DCIT 9(2), MUMBAI vs. NIKMO FINANCE P. LTD, MUMBAI

सुनवाई क" तार"ख /Date of Hearing : 08-11-2016 घोषणा क" तार"ख /Date of Pronouncement : 21-12-2016 आदेश / O R D E R

PER RAMIT KOCHAR, Accountant Member

ITA 53/Mum/2014 2

2. The grounds of appeal raised by the Revenue in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called “the Tribunal”) read as under:-

“1. Whether on the facts and in the circumstances of the case and in law, the Learned CIT (A) erred in holding Entertainment Duty collected by the assessee as "Capital Receipt" relying on the decision of the Hon'ble Bombay Court in the case of CIT vs. Chaphalkar Brothers without appreciating the fact that the department has not accepted the said decision and has filed an SLP which is pending before the Hon'ble Supreme Court? 2. The appellant prays that the order of the CIT(A} on the above grounds be set aside and that of the Assessing Officer be restored.”

- Nikmo Finance Pvt. Ltd. is engaged in the business of operating multiplex theatres in Mumbai. The Maharashtra State levy tax on payment for admission in multiplexes for viewing the movies, generally referred to as Entertainment Tax". The breakup of Entertainment Tax collected of Rs. 2,06,32,715/- but not paid is enclosed herewith for your ready reference as per Annexure 'A'.

ITA 53/Mum/2014 3 - However, the State Governments, with a view to encourage setting up of multiplexes in the State, grant exemption from payment of entertainment tax.

- The schemes for entertainment tax exemption of State Governments normally provide the following:

- The scheme is to encourage setting up of multiplexes within the state. - The amount eligible for entertainment tax exemption ·is restricted to the amount of capital investment made to set up the multiplex. - The applicant for entertainment tax exemption should provide proof of the amount invested in setting up multiplex by way of a report of valuation report or a certificate by a Chartered Accountant . - The scheme generally allows multiplex operator to retain the tax collected by him. In some schemes it is also provided for exemption by way of payment first and subsequent refund. - The eligibility for exemption from payment of entertainment tax is normally given for a period of 3 to 5 years from the date of commencement of operation of multiplex.

- The company has availed entertainment tax exemption in respect of the multiplex theatre known as “Cinemax” situated at Growell Mall, Kandivli (E), Mumbai…….”

The A.O. rejected the contention of the assessee and observed that the issue is recurring in nature and in the assessee’s own case for assessment years 2008-09 and 2009-10, additions have been made on similar issue and hence the A.O. treated the entertainment tax collected by the assessee as revenue receipt vide his order dated 12th February, 2013. The A.O. also observed that the learned CIT(A) upheld the action of the AO for the assessment year 2008- 09 , while learned CIT(A) allowed the relief to the assessee for the assessment year 2009-10 which decision of learned CIT(A) is challenged by Revenue before the tribunal as the decision of the first appellate authority was not ITA 53/Mum/2014 4 accepted by the department. Thus , the AO held that the entertainment tax collected by the assessee of Rs.2,06,32,715/- be treated as Revenue receipt in the hands of the assessee vide assessment order dated 12.02.2013 passed by the AO u/s 143(3) of the Act.

4. Aggrieved by the assessment order dated 12.02.2013 passed by the A.O. u/s 143(3) of the Act, the assessee filed its first appeal before the ld. CIT(A).

“Against the above finding and reasoning appellant has submitted that its case is covered by the Bombay Entertainment Duty (Amendment Act). Appellant has also submitted eligibility' certificate for exemption from payment of tax granted by the Collector of Mumbai. This issue has been decided by the CIT(A) against the finding of the Assessing officer in A.Y. 2008-09 and 2009-10. The A.R. of the appellant has submitted as under:

"The appellant is actually in receipt of entertainment tax which has been collected along with sale of tickets. The price of a ticket is a composite amount inclusive of entertainment duty. By virtue of incentive granted, the owner is entitled to retain the entertainment duty collected & exempted from payment of the same to the State Government.

