Income Tax Appellate Tribunal - Delhi
Pvr Ltd, New Delhi vs Assessee on 29 March, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "F" NEW DELHI
BEFORE SHRI R.P. TOLANI AND SHRI A.N. PAHUJA
ITA No. 1897/Del/2010
Asstt. Year: 2006-07
M/s PVR Ltd., Vs. Addl. CIT, Range-14,
61, Basant Lok, Vasant Vihar, New Delhi.
New Delhi-110057.
PAN/GIR No. AAACP4526D
(Appellant) ( Respondent )
Assessee by : Sh. Anil Chopra FCA &
Sh. V.K. Garg CA
Revenue by : Sh. Sudesh Garg CIT(DR)
ORDER
PER R.P. TOLANI, J.M :
This is assessee's appeal against CIT(A)'s order dated 29-03-2010 relating to A.Y. 2006-07. Following grounds are raised:
"1. That the Ld. Commissioner of Income Tax (Appeals) [ld. CIT(A) ] has erred on facts and in law in making an addition of Rs. 2,25,41,765/- in respect of Entertainment Tax (E Tax) excluded from sales, pursuant to grant in aid allowed by the UP State Government as capital subsidy to promote the setting up of multiplex in specified area of the state. The said amount of E Tax, though accepted as capital receipt by the Assessing Officer (Ld. AO), has been treated as revenue receipt by the ld. CIT(A).
2. That the treatment of the said amount of E Tax as revenue receipt as against capital receipt claimed by the assessee and accepted by the Ld. AO is based on erroneous views and/ or non-appreciation of the facts and law involved including the law as laid down by the apex court in the case of CIT V. Ponni Sugar and Chemicals Ltd. 306 ITR 392.
2 ITA no. 1897/Del/2010 M/s PVR Ltd.
3. That the treatment of the said amount of E Tax as revenue receipt as against capital receipt claimed by the assessee and accepted by the Ld. AO is inconsistent with the view of the Hon'ble High Court of Allahabad and Karnataka where the similar grant in aid of E Tax has been held as capital receipt.
4. That the ld. CIT(A) has erred on facts and in law in not considering the assessee's alternative claim that in case the said amount of E Tax is treated as income, the same is an allowable expense u/s 43B as deemed payment of tax. As per clear settled law, any receipt of tax if taxed as trading receipt then any payment thereof is also allowable as an expense."
5. That the ld. CIT(A) has erred in treating the said amount 2,25,41,765/- in respect of E Tax grant in aid as a revenue receipt without giving any opportunity to the appellant on the issue of the E Tax being held to relate to the mall developer. Otherwise too, the said addition is without properly considering various details, information, explanations, documents and case law filed before him which clearly support the assessee's view. As such too the said addition deserves to be deleted in toto.
6. That without prejudice to the grounds herein above, the ld. CIT(A) has erred on facts and in law in not allowing depreciation of Rs. 23,04,466/- on fixed assets. The amount of E Tax capital subsidy of Rs. 2,25,41,765/- is not to be reduced from actual cost of the fixed assets, as the same is not covered under the provisions of Expla. 10 to sec. 43(1). Without prejudice to other grounds if E Tax grant in aid is a revenue receipt, it is in any case not to be reduced from the actual cost of fixed assets for computing admissible depreciation.
7. The ld. CIT(A) has erred on facts and in law in confirming the disallowance of loss/ expenditure debited to P&L a/c of Rs. 70,08,183/- in respect of ESOP and ESPS schemes. The disallowance has been made by erroneously treating said expenditure/ loss as notional, as a capital expense and as a contingent liability.
3 ITA no. 1897/Del/2010 M/s PVR Ltd.
8. That the said disallowance of Rs. 70,08,183/- on account of ESOP and ESPS schemes as confirmed by the Ld. CIT(A) is based on erroneous facts and erroneous views and/ or non- appreciation of the facts and law involved. The said claim is neither notional, is a revenue expense and does not constitute a contingent liability. The claim has been incurred and debited to P&L a/c as required under binding SEBI guidelines and is admissible in law and there is no provision under the Act against allowance of the same.
9. That the ld. CIT(A) has erred on facts and in law in confirming the disallowance of Rs. 34,53,218/- out of interest and indirect expenses u/s 14A in relation to income not forming part of total income. Hardly any expense on the facts involved was incurred for earning of the non-taxable income i.e. dividend on investments. There is no specific identification of any such expenditure for earning of such non-taxable income by the Ld. AO. As such and otherwise too the expenditure assumed or deemed to be incurred on non-taxable income cannot be disallowed.
10. Without prejudice to assessee's ground no. 9 above, the ld. CIT(A) has erred on facts and in law in not deleting the disallowance of Rs. 26,49,794/- in respect of interest said to be indirectly attributable to non-taxable income made by the Ld. AO by applying Rule 8D. The entire investments in relation to tax free income being out of non-interest bearing funds, no such disallowance of interest is prescribed on merits and on the facts and law involved. Moreover, both the Ld. AO and the Ld. CIT(A) have not rebutted the additional evidence filed by the assessee which show that the investments in relation to tax free income have no nexus with any interest bearing loans. As such the disallowance of interest of Rs. 26,49,794/- under section 14A read with Rule 8D is unlawful and deserves to be deleted.
11. That the grounds of appeal as herein are without prejudice to each other.
4 ITA no. 1897/Del/2010 M/s PVR Ltd.
12. That the assessee respectfully craves leave to add, amend, alter and/ or forego any ground(s) at or before the time of hearing."
2. Ground nos. 1 to 5 pertain to one issue about treatment of entertainment tax subsidy being capital/ revenue in nature; out of which ground nos. 1 to 3 raise main issue; ground no. 4 is alternate claim u/s 43B; and ground no. 5 raises the issue of not providing adequate opportunity to file the document in the enhancement proceedings by the ld. CIT(Appeals) u/s 251(2) of the I.T. Act. The assessee has also filed an application for admission of additional evidence in this behalf. 2.1. Ground nos. 6 relates to the issue of reducing the cost of assets under Explanation 10 to sec. 43(1) by the amount of E tax subsidy, thus resulting into reduction of depreciation claim of the assessee. 2.2. Ground nos. 7 & 8 pertain to ESOP and ESPS schemes; 2.3. Ground nos. 9 & 10 pertain to disallowance u/s 14A. 2.4. Ground nos. 11 & 12 are general in nature and require no adjudication.
3. Brief facts about ground nos. 1 to 3 are: Assessee is a listed public company, engaged in the business of exhibition of films in multiplexes, during the course of which it develops, operates and manages such multiplexes. Assessee is the owner of reputed brand named as PVR. It had opened a PVR EDM-3 screen multiplex at plot no. 1, Kaushambi,Dist Gazhiabad in UP. The structure of the multiplex was constructed by a concern CCPL Ltd., which started the process of license and eligibility for the U P State Govt.'s multiplex subsidy scheme by applying to District Magistrate Gazhiabad in prescribed form. CCPL in the meanwhile after complying with many formalities including permissions from Fire, 5 ITA no. 1897/Del/2010 M/s PVR Ltd.
Electrical, GDA, obtained the necessary licenses for operating cinema halls, vide DM's order Dtd 31-3-2005. The application for Entertainment Tax exemption was duly processed by authorities and vide letter dtd. 16.8.2005, DM Ghaziabad by virtue of powers vested in him by the said scheme granted the eligibility of benefits of exemption of Entertainment Tax to CCPL.
