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Income Tax Appellate Tribunal, DELHI BENCH “A”, NEW DELHI
Before: SHRI S.V. MEHROTRA & SMT. DIVA SINGH
O R D E R PER S.V. MEHROTRA, A.M :
This is an appeal filed by the Revenue against the order dated 25.02.2014 passed by the Commissioner of Income Tax (Appeals)-VI, New Delhi, u/s 143(3) of the Income Tax Act, 1961 (in short “the Act”) relating to assessment year 2010-11.
Brief facts of the case are that the assessee company had electronically filed its return of income declaring loss of Rs.(-)6,38,22,681/- for the assessment year under consideration. In the relevant assessment year, the assessee company was engaged in the business of running and management of a Multiplex comprising 8-Screens Cinema and Shopping Mall in the name & style as “Spice World” at I-2, Sector-25A, Noida, Gautambudh Nagar, UP. The assessee company earned revenue from sale of cinema tickets, sale of space or time for advertisements, sale of food and beverages in the cinema and rental income from shops in the Mall.
During the course of assessment proceedings, the Assessing Officer noticed that the assessee company in its computation of income claimed deduction of entertainment tax of Rs.4,38,79,626/- from the total income.
Further, he noticed that in clause 11 under the head contingent liability it had been mentioned as under :-
“The Company collects entertainment tax on sale of tickets of cinema operation. The UP State Govt. has, with a view to encourage setting up of multiplexes in the state, granted an exemption to the Company, from payment of entertainment tax. As per the underlying scheme, the Company is permitted to collect entertainment tax from its customers and retain the same for a period of 5 years and retain 100% of the same in the initial three years and 75% of the same in the 4th and 5th year, subject to the overall ceiling of the cost of the multiplex. The entertainment tax so collected by the company is accounted for as income in the P&L account in the year of receipt. The exemption is available to the company in respect of sale of tickets of cinema operation other than "4-D" theatres. As advised by a tax expert, the Company has considered the amount of entertainment tax so collected on sale of ticket of the cinema operations and retained by it as capital receipt for income tax purposes and hence, not taxable. Accordingly, the tax provision for the current period is calculated based on the profits of business as reduced by the amount of entertainment tax collected by the Company during the period.”
Accordingly, he show-caused the assessee as to why the entertainment tax should not be treated as revenue receipt. The assessee’s detailed reply has been reproduced in the assessment order from pages 2 to 8. After considering the assessee’s reply, the Assessing Officer concluded that the subsidy received by the assessee company was on revenue account and not capital account for the following reasons :-
(a) The subsidy had been given to the company after commencement of its business and operationalization of the Multiplex. (b) The subsidy was in the nature of exemptions from payment of entertainment tax which was generated during the course running of Cinema Halls in the Multiplex. (c) The subsidy was not linked to any of the fixed assets of the company. (d) There was no stipulation in the schemes of subsidy regarding the manner in which the subsidy amount was to be utilized by the company. The company was free to use it in the manner it deemed fit. (e) The money was given to the assessee for assisting it in carrying out the business operation.
He, accordingly, made an addition of Rs.4,38,79,626/-. Ld. CIT(A) deleted the addition following the decision of his predecessors for assessment years 2006-07 to 2009-10, which was upheld by the Tribunal. Being aggrieved, the Department is in appeal before the Tribunal against the deletion of the addition of Rs.4,38,79,626/- made on account of disallowance of entertainment subsidy.
At the time of hearing, ld. counsel for the assessee submitted that the decision of Tribunal for assessment years 2006-07 to 2009-10 relied on by ld. CIT(A) has been upheld by the Hon’ble Delhi High Court in assessee’s own case in of 2013 (A.Y. 2006-07), ITA No.586 of 2013 (A.Y. 2007- 08), ITA No.204 of 2014 (A.Y. 2008-09) and ITA No.161 of 2014 (A.Y. 2009- 10). In the aforementioned judgement dated 30.01.2015, the Hon’ble Delhi High Court held as under :-
“32. 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.