The Government of Maharashtra has pronounced a scheme for promotion of new Cinema houses termed as 'Multiplex Theatre Complex'. The object and the statement for pronouncement of this scheme by Bombay Entertainment Duty (Revised ordinance 2001) (Administrative orders for enforcement of Maharashtra Ordinance no: XXIV of 2001) (Copy Enclosed). On perusal of the same, it is found that that to promote the Multiplex Theatre Complexes in the State, the scheme was pronounced. The main reason, as assigned in the aforementioned scheme was that the Multiplex Theatre Complexes are highly capital incentive & also having long gestation period thus need support from ITA 53/Mum/2014 5 the Government. Government wanted construction of new multiplexes within the specified period & to promote such activities, the financial support was promised in the form of allowance of entertainment duty to be retained by the owners.

It was cash assistance from the Government and the mode of payment was decided by the Government, either payment of a direct cash or collection of duty on behalf of Government & retained it for a specified period of time. However, in either way the purpose was to directly assist the developer of Multiplexes by granting incentives. The scheme do not provide for any assistance for reimbursement of day to day revenue expenditure but the scheme is meant to build up & to promote the new multiplex cinema halls which are nothing but for the construction purpose. The purpose for which a grant is given is the area of paramount importance rather the source, which is quite immaterial as held the various Courts. It is for the Government to decide & if the Government found it convenient to adopt a policy of enabling the multiplex entrepreneur to fund the capital cost for setting up and establishing multiplex cinema, it is not justified to view that the incentive being given post establishment, though meant exclusively for meeting the capital cost, is a trading receipt in the hands of appellant.

The purpose for which a grant is given is the area of paramount importance rather the source, which is quite immaterial as held by the various Courts.

The Hon'ble Apex Court in the case of CIT v. Ponni Sugars & Chemicals Ltd - 306 ITR 392 has observed that "one has to apply the purpose test. The point of time at which subsidy is paid is immaterial. If the object of the scheme is to enable the assessee to set up a new unit or to expand the existing unit then, the receipt of the subsidy would be on capital account.

The Hon'ble Bombay High Court in the case of Reliance Industries Ltd has now affirmed the decision of Special Bench (273 ITR 16) and held that subsidy was on ITA 53/Mum/2014 6 capital account wherein the decision of Ponni Sugar & Chemicals (supra) has also been considered.

The decision in the case of Fakirchand has held that "Subsidy representing reimbursement of entertainment tax is taxable as revenue receipt." This decision is taken by the Hon’ble Court by relying on the decision in the case of CIT vs. Ajanta Talkies (2004) 190 CTR (MP) 280: (2005) 143 TAXMAN 40 and CIT vs. Rajaram (2001) 170 CTR (SC) 427: (2001) 251 ITR 427 (SC). Decision in the case of Ajanta Talkies was taken relying on the decision in the case of CIT vs. Rajaram (2001) 170 CR (SC) 427: (2001) 251 ITR 427 (SC) in Ajanta Talkies, it is held that entertainment tax subsidy received by assessee was revenue receipt.

In the case of Rajaram it was held that "Power subsidy received by assessee which went towards reduction of the electricity bills was revenue receipt liable to tax”. Reliance was placed on the decision in the case of Sahney Steel & Press Works Ltd. v, CIT (1997) 142 CTR (SC) 261: (1997) 228JTR 253 (SC).