3.1. CCPL management realized that presently they did not have the expertise and wherewithal to operate a highly technical business of multiplexes and approached the assessee which was an established leading brand in multiplexes. Both the parties entered in to a revenue sharing agreement executed on 1-9-2005 effected from 1-4-2005 by which the assessee became operator/proprietor of multiplex business on a lease for 20 years. The agreement obliged the assessee to convert the theatre space into a full fledged, operational multiplex equipped with the latest technology. To make it functional with all the furnishings, equipments, technology and to take all other necessary steps in this behalf. The multiplex license, multiplex operator license, ET subsidy benefits were transferred in the name of the assessee by U.P. Govt. authorities after due processing. After due transfer of license and ET eligibility in the name of assessee, as per the U P State Govt. scheme, it received the necessary license and eligibility for exemption from payment of ET collected during operation of the multiplex. 3.2. Assessee filed original return declaring income of Rs. 7,10,95,711/- including the E. Tax collected by it. According to assessee, it realized this mistake during the course of assessment and filed a letter dated 4-3-2008 requesting to revise the original computation on the ground that an amount of Rs. 2,25,41.765/-, received by it as entertainment tax ("E tax") collected and credited to P&L A/c was inadvertently not reduced from the profits 6 ITA no. 1897/Del/2010 M/s PVR Ltd.
while computing the income for A.Y. 2006-07; the subsidy being capital in nature was reduced from the returned taxable income. In support of its revised claim, assessee submitted as under:
"i) That the Uttar Pradesh (UP) State Government vide said Notification no. 1161 dated 13.7.99 with a view to encourage setting up of multiplexes in the State, granted capital cost subsidy by way of exempting payment of entertainment tax to the extent of capital cost of the multiplex within a specified period.
ii) That as per the said Notification and the scheme of exemptions from payment of entertainment tax, the amount of entertainment tax collected and retained by the assessee is deemed to have been paid to the credit of concerned department of the U.P. Government
iii) That the aforesaid amount of entertainment tax collected and retained by the assessee in respect of the said capital subsidy has been credited to the profit and loss account in the books of accounts of the assessee.
iii) That the aforesaid amount of entertainment tax is in the nature of capital receipt, being subsidy to encourage the setting up of multiplexes in the state. Accordingly, the same is non capital receipt and is to be reduced from the total taxable income of the assessee.
iv) Without prejudice to assessee's claim and in the alternative, it was claimed that if the said receipt of entertainment tax is treated as revenue receipt, the same being a tax is allowable as expense under section 43B of the Income tax Act, as the same is deemed to have been paid by the assessee to the credit of the U.P. Government as per the scheme of the said notification.
v) That the assessee has inadvertently, shown the said amount as income as returned. The error is hereby rectified.
7 ITA no. 1897/Del/2010 M/s PVR Ltd.
Material facts have been disclosed. The issue involved is a question of law in favour of the assessee. It is settled law that entries in books of account are not decisive of the taxability of receipts, which is to be decided in accordance with correct view in law.
Otherwise also the assessee was to be assessed on its correct total taxable income computed under the provisions of the tax and not in accordance with entries in account or a return as filed."
3.3. After considering assessee's explanation, AO held that the grant in terms of waiver of entertainment tax was capital subsidy and an incentive for policy of setting up and operation of permanent cinema halls/ multiplexes during a specific period. Following Hon'ble Supreme Court judgment in the case of CIT Vs. Ponni Sugars & Chemicals Ltd. (2008) 306 ITR 392, assessee's claim of subsidy being capital in nature was accordingly allowed by AO.
3.4. AO further held that entertainment tax subsidy granted to assessee meant to reduce the actual cost of assets of the multiplex. Therefore, while working out the depreciation, the amount of subsidy was reduced from the actual cost of such assets u/s 43(1) read with Explanation 10. AO further made other disallowances in respect of claim of ESOP & ESPS which were not paid. Expenses incurred for tax free income u/s 14A were also disallowed. These additions/ disallowances were challenged in first appeal before ld. CIT(Appeals).
3.5. During the course of hearing, ld. CIT(Appeals) observed that assessee had offered the E. Tax subsidy in the original return of income treating it as revenue receipt; thereafter by revising the computation, the assessee had 8 ITA no. 1897/Del/2010 M/s PVR Ltd.
claimed it to be the capital receipt. According to ld. CIT(Appeals), AO's action was not correct and multiplex subsidy granted was revenue in nature. Accordingly, a notice of enhancement u/s 251(2) of the I.T. Act was served on the assessee. Assessee filed written submissions, supported with evidence, opposing the enhancement. Ld. CIT(Appeals), however, held that E. Tax the subsidy in question was revenue subsidy by following main observations:
"(i) It is an admitted fact that the theatre was constructed by CCPL Developers Pvt. Ltd. and they were owner of the theater.
They had given the cinema theatre on revenue sharing basis to the appellant for a limited period of 20 years. The ownership was retained by CCPL Developers Pvt. Ltd. It is seen that the appellant in its printed annual report for the Financial Year 2005-06 have shown that they were owner of multiplex at Ghaziabad. Thus, the appellant has made a false claim before the AO that they were owner of the multiplex.
(ii) It is seen that the license was granted to CCPL Developers Pvt. Ltd. and order for entertainment tax subsidy was also issued in favour of CCPL Developers Pvt. Ltd. Thus, the appellant was not at all entitled for claim of exemption of entertainment tax subsidy. It is seen that the appellant entered into revenue sharing and co-ordination agreement with CCPL Developers Pvt. Ltd. on 01-09-2005. But the appellant has claimed the exemption of entertainment tax even in respect of amount collected prior to this agreement i.e. from 31-03-2005.
(iii) I find that the subsidy is being diverted to the appellant for reducing the operating cost because of revenue sharing arrangement. The appellant is not owner of the multiplex so the subsidy cannot devolve upon hire.
(iv) It is further seen that in the original return the appellant had offered the amount of Rs. 2,25,41,765/- for taxation as revenue receipt. However as an after thought the appellant filed 9 ITA no. 1897/Del/2010 M/s PVR Ltd.
a revised computation claiming the amount of entertainment tax subsidy as capital receipt.
(v) The appellant could not give any satisfactory explanation in response to this office notice no. dated 15.02.2010 issued u/s 251(2) of the I.T. Act for enhancement of addition from Rs. 23,04,466/- to Rs. 2,25,41,765/-. There can be no dispute with regard to the fact that the amount collected from customers by way of entertainment tax is of revenue nature. The appellant has been given incentive by the Government for not depositing this amount of revenue/tax. Giving of such incentive cannot alter the basic revenue nature of the amount. The amount of entertainment tax is very much of revenue nature and will remain so even if the appellant has been exempted from making payment thereof to the Government's account. By giving the incentive, the Government has merely reduced the expenses of the appellant.
(vi) Considering the facts and circumstances of the case and legal position on the issue, I hold that the amount of Rs. 2,25,41,765/- was a revenue receipt and the same is liable for taxation. I, therefore, enhance the addition by Rs. 2,25,41,765/-. The AO is accordingly directed to issue necessary demand notice and take action for recovery of the same."
3.6. The CIT(Appeals) held the subsidy to be revenue in nature and included in taxable income. As a consequence reversed the action of AO in reducing the actual cost of the assets u/s 43(1) and thereby reducing the depreciation and directed the AO to work out the same accordingly. 3.7. CIT(Appeals) upheld the disallowance on account of ESOP made by AO by following observations:
"I have carefully considered the submissions of the ld. AR and perused the assessment order passed by the AO. It is seen that the appellant has claimed the expenditure on account of ESOP on notional basis. On the ground that the scheme was approved by SEBI. Hon'ble Supreme Court in the case of Southern Technologies Ltd. vs. CIT 320 ITR 573 has held that the 10 ITA no. 1897/Del/2010 M/s PVR Ltd.
guideline of any regulatory authority cannot over ride the specific provisions of the Income tax Act. In order to claim a deduction admissible under I.T. Act, the appellant must show the specific provisions under which the same is allowable under I.T. Act. In view of the discussion and decision of Hon'ble ITAT, Delhi in the case of Ranbaxy Ltd. (supra), I hold that he AO was fully justified in making disallowance of Rs. 70,08,183/- on account of ESOP. I, therefore, uphold the disallowance made by the AO."
3.8. Apropos disallowance u/s 14A, ld. CIT(Appeals) held that as per the ITAT Special Bench Mumbai judgment in the case of Daga Capital 312 ITR 1 (St.) (Mum.); Rule 8D was retrospective in nature. It was held that the disallowance made by AO under Rule 8D was correct and the ground of the assessee was dismissed.