The appeals of the Revenue challenging the view taken by CIT and ITAT are, thus, liable to be dismissed. This court, however, is of the view that the matter cannot end only with such result of the process. We notice that the Assessing Officer having declined to grant the benefit under the scheme to the assessee (claiming the amounts collected as entertainment tax to be capital receipts), the first and the second appellate court concluded their respective orders (in appeals brought by the assessee and revenue respectively) by holding that the claim of the assessee was correct. It appears that there has been no exercise undertaken to find on facts as to 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.
Thus, while dismissing the appeals of the Revenue, we direct the Assessing Officer to do the needful in the above regard for finalizing the assessments for the periods in question.”
Respectfully following the decision of Hon’ble Delhi High Court, we uphold the claim of assessee regarding receipt of subsidy being capital subsidy.
However, the same will be subject to the term of scheme and could not exceed 100% of cost of construction over the years. The Assessing Officer is directed to carry out the same exercise as has been directed by Hon’ble Delhi High Court for finding of facts as to the expenditure incurred by assessee in the cost of construction and setting off of the Cinema Hall to make it functional so as to assess the extent of capital subsidy, it could claim over the assessment years in question on account of entertainment tax exemptions. In the result, this ground is allowed for statistical purposes.
The next ground appeal is that ld. CIT(A) erred in treating income of Rs.5,32,367/- derived from renting of space for display purpose as income from house property when it had been rightly treated as income from other sources by the Assessing Officer.
The facts apropos this issue are that during the year under consideration, the assessee company had considered an amount of Rs.5,32,367/- on account of renting of space for display purposes as income from house property. The Assessing Officer was of the opinion that the renting of space for display purpose was not covered within the purview of house property. After considering the assessee’s submissions, the Assessing Officer treated the rent of space for hoardings or signboards and renting of roof as income from other sources and, accordingly, made addition of Rs.1,59,710/- being 30% of the rental income returned by assessee as income from house property. Ld. CIT(A), following the decision of ITAT, Mumbai Benches in the case of (i) Mahalaxmi Sheela Premises CHS Ltd. vs. ITO in to 786/Mum/2010, order dated 30.08.2011 and (ii) M/s Kamlesh Real Estates (P) Ltd. vs. ACIT in ITA No.1451/Mum/2010, order dated 20.04.2011 allowed the assessee’s claim. Ld. DR relied on the order of Assessing Officer.
Ld. counsel for the assessee submitted that this issue is covered in favour of assessee by the decision of Hon’ble Delhi High Court in the case of Niagara Hotels & Builders (P.) Ltd. vs. CIT, (2015) 60 taxmann.com 83 (Delhi).
We have considered the submissions of both the parties and have perused the record of the case. As per section 22 of the Act, if the income is derived from the ownership of any buildings or lands appurtenant thereto then the income is assessable under the head ‘income from house property’. The term “building” cannot be assigned a restricted meaning because it is of wide connotation. We find that Hon’ble Delhi High Court in the case of Niagara Hotels & Builders (P.) Ltd. (supra) has held in para 21 as under :-
“21. In the case at hand, the building the top terrace of which is the subject of focal attention here has been developed for its various portions to be sold or let out with no possibility of the terrace floor being subjected to such utilization. The assessee continues to be the owner of the terrace floor. It has conceivably no other purpose to be served by such property as is held on the terrace floor, except the exploitation of the licensed space for gaining the income that cannot be treated as either income from business or income from other sources. The income was thus rightly returned as income from house property.”
The facts in the case at hand are identical and, therefore, respectfully following the decision of Hon’ble Delhi High Court in the case of Niagara Hotels & Builders (P.) Ltd. (surpa), this ground is dismissed.
Resultantly, the appeal of the Department is partly allowed for statistical purposes. Order pronounced in the open court on this 17th day of February, 2017.