In the case of Sahney Steel & Press Works Ltd. & Others (supra), a notification was issued by the Andhra Pradesh Government that certain facilities and incentives were to be given to all the new industrial undertakings, which commenced production on or after 1st January, 1969 with investment capital (excluding working capital) not exceeding Rs.5 crores. The incentives were to be allowed for a period of five years from the date of commencement of production. Concession was also available for subsequent expansion of 50 percent and above of the existing capacity provided in each case, the expansion was located in a city or town or panchayat area other than that in which existing unit was located. The salient features of the scheme formulated by the Andhra Pradesh Govt. were that the incentives were not available unless and until the production had commenced; the availability of incentive would be limited to a period of five years from the date of commencement of production; the incentives were to be given by way of refund of sales tax and also by way of subsidy on power consumed for production to the extent stated in the notification;. the ITA 53/Mum/2014 7 exemptions were given from payment of water drawn from Govt. sources. The assessee-company, S, set up factory at P which went into production in the year 1973. 'The assessee maintained its accounts according to the calendar year. It was, therefore, entitled to the benefits of the said Government order in the calendar year 1973, which meant the assessment year 1974-75. In the said accounting year, the assessee obtained refund totaling Rs. 14,665.70 being refund of sales tax on purchase of machines, purchase of raw materials and sale of finished goods. The Income-tax Officer, while making the assessment for the year 1974-75, included the said amount in the assessable income of the assessee which was confirmed on appeal by the Commissioner of Income Tax (Appeals). On further appeal, however, the Tribunal upheld the assessee's contention and held that the amount of Rs.14,665.70 refunded to the assessee in terms of the said Government order did not' represent refund of sales tax' but was a development subsidy in the nature of a capital receipt. The High Court held that the amount was assessable. On appeal to the Supreme Court by the assessee; “Held, dismissing the appeal, that, under the notification in question the payments were made to assist the new industries at the commencement of business to carry on their business. The payments were nothing but supplementary trade receipts. It was true that the assessee could not use this money for distribution as dividend to its share-holders. But the assessee was free to use the money in its business entirely as it liked and was not obliged to spend the money for a particular purpose. The subsidies had not been granted for production of or bringing into existence any new asset. The subsidies were granted year after year, only after the setting up of the new industry and commencement of production. Such a subsidy could only be treated as assistance given for the purpose of arriving on of the business of the assessee. The subsidies were of revenue nature and would to be taxed accordingly.”

The principle laid down in the case of Sahney Steel and Press Works (supra) is that if the purpose of subsidy is to help the assessee to set up its business or complete a project, the moneys must be treated as having been received for capital purposes. But if moneys are given to the assessee for assessing him in carrying out the business ITA 53/Mum/2014 8 operations and the moneys are given only after and conditional upon commencement of production, such subsidies must be treated as assistance for the purpose of the trade.

The Hon'ble Apex Court in the case of CIT v. Ponni Sugars & Chemicals Ltd (3061T.R 392) has observed that “one has to apply the purpose test. The point of time at which subsidy is paid is immaterial. If the object of the scheme is to enable the assessee to set up a new unit or to expand the existing unit then, the receipt of the subsidy would be on capital account. The Hon'ble Bombay High Court in the case of Reliance Industries Ltd has now affirmed the decision of Special Bench (273 ITR 16) and held that subsidy was on capital account wherein the decision of Ponni Sugar & Chemicals (supra) has also been considered.

Thus, the decision in the case of Ponni Sugar which is later decision of the· Hon’ble Supreme Court has held that the purposive test needs to be followed to decide whether any receipt is revenue receipt or capital receipt. This test was not specifically spelt out in the case of Sahney Steel. Decisions relied upon by the Learned AO are the decisions given before the decision of Ponni Sugar: Hence, the decisions relied upon by the Learned A.O. needs to be reviewed in light of the decisions given in the case of Ponni Sugar.: As against this the decisions referred by the appellant in (vi) below have considered the decisions on the case of Ponni Sugar. The observations made by the Hon'ble Supreme Court of India in a later decision reported as Mepco Industries Ltd. vs. CIT & Anr. (2009) 227 CTR (SC) 313: (2009) 31 DTR (SC) 305: 2009 (7)SCC 564,. where the above dictum was reiterated as follows:

H ... Sahney Steel. & Press Works Ltd. Etc. (supra) was a case which dealt with production subsidy, Ponni Sugars & Chemicals Ltd. (supra) dealt with subsidy linked to loan repayment whereas the present case deals with a subsidy for setting up an industry in the backward area. Therefore, in each case, one has to examine the nature of the subsidy. The judgment of this Court in Sahney Steel & Press Works Ltd. Etc. (supra) was on its own facts; so also, ITA 53/Mum/2014 9 the judgment of this. Court in Ponni Sugars & Chemicals Ltd. (supra). The nature of the subsidies in each of the three cases is separate and distinct. There is no straightjacket principle of distinguishing a capital receipt from a revenue receipt.