3.9. Aggrieved, against the order of ld. CIT(Appeals) the assessee is in appeal before us.
4. Learned counsel for the assessee adverting to ground no. 5 of the appeal and request for admission of additional evidence contends that AO has considered the claim of the assessee about subsidy being capital in nature after consideration of relevant agreement/ documents. CIT(A) held the same to be revenue in nature and enhanced the assessment u/s 251(2) without giving adequate opportunity of being heard. In the case of enhancement of assessment by CIT(A), the ITAT becomes virtually the first appellate authority to decide the issues about enhancement. The enhancement notice was issued to assessee on 15-2-2010; assessee filed its reply dated 12-3-2010 and again on 19-3-2010. ld. CIT(Appeals) heard the assessee on 19-3-2010 and the order was passed on 29-3-2010. Thus the assessee was not given sufficient time to address the issues which CIT(A) considered in rebuttal of assessee's evidence. Thus assessee could not 11 ITA no. 1897/Del/2010 M/s PVR Ltd.
comply with the issues raised in enhancement. In the absence of proper opportunity to file complete evidence before CIT(A). In these circumstances assessee has no choice but to adduce additional evidence, which it could not file due to no further query by CIT(A).
4.1. Under these circumstances it is justified for assessee to submit this additional evidence before ITAT in order to properly represent its appeal. It is pleaded that in the interest of justice, additional evidence may be admitted.
5. Ld. DR is heard on admission of additional evidence.
6. We have heard rival contentions and gone through the relevant material available on record. In view of the fact that ld. CIT(Appeals) proposed to enhance the assessment and the hearing has been completed within a short time and assessee could not respond to CIT(A)s propositions by way of rebuttal, in the interest of substantial justice, we are inclined to admit the additional material. Hon'ble Supreme Court in the case of Collector of Land Acquisition Vs. Mst. Katiji 167 ITR 471 (SC) has held that when the cause of substantial justice and technical considerations are pitted against each other the cause of substantial justice should prevail. In case of enhancement by CIT(A), a liberal approach about additional evidence is to be adopted in the facts and circumstances of this case. 6.1. Adverting to the issue about the nature of E. Tax subsidy, ld. counsel contends that due to onslaught of cable television, there was steep decline in viewing public to go to cinema halls, thus leading to serious erosion of entertainment tax collection of the state government and plummeting of prospectus of cine industry. To promote the viewership in cinema halls various state governments including the U.P. state govt. were seized with the matter of and mulling over the attractive incentives to promote the cinema 12 ITA no. 1897/Del/2010 M/s PVR Ltd.
industry by setting up of operational multiplexes for a longer time. The U.P. govt. was aware of the fact that setting up and operation of multiplexes on a regular basis involved various problems as they required huge capital investment and modern equipments. Unless the industry was promoted as a whole by way of offering certain robust incentives, multiplexes will not be set up, as desired by govt.
6.2. The U.P. Govt. by various G.Os. and in the one dated 13-7-1999, referred to all these circumstances and came up for incentives to cinema industry the contents are as under:
1. "So many promotional schemes for opening of multiplexes in the State have already in vogue. In pursuance of the same of late a G.O. No. 1803/11-KSV-6-98-20-(R)/12/98 dated 07.12.1998 has been issued for opening of permanent multiplexes under the promotional scheme under which the grant is available for a period of three years for opening cine halls in the area inhabited by a population of more than three lacs.
2. In pursuance of the same it has been experienced that in spite of various promotional schemes, the new cine multiplexes are not opening in large numbers as expected and viewer ship in the cine halls has also been declining. Therefore, the Govt. after due consideration has decided for setting up of multiplexes fully developed in keeping with the modern ways and techniques and such multiplexes cine halls which have an investment of more than Rs. 1.4 Crores and which have at least three cine halls; shall be entitled exemption of Entertainment Tax 100% for the first year and 75% for second and third years."
6.3. Thereafter, in furtherance of incentives to promote setting up of multiplexes exhibiting cinema, another G.O. dated 12-11-2001 was issued, which is as under:
13 ITA no. 1897/Del/2010 M/s PVR Ltd.
"Sub. Amendment in G.O. No. 1161/11/KSV-6-99-Twenty- R(12)/98 dated 13.7.99 issued with a view to promote scheme for opening of Multiplexes Cine Halls in the State of U.P."
The first para of the scheme reads as under:-
"Under Film Policy, 1999 the Govt. with a view to promote opening of multiplexes theatres issued a G.O. No. 1161/11/KSV-6-99-Twenty-R(12)2/98 dated 13.7.99. The multiplexes opening under this scheme shall have the provision of granting tax entertainment tax exemption 100% for the first year and 75% each for second and third years."
......."
Various other circulars are placed on record by the assessee. Only main circulars are referred for the sake of brevity. 6.4. From the said G.O., it may be seen that the object of Govt. policy was to promote opening of long term multiplex theatres function and these incentives were offered because new cinema multiplexes were not opening in large numbers and the cinema viewership was declining. The Government desired setting up of multiplex theatres which were fully developed, operational and modern in terms of technology with minimum three halls and investment of more than 1.5 crores. The scheme required substantial investment and govt. was fully conscious of these realties about mobilization of large capital and thus wanted to promote the investment of capital in multiplexes segment. The incentive was desired in such a manner that the multiplexes operate for a prescribed period with 3 cinema halls. Thus, to ensure this govt. policy of long term operations of multiplexes the method of incentives was devised by linking them with instalments of entertainment tax exemption.
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6.5. The object of the scheme was to promote the policy of development and operation of permanent functional multiplexes. The investment was to be first made in lieu with object of long term operational performance of multiplex; the subsidy was for development of cine industry; the reimbursement was linked with exemption from payment of entertainment tax collected. Thus the incentives were tailor made for promoting a specific category of industry i.e. long term, functional, modern cinema houses called multiplex. The operator of multiplex by this scheme was thus eligible to collect the entertainment tax and keep it with it as subsidy. An exemption certificate was to be provided by entertainment tax authorities from such liability of payment of E. tax. Thus only the method of reimbursement was linked to E. Tax instead of lump sum of upfront subsidy payments. 6.6. The cinema license relating to the multiplex is granted by U.P. Govt. given after completion of relevant formalities based thereon the NOC was granted to eligible operator. Similarly the E. tax exemption certificate is given to operator after due diligence by authorities.
6.7. It may be noted that though CCPL made the building and applied for license, by the agreement, transfer of possession and right to earn thereform, assessee become its constructive owner on lease for 20 years. All other investment for conversion of the building into multiplexes by investment of plant and machinery, fixture and fittings, furniture, leasehold improvement know how & other resources etc., as per the facts relevant to each separate multiplex was to be invested and carried out by assessee PVR. Leasehold improvements included various items like false ceiling, flooring, plastering, lighting, racks etc. 15 ITA no. 1897/Del/2010 M/s PVR Ltd.
6.8. The object and purpose of the scheme is to help/ promote the setting up of multiplexes industry and the subsidy is meant to extend the incentive to multiplex industry and not for reimbursing the cost of any specific asset used therein. It is given for promoting the activity of setting up of the multiplexes as distinct from specific asset of the multiplex. The subsidy is granted by state govt. depending not only on commencement of the multiplex but also linked to its operation and attracting viewers. This is so because the purpose of the scheme is to promote cinema policy conceived by U.P. Govt. i.e. establishment of permanent and long term operational multiplexes.
