties of a business of this nature, it is also possible that a multiplex owner may not be able to muster enough viewership to recover all his investments in the five year period.”

“Seen in the above light, we are of the considered view that it was unreasonable on the part of the Assessing Officer to decline the claim of the assessee about the subsidy being capital receipt. Such a subsidy by its very nature, was bound to come in the hands of the assessee after the cinema hall had become functional and definitely not before the commencement of production. Since the purpose was to offset the expenditure incurred in setting up of the project, such receipt (subject, of course, to the cap of amount and period under the scheme) could not have been treated as assistance for the purposes of trade.”

“The facts that the subsidy granted through deemed deposit of entertainment tax collected does not require it to be linked to any particular fixed asset or that is accorded “year after year” do not make any difference. The scheme makes it clear that the grant would stand exhausted the moment entertainment tax has been collected (and retained) by the multiplex owner meeting the entire cost of construction (apparatus, interiors etc. included), even if it were “before completion of five years”.

“As held by the Supreme Court in the case of Sahney Steel (supra), the character of the subsidy is to be determined having regard to the purpose for which it is granted. The “purpose test”, referred to in Ponni Sugars (supra) when applied to the case at hand, leaves no room for doubt that the assistance in the form of entertainment tax exemption is shown to have come in the hands of assessee to enable it to set up the new unit which renders it a receipt on capital account. The periodicity (year to year) of the subsidy, its source (collections from the public at large) and the form (deemed deposit) are irrelevant considerations.”

“The factual matrix in Ponni Sugars (supra) is nearer home to the case at hand which is distinguishable from the case of Sahney Steel (Supra). In Sahney Steel (supra), the incentives were linked to production which is the prime reason why the subsidy of sales tax was held to be operational subsidy or revenue in nature.”

“Indeed, in Ponni Sugars (supra), the fact that the amount received as subsidy was required necessarily to be utilized only for repayment of term loans for setting up of the new unit was one of the important factors taken into account for treating it to be capital receipt. The case at hand is not very different. As observed earlier, the subsidy is meant to liquidate the cost incurred in setting up of the multiplex cinema hall and for making it operational by installing the requisite apparatus. The flow of subsidy stops as soon as the expenditure on such account is met in entirety.”

“For the foregoing reasons, we find that ITAT in the impugned orders has taken a correct view of law on the basis of available facts to conclude that the assessee is entitled, in terms of the UP Scheme, to treat the amounts collected towards entertainment tax as capital. The question of law raised in these appeals is, thus, answered in the negative against the revenue/appellant.”

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