It depends upon the circumstances of each case. As stated above, in Sahney Steel & Press Works Ltd. Etc. (supra), this Court has observed that the production incentive scheme is different from the scheme giving subsidy for setting up industries in backward areas.”

The observations made by the Hon'ble Supreme Court of India in a later decision reported as Mepco Industries Ltd. Vs. CIT & Anr. (2009) 227 CTR (SC) 313: (2003) 31 STR (SC) 305 where the above dictum was reiterated as follows:

“…….Sahney Steel & Press Works Ltd. Etc. (supra) was a case which dealt with production subsidy , Ponni Sugars & Chemicals Ltd. (supra) dealt with subsidy linked to loan repayment whereas the present case deals with a subsidy for setting up an industry in the backward area. Therefore, in each case, one has to examine the nature of the subsidy. The judgment of this Court in Sahney Steel & Press Works Ltd. Etc. (supra) was on its own facts; so also, the judgment of this Court in Ponni Sugars & Chemicals Ltd. (supra). The nature of the subsidies in each of the three cases is separate and distinct. There is no straightjacket principle of distinguishing a capital receipt from a revenue receipt.

It depends upon the circumstances of each case. As stated above , in Sahney Steel & Press Works Ltd. Etc. (supra) , this Court has observed that the production incentive scheme is different from the scheme giving subsidy for setting up industries in backward areas.

In the case of Shree Balaji Alloys & Ors. V. Commissioner of Income Tax & Ors (2011) 51 DTR(J&K) 217 (after referring to all the above stated three Supreme Court decisions) and after applying the purpose of the scheme has held that Excise refund and interest subsidy received by the assesses in pursuance to the incentives ITA 53/Mum/2014 10 announced and sanctioned on the subject, pertaining to the Industrial Policy for the State of Jammu & Kashmir, is capital receipt.

Recently, The Hon’ble high Court in the similar matter in the case of CIT v. Chaphalkar Brothers, ITXA No. 1036 of 2010 (Order dated 08/06/2011) (Copy Enclosed) has considered the issue of subsidy of entertainment tax by government of Maharashtra & held that “ The fact that the subsidy was not meant for repaying the loan taken for construction of multiplex cannot be a ground to hold that subsidy receipt was on revenue account. Because, if the object of the scheme was to promote cinema houses by constructing multiplex theatres than irrespective of the fact that the multiplexes have been constructed out of own funds or borrowed funds, the receipt of subsidy would be on capital account.

In the case of Abhishek Industries Sales-ta subsidy received by the assessee on recurring basis after the unit commenced production is an operational subsidy provided by the State and not in the nature of financial assistance fo setting up the industry and therefore such subsidy constituted revenue receipt. In the case of Commissioner of Income tax and ors V. M/s Udupi Builders Pvt. Ltd.(2010) 319 ITR 440 it is held that the subsidy has been announced by the State of Karnataka to encourage the hotel industry and the State is in the habit of releasing subsidy amount depending upon the budgetary allocation in each year. The Court has come across in several cases that the State has released subsidy amount even after ten years of the commencement of the project. Therefore, the contention of the revenue was not accepted. The receipt was treated as a capital receipt.

Jurisdictional Mumbai ITAT has in the case of Associated Cement Co Ltd V Addl. CIT (2011-TIOL-212- ITAT-Mum) held that transport subsidy given by the State Govt. is capital receipt.

In the case of Kalpana Palace v. CIT (275 ITR 365) H’ble Alahabad High Court held that even though grant-in- aid was given after the business of cinema halls was set up ITA 53/Mum/2014 11 in backward area, it was still relatable to the construction of cinema halls and was a capital receipt.

The learned Commissioner of Income Tax, Appeal in the appellant’s own case for A Y 2009-10 has allowed the claim of capital receipt.”