6.9. Coming to the issue of initial application for eligibility and multiplex structure being owned by CCPL and thereafter its transfer to assessee. A legal opinion from Sr. Advocate of Delhi Shri A.N. Haxer, was obtained, the following part elaborately deals with this issue which may be considered as assesses arguments:
"Use of the term multiplex owner in the scheme is to be read in context of the related UP Entertainment and Betting Act, 1979 ("Act") and Rules. The word owner is not defined in the Act but the word proprietor is clearly defined therein in an inclusive manner. It is common knowledge that in common parlance the word owner & proprietor have the same meaning. Thus owner / proprietor for the purposes of entertainment tax as defined in Act etc. is the manager / operator also and not only the person who owns the building. On a harmonious interpretation of the applicable provisions of statutes involved it is clear that the word owner under the scheme covers the appellant. This is more particularly as also seen in the facts and circumstances of the case as borne out by various agreements, contractual understandings, diversion by overriding title, joint venture revenue sharing relationship that are clearly seen from the record. It is the appellant which is complying with all 16 ITA no. 1897/Del/2010 M/s PVR Ltd.
obligations and which is receiving the entertainment tax subsidy. As the I-Tax department itself endeavours to tax the appellant on such entertainment tax subsidy it cannot say that the appellant is not entitled to the same. The question is only of nature of receipt in the hands of the appellant which as aforesaid is one of capital receipt i.e. not taxable as income."
6.10. License for exhibition of cinematography films is given u/s 3 of the Cinematography Act, 1918, which is as under:
"3. Cinematograph exhibitions to be licensed - Save as otherwise provided in this Act, no person shall give an exhibition by means of a cinematograph elsewhere than in a place licensed under this Act or otherwise than in compliance with any conditions and restrictions imposed by such license."
The District Magistrate of the District concerned is the appropriate authority for grant of license under the Cinematograph Act. The license is granted in the name of the owner of the building (since the place is licensed). In the present case the license was granted to CCPL for running of the cinema under the brand name of the Querist and later the 100% exemption certificate for five years was also granted in the similar manner based on the license.
The intention of the State Legislature while introducing the promotional schemes can be discerned from a perusal of the government orders. In G.O. No. 1161(1)/11-KSV-6-99-Twenty- R(12)/98 it was observed that inspite of various promotional schemes, the new cine multiplexes were not being set up in a large numbers as was expected and even the viewer ship in the cine halls had been declining. It was therefore felt that a better scheme to attract investment for setting up modern Multiplex with latest technology was the need of the hour. The Querist, based on such assurance invested in the State of Uttar Pradesh since being a pioneer in the field it alone had the 17 ITA no. 1897/Del/2010 M/s PVR Ltd.
wherewithal to setup multiplexes and being the owner of the well established brand name 'PVR' it could also attract better viewership.
In the G.O. No. 2226(11)-T.R.-6-2001-Twenty-R(12)/98-TC dated 12.11.01 it was clarified that "The multiplexes theatre where the cost of construction concerning the Cinema Theatre (excluding the cost of construction made for commercial purposes namely shops, hotels, swimming pool etc) (and including the cost of installation of the equipments, furnishing/decoration etc.) has already been obtained before a prescribed period of five years then for remaining period of five years the multiplexes cinemas shall not be entitled for grants".
The above language clearly suggests that the outer limit for the grant of the benefit was a period of 5 years and if the benefit was availed within 5 years no further benefit would be available for the balance period of 5 years. This is also evidenced by the order of the District Magistrate dated 01.09.05 in which it was indicated that "if cost of construction of building (including cost of equipment, decorations etc. in which value of the land has not been added) is received before the completion of the period of five years of grant is prescribed in the government order will not avail the benefit of grant for the remaining period of five years." It is noteworthy that in the said order it is prescribed as follows:- "Amount of exemption in the Entertainment Tax for the convenience of the Multiplex Owner shall be set off against the amount of entertainment tax payable by him as per the prescribed procedure."
Thus, in the language of the District Magistrate issuing the exemption certificate the convenience of the Multiplex owner who would spend substantial sums of money to carry forward the idea of the state government is of importance. It is important to note that while the grant of subsidy in the form of exemption is to aide the speedy recovery of the amount spent on the setting up of the multiplex it significantly does not include the cost of the land. Therefore, although the license and certificate is granted in name of CCPL, the grant/subsidy for 18 ITA no. 1897/Del/2010 M/s PVR Ltd.
setting up of a multiplex is for the benefit of the proprietor or the owner of the multiplex.
The legislature while enacting the legislation in question envisages that the owner of the premises may not have the requisite expertise to establish and manage the establishment liable to entertainment tax and therefore the liability to pay the Entertainment Tax under U.P. Entertainments and Betting Tax, Act 1979 (herein after referred to as 'the Act') as prescribed under section 3 of the Act is imposed on the 'proprietor'. For a convenient perusal relevant extract of Section 3 is reproduced below:
"3. Tax on payment for admission to entertainment - (1) Subject to the provision of this Act, there shall be levied and paid on all payments for admission to any entertainment, other than an entertainment to which [Section 4 or Section 4-A or Section 4-B applies or a compounded payment is made under the proviso to this sub-section] an entertainment tax at such rate not exceeding [one hundred and fifty percent] of each such payments as State Government may from time to time notify in this behalf, and the tax shall be collected by the proprietor from the person making the payment for admission and paid to the Government in the manner prescribed.
..........."
Proprietor under the Act is defined under section 2(m). Section 2(m) is reproduced below:
"2.........
(m) 'proprietor' in relation to any entertainment includes any person -
(i) connected with the organization of the entertainment, or
(ii) charged with the work of admission to the entertainment, or
(iii) responsible for, or for the time being in charge of, the management thereof"
19 ITA no. 1897/Del/2010 M/s PVR Ltd.
The Querist falls under the said definition of 'proprietor' liable to pay tax under section 3 of the Act. The Querist is the owner of the brand PVR which it has developed with its sole efforts and investment. Even the intention of the parties while entering into the aforesaid Memorandum of understanding was that space in the building would be licensed to the Querist on long term basis and the Querist alone would be responsible for the investment in setting up of the Multiplex and would be liable for operations, day to day running and management of the Multiplex and would also be entitled to enjoy the benefits of the subsidy/waiver of deposit of Entertainment Tax as prescribed by the exemption scheme mentioned above.
The intention of the legislature while providing the grant in terms of the exemption from deposit of the entertainment tax was to promote the setting up of multiplexes which were fully developed modern and in keeping with the present times. All the said required conditions to advance the intention of the legislature could have been fulfilled only by the Querist who alone has the requisite experience, wherewithal, investment capability and the established brand name. In accordance with the intention behind the grant it was also made clear by the order/certificate granting exemption that the cost of land shall not be included in the calculation of capital expenditure incurred for setting up of the said multiplex. It is apparent therefore that it is not the ownership of the land that would matter for the purpose of getting the benefit of the exemption but the proprietorship of the multiplex; The intention of parties while entering into a contract for the setting up of the Multiplex 'PVR EDM' can be read from the Memorandum of Understanding, Revenue Sharing and coordination Agreement and the Supplementary Agreement. The extracts as culled out and reproduced below would also prove the fact that the Querist is the proprietor/owner of Multiplex business which is the requisite for availing of the benefit of grant as made available by the State of Uttar Pradesh........
20 ITA no. 1897/Del/2010 M/s PVR Ltd.
Further the collection of the tax under section 3 of the Act is the duty or responsibility of the proprietor, which in the present case is the Querist. Additionally the Querist has also given an undertaking to the State of Uttar Pradesh to run the said Multiplex (PVR EDM) for the requisite period of five years beyond the time when the benefit of waiver from deposit of entertainment tax has stopped. Therefore, the benefit of the waiver on the deposit of the tax so collected will be to the credit of the Querist.....) Photocopy of certificates from concerned state authorities confirming the year wise E tax subsidy availed by the PVR multiplex in respect of its multiplex in UP. As borne out from the said certificates, PVR is the proprietor of multiplexes and is entitled to E tax subsidy. Further, it is borne out from the certificates that the subsidy is for the promotion of the new multiplexes and to the new multiplexes irrespective of the fact as to in whose name the license is."
7. Learned counsel for the assessee further contends that the observation of the CIT(Appeals) that license and eligibility for subsidy was granted to CCPL Developers Pvt. Ltd. and therefore the assessee was not at all entitled to claim exemption of E. Tax subsidy, is not correct. This objection is fully met by the above opinion which analyses the terms owner, operator, liability, license, transfer, subsidy etc. of entertainment tax etc threadbare. These facts clearly emerge from record that initially though the application for eligibility was filed by CCPL Developers Pvt. Ltd.; as already mention they were not equipped to operate the multiplex theaters. Thereafter by way of a duly executed written agreement dtd 1-9-2005 effective from 1-3-2005 between assessee and CCPL the multiplex structure was transferred to assessee on a lease of 20 years, who transformed the same into a fully functional, modern multiplex. Thereafter both the parties completed the necessary formalities and on fulfillment thereof, licenses and eligibility to 21 ITA no. 1897/Del/2010 M/s PVR Ltd.
receive subsidy was granted by U.P. State Govt. to assessee. Ld. CIT(Appeals) has drawn an erroneous inference by only looking at revenue sharing and co-ordination agreement dated 1-9-2005 and holding that subsidy was received from 1-4-2005. CIT(A) ignored the vital fact emerging from agreement itself that agreement was operational wef 1-4-2005. Thus the assessee was already in this business arrangements with CCPL Developers Pvt. Ltd.
7.1. CIT(Appeals) on one hand held that receipt in question as "subsidy" albeit revenue subsidy" and income of the assessee and on the other hand observed that the assessee not being the owner of multiplex, the subsidy cannot devolve on it. The findings are contradictory. The main issue in question is capital or revenue nature of subsidy and not how assessee could have earned. Ld. CIT(Appeals) by cherry picking the issues here and there, has endeavored to confuse the issue. It is pleaded that the observations of ld. CIT(Appeals) are totally misconceived and contrary to record as:
(a) AO and ld. CIT(Appeals) both unequivocally held that entertainment tax receipts in question as subsidy received by the assessee. Only the nature of subsidy has been changed by CIT(A) from capital to revenue and it has been taxed in assessee's hands. Therefore, all other proposition as raised by CIT(A) are self contradictory.
(b) Having accepted it to be a subsidy, there is no justification in mudding the observations by saying that assessee had no right over subsidy. In that case it should not have been taxed in the hands of the assessee.
(c) The grant of license, eligibility and entitlement subsidy scheme is in the domain of U.P. govt.. The assessee was held eligible for license and subsidy after due diligence and scrutiny of the proposal by the 22 ITA no. 1897/Del/2010 M/s PVR Ltd.
U.P. govt. authorities. Questioning the license and eligibility now by CIT(A) implies that U.P. govt. has illegally given the subsidy to assessee. CIT(Appeals) cannot assume the role of auditor over the decision of U.P. Govt. and without access to their complete record and proceedings give such a finding. These observations thus are without any justification, self contradictory and vainfully challenge the exercise of statutory and executive functions of the U.P. govt. in implementation and grant of entertainment subsidy scheme.
(d) The eligibility of subsidy does not devolve only because of ownership. It is the operator/ license holder as defined under the Cinematography Act, 1918, who is eligible for subsidy. The assessee has been recognized as operator/ license holder of the multiplex and has earned the subsidy. The meaning and purport of word 'operator' which has been answered in detail by legal opinion mentioned above. The issue for examination before ITAT is the nature of subsidy and not its eligibility in assessee's hands. The same is unambiguously held by both AO and CIT(A) as assessee's subsidy receipt. 7.2. Ld. counsel then relied on Hon'ble Supreme Court judgment in the case of CIT V. Ponni Sugar and Chemicals Ltd. (supra), holding as under:
"The character of the receipt of subsidy in the hands of the assessee under a scheme has to be determined with respect to the purpose for which the subsidy is granted. In other words, one has to apply the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. If the object of the subsidy is 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 is to enable the assessee to set up a new unit or to expand an existing unit then the receipt of the subsidy would be on capital account."
23 ITA no. 1897/Del/2010 M/s PVR Ltd.
7.3. Hon'ble Supreme Court has categorically held that the character of the receipt of subsidy in the hands of any assessee is to be determined keeping in mind following criteria:
(i) The scheme and purpose for which the subsidy is granted, which may be called as "purpose test".
(ii) The point of time on which the subsidy is paid is not relevant.
(iii) The source of the subsidy is not relevant.
(iv) If the object of the subsidy is to enable the assessee to set up a new unit or expansion of existing unit then the receipt of subsidy is capital in nature.
7.4. In the light of Hon'ble Supreme Court judgment Ponni Sugar and Chemicals Ltd. (supra), it is pleaded that:
(i) it is beyond doubt that U.P. govt. in order to promote the industry of cinema by modern multiplexes/ theatres/ cinema halls in the state of U.P. promulgated this incentive scheme. Thus the purpose of the scheme was to promote multiplexes industry as a whole.
(ii) The scheme thus was for promotion of a particular type of industry i.e. multiplex setting up as the earlier schemes could not fulfill this purpose of the state govt.
(iii) The govt. in order to promote setting up of fully developed multiplexes with 3 halls and modern technology with an investment of more than 1.5 crores promulgated this scheme. Thus the scheme was for promotion of cinema entertainment sector as a whole. Cinema hall promotion subsidy has earlier been held to be capital in nature by various judgments, which are referred hereinafter.
24 ITA no. 1897/Del/2010 M/s PVR Ltd.
(iv) To ensure the optimum achievement of scheme the disbursement of subsidy has been designed in the form of retaining instalments of entertainment tax, in place of lump sum or upfront subsidy payment. The method or time of reimbursement cannot convert the character/ nature of subsidy from capital to revenue. The reimbursement of subsidy was linked to entertainment tax collection to ensure that assessee efficiently operates the multiplex for stipulated 5 years to promote the shceme. In case multiplex does not run or attracts less viewers there was corresponding reduction in reimbursement of amount of subsidy. The reimbursement pattern was designed to ensure the achievement of long term object of the scheme.
(v) The assessee entered into agreement with CCPL by way of a written agreement, which has been duly scrutinized by U.P. Govt. authorities and has not been challenged in any manner. The written agreement by two unrelated parties and accepted by authorities cannot be called in question. The assessee is held to be operator/ licensee as per the provisions of Cinematographic Act. Accordingly it has been held eligible for license and E. Tax subsidy. The subsidy instalments have been duly released by due verification and in terms of exemption certificate.
7.5. It may be pertinent to mention that after the hearing of this appeal was initially concluded, Bombay High Court judgment dated 8th June, 2011 in the case of CIT Vs. M/s Chaphalkar Brothers, Pune, rendered in ITA nos. 1036 & 1147 of 2010, came to be notice of the Bench. The judgment was rendered on the same subject matter i.e. entertainment tax subsidy for 25 ITA no. 1897/Del/2010 M/s PVR Ltd.
multiplexes. The appeal was refixed for clarification to enable both the parties to respond to the Hon'ble Bombay High Court judgment in the case of M/s Chaphalkar Brothers (supra).
7.6. Learned counsel for the assessee contends that Hon'ble Bombay High Court judgment clinches the very issue in question holding that subsidy provided to multiplex is capital in nature. In this case the ITAT held the subsidy to be capital in nature. On revenue appeal Hon'ble Bombay High Court, relying on the judgment of Hon'ble Supreme Court in the case of Ponni Sugar and Chemicals Ltd. (supra), held the multiplex subsidy to be capital in nature by following observations:
According to the Revenue, in the light of the judgment of the Apex Court in the case of Sahney Steel and Press Works Limited Vs. Commissioner of Income Tax reported in (1997) 228 ITR 253 (SC), the entertainment duty subsidy received by the assessee must be held to be revenue receipt because, the subsidy is granted after the commencement of business and after the entertainment duty is collected by the assessee.
The Apex Court in the case of Commissioner of Income Tax Vs. Ponni Sugars and Chemicals Limited reported in (2008) 306 ITR 392 (SC) has on consideration of its decision in the case of Sahney Steel (supra) held thus:
"The importance of the judgment of this court in Sahney Steel case lies in the fact that it has discussed and analysed the entire case law and it has laid down the basic test to be applied 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 26 ITA no. 1897/Del/2010 M/s PVR Ltd.