The ld. CIT(A) allowed the appeal of the assessee vide appellate orders dated 09-10-2013 , by holding as under:-

“I have considered the finding of the Assessing Officer, rival submission of the appellant and background of the case, carefully. I find that entertainment duty collected by the appellant has been regarded as subsidy by the Hon'ble Jurisdictional High Court in the case of CIT -1, Kolhapur vs. M/s. Chaphalkar Brothers' Pune in of 2010. Further, in the appellant's own case in AY. 2009-10 my predecessor Ld. CIT (A) has decided the issue in the favour of the Appellant vide CIT(A)-20/DCIT9(2)/IT-334/2011-12 dated 12.03.2012 as under:-

3.3. I have perused the assessment order and written submissions of the appellant. The Hon’ble Bombay High Court in CIT vs Chaphalkar Brothers (ITA No. 1036 of 2010 dated 08.06.202011) considered the issue of subsidy of entertainment. tax by Government of Maharashtra. It was held that :

(i) a subsidy is a capital receipt when it is for the promotion of a new industry; while it is a revenue receipt liable to tax if it is granted to supplement the profits of an industry,

(ii) the subsidy granted by the State of Maharashtra, is for the promotion of multiplexes,

(iii) the subsidy was granted in the form of a concession on entertainment duty,

(iv) that the object behind the subsidy was to promote construction of new cinema houses, ITA 53/Mum/2014 12

(v) the Sate Government had decided to grant the subsidy in view of the fact that setting up new multiplexes is highly capital intensive, with a long gestation period.

3.3.1. The Hon'ble Bombay High Court relied on Ponni Sugars (306 ITR 392) where the Hon’ble Supreme Court had explained its previous judgment in Sahney Steel and Press Works Ltd. C. CIT (228 ITR 253) as under:-

The importance of the Judgment of this court in Sahney Steel case lies in the fact that it has discussed and analyzed the entire case law and it has laid down the basic test to be applies in judging the character of a subsidy. That test is that the character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. In other words, in such cases one has to apply the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. The form of subsidy is immaterial. The main eligibility condition in the scheme with which we are concerned in this case is that the incentive must be utilized for repayment of loans taken by the assessee to set up new units or for substantial expansion of existing units. On this aspect there is no dispute. If the object of the subsidy scheme was to enable the assessee to run the business more profitably then the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account.

3.3.2. The Hon'ble Bombay High Court held that the ratio of Panni Sugars was that only the object of the subsidy scheme must be considered and on the facts of the case, the subsidy was introduced with the object of promoting the construction of multiplexes ; and the point of time in which it could be availed – the form in which it was granted – was not relevant. The Hon’ble Bombay High Court held:-

The fact that the subsidy was not meant for repaying the loan taken for construction of multiplexes cannot be a ground to hold that subsidy receipt was on revenue account, because, if the object of the scheme was to promote cinema houses by constructing multiplex theatres, then irrespective of the fact that the multiplexes have been constructed out of own funds or borrowed funds, the receipt of subsidy would be on capital account.

ITA 53/Mum/2014 13 3.3.3. Following the decision of Hon’ble Bombay High Court as discussed above, this ground of appeal is allowed.”

Hence, the appeal of the assessee was allowed by the ld. CIT(A) by following the decision of Hon’ble Bombay High Court in the case of CIT -1, Kolhapur v. M/s. Chaphalkar Brothers' Pune in of 2010 , (2013)351 ITR 309(Bom. HC) .

“The present appeal has been filed by the assessee against the order of the Commissioner of Income Tax (Appeals) [(hereinafter referred to as CIT(A)] dated 29.07.11. The assessee has taken the following grounds of appeal:

“1. The Learned Commissioner of Income Tax, Appeal – 20 erred in law & on facts in not treating the entertainment duty collected of Rs.2,07,92,130/- as revenue receipt.

2. Appellant prays that the entertainment duty of Rs.2,07,92,130/- collected during the year under consideration should be treated as capital subsidy not liable to be taxed as revenue receipt.”