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."
Thus, the purpose for which the subsidy was given is 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.
4. 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:
"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.
27 ITA no. 1897/Del/2010 M/s PVR Ltd.
2. Government has, therefore, with a view to commemorate birth centenary of Chitrapati late Shri V. Shantaram, decided to grant concession in entertain duty to Multiplex Theatre Complexes to promote construction of new cimena houses in the State."
5. 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.
7.7. In the light of Hon'ble Bombay High Court judgment, ld. counsel pleads that the Maharashtra and U P Govt schemes on entertainment subsidy are pari material, there is no contrary decision, therefore, the issue stands clinched in favor of the assessee.
7.8. The other observations of ld. CIT(Appeals) about the eligibility of the assessee for grant of subsidy are irrelevant with no consequence. Having held the grant in question to be subsidy income in the hands of the assessee, by these irrelevant references the CIT(A) has only vainfully tried to divert the issues. The subsidy has been taxed as income in the hands of the assessee, only the nature has been changed from capital to revenue, after holding so there was no need for CIT(A) to make contradictory observations. The very issue is now decided by Hon'ble Bombay High Court 28 ITA no. 1897/Del/2010 M/s PVR Ltd.
in the context of Entertainment Subsidy in the facts of multiplex only. It is pleaded that the Bombay High Court judgment being solitary one the very issue is binding and the same may be followed and the subsidy be held as capital in nature.
7.9. Further reliance is placed on another judgment of Hon'ble Bombay High Court CIT Vs Reliance Industries Ltd. 2010-TIOL-228-Mum-IT, upholding the ITAT Mumbai Special Bench judgment, holding Sales Tax subsidy for promotion of industries in backward districts to be capital in nature. It is fairly conceded that Hon'ble Supreme court vide order 9-9-2011 to rehear the revenue appeal on the questions framed including the issue of Sales Tax incentive being a capital receipt. It is pleaded that the order of Mumbai Special Bench in the case of Reliance Industries Ltd. has not been stayed by Hon'ble Supreme Court, therefore it is still binding on ITAT. It is thus vehemently pleaded that in view of Hon'ble Supreme Court judgment in the case of Ponny sugar and chemicals, Bombay High court in the case of Chaphalkar Bros and Mumbai Special Bench in the case Reliance Industries Ltd., (supra) the assessee's claim about Entertainment Tax subsidy being capital in nature deserves to be allowed.
7.10. Ld counsel in support of his contentions relies on following judgments holding that Govt. subsidy provided for opening of new cinema theatres is capital in nature:
- CIT v. Pramod Kumar Shukla (2009) 312 ITR 223 (All.);
- Sharda Chitra Mandir Vs. ITO (2008) 301 ITR 230 (All.);
- Kalpana Palace Vs. CIT (2005) 275 ITR 365 (All.)
- Sadichha Chitra v. CIT 189 ITR 774 (Bom.) 29 ITA no. 1897/Del/2010 M/s PVR Ltd.
7.11. Reliance is also placed on following judgments holding subsidy received in connection with promotion of opening of new units of other industries is held to be capital in nature:
- CIT v. M/s Udupi Builders Pvt. Ltd. 319 ITR 440 (Kar.) "The assessee received a sum of Rs. 3,73,000 as a subsidy granted by the State to encourage the hotel industry. The assessee claimed the amount towards the capital investment. The Assessing Officer disallowed the claim. The Commissioner (Appeals) held that the subsidy had been granted to the assessee by the State under the 1982-87/88 package of incentives and concessions and it was towards investment and not a revenue receipt. The Tribunal confirmed the order passed by the Commissioner Appeals). On appeal :
Held, dismissing the appeal, that the subsidy had been announced by the State of Karnataka to encourage the hotel industry and the State was in the habit of releasing the subsidy amount depending upon the budgetary allocation in each year. The State had released the subsidy amount even after ten years of the commencement of the project. Therefore, the contention that since the assessee received the amount of subsidy after completion of the hotel project and commencing of the business, such receipt had to be taken as revenue receipt and not a capital receipt could not be accepted. Thus, the subsidy received had to be treated as a capital receipt not liable to tax."
- CIT Vs. Tiruttani Co-opeative Sugar Mills Ltd. 322 ITR 59 (Mad.) "The assessee, a co-operative society engaged in the manufacture and sale of sugar claimed the receipt on account of higher free sale of sugar and excise duty rebate to be capital in nature not assessable to tax. The Assessing Officer rejected the claim and the Commissioner (Appeals) confirmed the order passed by the Assessing Officer. The Tribunal allowed the appeals filed by the assessee. On appeals by the Department :
Held, dismissing the appeals, that the Tribunal was right in holding that the receipts from the sale of levy free sugar and 30 ITA no. 1897/Del/2010 M/s PVR Ltd.
concession in the rate of excise duty rebate were capital receipts not liable to tax"
CIT Vs. Tirumala Bricks & Tiles Factory 217 ITR 547 (AP) "Held, that a perusal of the scheme formulated by G.O. Ms. No. 224, dated March 9, 1976, by the Andhra Pradesh Government made it clear that the incentive was granted for the purpose of setting up new industrial units and/or effecting substantial expansion of the existing units in backward areas. The quantum of subsidy offered was 10 per cent. of the fixed capital subject to a maximum of Rs. 10 lakhs. This showed that the incentive granted by the State was a capital receipt in the hands of the assessee. The fact that the amount of subsidy would be disbursed on proof of relevant expenditure incurred/taxes paid, did not indicate that the amount paid as subsidy, was a revenue receipt."
7.12. Adverting to the objection of Ld CIT(A) about assessee having entered the amount of subsidy in the books and original return as revenue receipt, ld counsel contends that it is trite law that entries in books are not decisive for ascertaining the tax liability of any receipt. The same is to be decided on the basis of real nature of the receipt, thus an entry in a/c books does not work as an estoppels against the assessee. The income is to be offered to tax on the basis of real nature and purport of the receipt. Reliance is placed on:
- Kedarnath Jute Mfg. Co. Ltd. Vs. CIT (1971) 82 ITR 363 (SC);
Held: Assessee following mercantile system of accounting was entitled to deduct from the profits and gains of its business liability to S.T. which arose on sales made by it during the relevant previous year - that liability did not seize to be liability because the Assessee had taken proceedings before higher authorities for getting it reduced or wiped out 31 ITA no. 1897/Del/2010 M/s PVR Ltd.
so long as the contention of the Assessee did not prevail - Further, the fact that Assessee had failed to debit the liability in its books of account did not debar it from claiming the sum as a deduction - Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights; nor can the existence or absence of entries in his books of account be decisive or conclusive in the matter."
- CIT Vs. Shoorji Vallabhadas & Co. (1962) 46 ITR 144 (SC);
- State Bank of India Vs. CIT (1986) 157 ITR 67 (SC);
- Sutlej Cotton Mills Ltd. Vs. CIT 116 ITR 1 (SC). 7.13. Adverting to the CIT(A)s objection about original license application and ET entitlement in the name of CCPL and assessee being a transferee, ld counsel contends that by now law has profoundly recognized the concept of constructive ownership. It is crystal clear from the record that assessee by a lese of 20 years was transferred the structure as constructive owner with possession and operation of multiplex. Entertainment Tax liability and other obligations under the Cinematographic Act lay on the assessee as an operator by way of revenue sharing agreement with CCPL. This being so assessee becomes constructive owner of multiplex also for all practical purposes and is eligible to subsidy and other benefits flowing from the scheme. This is the reason why U.P. Govt. has transferred the license and subsidy to assessee by due process of law and provisions of Cinematographic Act. For the proposition of constructive ownership reliance is placed on CIT vs Podar Cement Ltd 226 ITR 625(SC):
32 ITA no. 1897/Del/2010 M/s PVR Ltd.
Hence, though under the common law "owner" means a person who has got valid title legally conveyed to him after complying with the requirements of law such as the Transfer of Property Act, the Registration Act, etc., in the context of section 22 of the Income-tax Act, 1961, having regard to the ground realities and further having regard to the object of the Income-tax Act, namely, to tax the income, "owner" is a person who is entitled to receive income from the property in his own right. The requirement of registration of the sale deed in the context of section 22 is not warranted.
CIT (Addl.) v. U.P. State Agro Industrial Corporation Ltd. [1981] 127 ITR 97 (All); CIT (Addl.) v. Sahay Properties and Investment Co. P. Ltd. [1983] 144 ITR 357 (Patna); Kala Rani (Smt.) v. CIT [1981] 130 ITR 321 (P&H); Saiffuddin v. CIT [1985] 156 ITR 127 (Raj); Madgul Udyog v. CIT [1990] 184 ITR 484 (Cal); Maharani Yogeshwari Kumari v. CIT [1995] 213 ITR 541 (Raj); CIT v. General Marketing and Manufacturing Co. Ltd. [1996] 222 ITR 574 (Cal) and CIT v. Krishna Lal Ajmani [1996] 222 ITR 653 (Patna) approved."
Mysore Minerals Ltd vs CIT 239 ITR 775 (SC).
Hon'ble Supreme Court has held that for Income Tax Law, the word ownership is not limited to only written conveyance. If the conduct of parties shows the intent of an effective transfer, such transfer amounts to constructive ownership which can entitle a person to receive the income from such property.
7.14 Ld counsel contends that assessee satisfies all the tests as laid down by Hon'ble Supreme court in Ponny sugars (supra) :
i. The assessees case succeeds on purpose test i.e. the purpose of scheme was to promote cinema industry by setting up of modern and permanent multiplexes.
33 ITA no. 1897/Del/2010 M/s PVR Ltd.
ii. The point of time of disbursing subsidy is not relevant, in assesses case the subsidy comes in instalments in the form of amount equal to Entertainment Tax collected by if depending upon performance. iii. The source of subsidy is not relevant i.e. whether if comes directly from the coffers of state govt. or by collection of Entertainment Tax.
iv. The object of subsidy is to promote cinema exhibition in multiplex theatres through permanent, long term operational and modern multiplexes. The object is also linked with the investment of minimum capital.
7.15. The present multiplex scheme of U P govt was in continuation of earlier cinema halls scheme, the nature of subsidy offered by earlier cinema hall schemes has been held to be capital in nature by various judgments viz. Allahabad High court judgments in the cases of Pramod Kumar Sukla, Sharda Chitra Mandir and Kalpana Palace. (supra); and Sadichha Chitra by Bombay High Court (supra). 7.16 It is vehemently argued that in view of all the above facts, circumstances, submissions and case laws relied by the assessee the subsidy in question is clearly capital in nature. The enhancement of assessment by CIT(A) to change the nature of subsidy from capital to revenue may be set aside and order of AO on this issue may be restored.
8. Alternative plea: Ld counsel contends that assuming it is held that subsidy in question is revenue in nature, in that case the entertainment tax being an ascertained liability deferred by the statutory provisions the same may be allowed u/s 43B. Reliance for this proposition is placed on :
J.B. Boda & Co. Pvt. Ltd. Vs. CBDT (1997) 223 ITR 271 (SC); CIT Vs. Ravindra Platinum P. Ltd. (2008) 302 ITR 229 (Raj.) 34 ITA no. 1897/Del/2010 M/s PVR Ltd.
CIT Vs. Mahaluxmi Brick Manufacturing Moulding & Fabricating Industries Pvt. Ltd. (2005) 273 ITR 190 (P&H) CIT Vs. Bhagwati Autocast Ltd. (2003) 261 ITR 481 (Guj.)
9. Apropos ground no 6 about the reduction of cost of assets and thereby reduction in the claim of depreciation corresponding to subsidy- It is pleaded that sec 43(1) expln. 10 reads as under:
43(1) - "actual cost" means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. ....
[Explanation 10. - Where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called), then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee.
Provided that where such subsidy or grant or reimbursement is of such nature that it cannot be directly relatable to the asset acquired, such much of the amount which bears to the total subsidy or reimbursement or grant the same proportion as such asset bears to all the assets in respect of or with reference to which the subsidy or grant or reimbursement is so received, shall not be included in the actual cost of the asset to the assessee.]"
9.1 Hon'ble Supreme court in the case of CIT v P J Chemicals Ltd after considering a catena of judgments on this issue rendered by various courts interpreted the scope of this provision as under :
Where Government subsidy is intended as an incentive to encourage entrepreneurs to move to backward areas and establish industries, the specified percentage of the fixed capital cost, which is the basis for determining the 35 ITA no. 1897/Del/2010 M/s PVR Ltd.
subsidy, being only a measure adopted under the scheme to quantify the financial aid, is not a payment, directly or indirectly, to meet any portion of the "actual cost". The expression "actual cost" in section 43(1) of the Income- tax Act, 1961, needs to be interpreted liberally. Such a subsidy does not partake of the incidents which attract the conditions for its deductibility from "actual cost". The amount of subsidy is not to be deducted from the "actual cost" under section 43(1) for the purpose of calculation of depreciation, etc. Decision of the Andhra Pradesh High Court in CIT v. Godavari Plywoods Ltd. [1987] 168 ITR 632, decisions of the Karnataka High Court in CIT v. Snam Abrasives Ltd. [1994] 205 ITR 554, CIT v. Progressive Engineering [1993] 200 ITR 231 and CIT v. Kareem Cascami Ltd. [1993] 202 ITR 184, decision of the Madras High Court in CIT v. Metal Powder Co. Ltd. [1992] 197 ITR 516, decisions of the Madhya Pradesh High Court in CIT v. Steel Tubes of India Ltd. [1990] 181 ITR 90; CIT v. Steel Tubes of India P. Ltd. [1989] 180 ITR 159; CIT v. Steel Ingots P. Ltd. [1990] 181 ITR 42; CIT v. Vikram Metal Powder P. Ltd. [1992] 193 ITR 741 and CIT v. Steel Ingots P. Ltd. [1992] 194 ITR 560 and decision of the Orissa High Court in CIT v. Orissa Industries Ltd. [1992] 198 ITR 251 affirmed.
Lucknow Producers' Co-operative Milk Union Ltd. v. CIT [1983] 143 ITR 60 (All); CIT v. Elys Plastics P. Ltd. [1991] 188 ITR 11 (Bom) ; CIT v. Dewas Synthetics P. Ltd. [1991] 188 ITR 16 (Cal); CIT v. Meghalaya Plywood Ltd. [1993] 202 ITR 343 (Gauhati); CIT v. Grace Paper Industries P. Ltd. [1990] 183 ITR 591 (Guj); CIT v. Diamond Dies Manufacturing Corporation Ltd. [1988] 172 ITR 655 (Kar); CIT v. Kerala State Drugs and Pharmaceuticals Ltd. (No. 1) [1990] 184 ITR 424 (Ker) ; CIT v. Kalinga Jute Products P. Ltd. [1992] 196 ITR 633 (Orissa); Srinivas Industries v. CIT [1991] 188 ITR 22 (Mad) and CIT v. Ambica Electrolytic Capacitors P. Ltd.
[1991] 191 ITR 494 (Raj) approved."
36 ITA no. 1897/Del/2010 M/s PVR Ltd.
9.1.1. Hon'ble Supreme Court lays down that the basis of calculation of subsidy is not determinative as it is only a way to quantify it. If the nature of subsidy is intended to promote a particular industrial activity the subsidy is capital in nature and does not relate to any asset. The subsidy in the case of P J Chemical being for an incentive to move industries to backward areas it can not be held to be directly or indirectly given for acquisition of any asset. Therefore, the claim of depreciation should not be reduced by such subsidy. It has been specifically held that the word actual cost should be liberally interpreted.