2. The only question for adjudication in this appeal is as to whether the entertainment duty subsidy given to the assessee by the state government for construction of multiplexes is in the nature of revenue receipt or capital receipt.

3. At the outset, the ld. A.R. of the assessee has stated that the issue is squarely covered in favour of the assessee with the decision of the Hon’ble Bombay High Court in the case of ‘Chaphalkar Brothers’ (2013) 351 ITR 309 (Bom.). The Hon’ble Bombay High Court while adjudicating on the issue has observed as under:

“Thus, the purposes for which the subsidy was given is the relevant factor and if the object of subsidy was to enable the assessee to set up a new unit then the receipt of subsidy would be on capital account.

In the present case, as noted by the Income-tax Appellate Tribunal, the object of granting entertainment duty subsidy by the State Government was as follows :

ITA 53/Mum/2014 15 "1. As a result of the onslaught of cable television and advertisement in the field of information technology, the average occupancy in cinema theatre has fallen considerably and hardly any new theatres have been started in the recent past. Public at large these days prefer to see movies at home. Keeping in view this scenario, a concept of complete family entertainment centre, more popularly known as 'multiplex theatre complex' has emerged. These multiplex theatre complexes offer various entertainment facilities for the entire family under single roof. However, these complexes are highly capital intensive, their gestation period is also quite longer, and, therefore, need Government support and incentive in entertainment duty.

Since the object of subsidy was to promote construction of multiplex theatre complexes, in our opinion, receipt of subsidy would be on capital account. The fact that the subsidy was not meant for repaying the loan taken for construction of multiplexes cannot be a ground to hold that subsidy receipt was on revenue account, because, if the object of the scheme was to promote cinema houses by constructing multiplex theatres, then irrespective of the fact that the multiplexes have been constructed out of own funds or borrowed funds, the receipt of subsidy would be on capital account. In the light of the aforesaid objects of the scheme framed by the State Government, the decision of the Income-tax Appellate Tribunal that the amount of subsidy received by the assessee is on capital account cannot be faulted. Accordingly, both the appeals are dismissed with no order as to costs.”

ITA 53/Mum/2014 16 The assessee has collected entertainment taxes along with the sale of tickets and as per the incentive granted by the State Government, the assessee is exempted from the payment of entertainment taxes so collected to the State to the extent of capital investments made in multiplexes as stipulated in the scheme framed by the Government of Maharashtra. The Government of Maharashtra pronounced this scheme for promotion of new cinema houses termed as multiplexes and the object of this scheme by Bombay Entertainment Duty (Revised ordinance 2001) (Administrative orders for enforcement of Maharashtra Ordinance No. XXIV of 2001) to promote the multiplexes in the State. We are in agreement with the decision of Hon’ble Bombay High Court in the case of Chaphalkar Brothers (supra) as well as the decision of the Mumbai Bench of this Tribunal in assessee’s own case in for assessment year 2008-09 and in our considered view the entertainment tax collected by the assessee is to be treated as capital receipt. However, we have observed that this exemption from the deposit of entertainment tax so collected with the State is restricted to the capital investment made by the assessee in Multiplexes as provided by the scheme pronounced by the State Government. As such, for the limited purpose, we are setting aside and restoring the issue back to the A.O. with a direction to determine the quantum of entertainment tax duty so collected and which is not been deposited with the State to be treated as capital receipt being restricted to the capital investment made by the assessee in Multiplex keeping in view receipts of entertainment tax in the preceding years vis-à-vis investment made in Multiplex , in accordance with the terms and condition of scheme of the said incentive being offered by the State. The assessee is directed to appear before the AO and present entire data of the preceding years for claim of exemption of entertainment tax to be deposited with the State in accordance with terms and conditions of the scheme for grant of incentive to be treated as capital receipt being restricted to capital investment made in multiplex. The AO is directed to grant sufficient and reasonable ITA 53/Mum/2014 17 opportunity of being heard to the assessee in accordance with the principles of natural justice in accordance with law. We order accordingly.