9.2 In present case also the subsidy in question is in continuation of earlier new cinema hall promotion scheme which did not respond properly. Thus the new scheme was promulgated by U P Govt. to promote the industry of cinema by new method i.e. opening modern, log term operational multiplexes when earlier schemes for promotion of cinemas failed to be operational due to cable TV. The incentive are provided for the purpose of cinema industry as a whole and not for any specified asset directly or indirectly.
9.3 Further reliance is placed on the following judgments which have followed Hon'ble Supreme Courts judgment in P J Chemicals holding that the amount of such subsidy will not directly or indirectly reduce the cost of any asset:
i) CIT v Himachal Eng. Co 301 ITR 116 (HP)
ii) CIT v KCA Ltd 283 ITR 65 (BOM)
iii) CIT v Swastik Sanitary Works 286 ITR 544(GUJ) 9.4. In all these cases it has been held that respective subsidies were not given to meet the cost of any asset directly or indirectly, consequently it will 37 ITA no. 1897/Del/2010 M/s PVR Ltd.
not reduce the cost of any asset. The assesses case of multiplex subsidy stands on exactly similar footings.
9.5 The U.P. Govt. policies and scheme was framed for the growth of multiplex industry and not for supplementing the trade profits of the recipient. The scheme does not mention acquisition or commissioning of any particular type of assets. Once the incentive is for promoting a particular type of industry it can not be assumed to be prvided for meeting the cost of any asset directly or indirectly. Hon'ble Supreme court in P J Chemicals case has enunciated this principle.
9.6 Similar issue on 43(1) has been decided by the ITAT at Vishakhapatnam in the case of Sasisri Extraction Ltd. v ACIT 307 ITR (AT) 127, holding as under:
"The assessee-company engaged in the business of manufacture of edible oils did not declare the receipt of investment subsidy under a scheme floated by the Andhra Pradesh Government. It claimed depreciation under section 32 of the Income-tax Act, 1961. The Assessing Officer made addition in respect of the subsidy received by the assessee-company on the ground that it was linked to the fixed capital cost of the assessee. The Commissioner (Appeals) confirmed the order of the Assessing Officer. The assessee preferred an appeal contending that the subsidy granted under the scheme was to encourage entrepreneurs to establish industries, and the mere fact that a specified percentage of the fixed capital cost was taken as the basis for determining the subsidy should not be mistaken as payment intended to subsidise the cost of the capital:
Held, allowing the appeal that the scheme was intended to accelerate industrial development of the State and the incentive was given for setting up of industries in Andhra Pradesh. The amount of subsidy to be given was 38 ITA no. 1897/Del/2010 M/s PVR Ltd.
determined by taking the cost of eligible investment as the basis. The incentive in the form of subsidy could not be considered as a payment directly or indirectly to meet any portion of the actual cost and thus it fell outside the ken of Explanation 10 to section 43(1) of the Income-tax Act, 1961. The subsidy amount could not be reduced from the actual cost of the capital asset."
9.7 It is pleaded that the judgment of Hon'ble Supreme Court in the case of P J Chemicals and Vishakhapatnam ITAT in the case of Sasisri Extractions lay down a clear proposition that the subsidy in question being for setting up of an industry which in instant case means setting up of multiplex, cannot be considered to be attributable to the cost of any asset directly or indirectly acquired for such multiplex.
10. Apropos ground no. 7 in respect of ESOPS/ESPS ld counsel for the assessee contends that the ESOP payable being in the form of incentives to employees is an allowable business expenditure even though not paid. Hon'ble Supreme Court in the case of Woodward Governor 312 ITR 254 has held that the term expenditure in sec. 37 means an amount which is a loss even though the said amount has not gone out from the pocket of the assessee. Similar view has been adopted in SSI LTD V CIT 85 TTJ 1049(Chennai).
10.1 However it is conceded that Delhi ITAT in the case of Ranbaxy Lab. Ltd V Addl. CIT 124 TTJ 771 and Mumbai ITAT in the case of VIP Ind. Vs DCIT 2010-TIOL-654 has taken a view that such unpaid expenditure is not allowable.
10.2. Apropos the last issue i.e. ground nos. 9 & 10 pertaining to disallowance of expenses u/s 14A, ld. counsel contends that the disallowance has been made by applying Rule 8D which was applicable 39 ITA no. 1897/Del/2010 M/s PVR Ltd.
from A.Y. 2008-09 onwards and not in this year. Therefore, the application of Rule 8D is unjustified. Besides, there is hardly any expenditure which is incurred for earning of non-taxable income i.e. dividend or incentive. AO has not shown any nexus of the expenditure incurred and the exempted income earned. Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT & Another (2010) 234 CTR (Bom) 1 has held that Rule 8D is prospective in nature and the expenditure can be disallowed only after showing identification for the exempt income. Therefore, the orders of lower authorities should be reversed on this issue.
11. Ld. DR, on the other hand, contends that ld. CIT(Appeals) was justified in issuing the enhancement notice holding that the subsidy in question received by the assessee was revenue in nature on following contentions:
A. Eligibility of the assessee for subsidy:
(i) It is pleaded that the subsidy in question has been wrongly received by the assessee PVR and the same could have been received by CCPL. In this behalf ld. DR referred to the affidavit in form 3 & form 1 for alleging the claim of eligibility which was signed on 5-5-2006, whereas the communication was dated 11-8-2005 and these forms should have been filed before 1-9-2005.
Therefore, things are not right in the paper work on which the assessee received this subsidy.
(ii) The affidavit filed by the assessee for subsidy indicates that the valuation of cost of construction of cinema building was Rs. 9,53,38,000/-. Since the building was 40 ITA no. 1897/Del/2010 M/s PVR Ltd.
not constructed by PVR, it had no locus standi to file such affidavit.
(iii) The assessee is not owner of the cinema and the affidavit is filed in the capacity of cinema owner. The affidavit is untenable and mitigates against claim of subsidy. It indicates that the subsidy in question, if at all, should have been claimed by the cinema owner, which is CCPL and not by PVR, which possessed lease-hold right on the multiplex.
(iv) For eligibility of subsidy, the application was to be submitted to D.M. by 31-3-2001 and licenses were to be obtained by 31-3-2005. As on 31-3-2001 PVR was not in picture and the application was filed by CCPL.
(v) Eligible subsidy comes to Rs. 9.53 crores whereas the assessee has not incurred this much cost by way of investment. The diversion of the amount by way of revenue sharing agreement cannot be called subsidy.
(vi) The cost in question i.e. 9.53 crore is total investment of CCPL and PVR, therefore, the subsidy has been claimed by the assessee in unauthorized manner.
B. Actual relationship between CCPL & PVR:
(i) CCPL constructed the multiplex and thereafter entered into a MOU with PVR for operating this multiplex. The MOU itself indicates that CCPL claimed itself to be the recipient of eligible subsidy. Therefore, the subsidy in fact admissible to CCPL and not the assessee. .
41 ITA no. 1897/Del/2010 M/s PVR Ltd.
(ii) The assessee has derived the subsidy not by way of own entitlement but by way of revenue sharing agreement from the CCPL, which has diverted its benefit to assessee. This is further apparent from the fact that supplementary agreement dated 1-9-2005 refers to revenue sharing agreement wherein minimum guarantee was fixed between parties at Rs. 7.5 lacs per month for first 30 months; Rs. 5.5 lacs per month from next 31st to 60 months; and then Rs. 3 lacs per month from 61st month onwards plus 4% of revenue net of entertainment tax. Reference is made to paras 4 and 5 of the supplementary agreement, which indicate that the subsidy benefits were commercially shared between CCPL and PVR and corporate guarantee was issued in favour of CCPL to bear all consequences. Thus, assessee had entered into 2 simultaneous agreements on 1-9-2005 and gave two different versions of the revenue sharing agreement, on the date when DM, Ghaziabad granted the subsidy. All this indicates that assessee was not eligible to or had a right to claim subsidy as its income.
(iii) It is alleged that U.P. Govt. does not seem to be aware of the internal arrangement between PVR and CCPL and the subsidy was obtained by a design.
C. The nature of income in the hands of the assessee may be changed.
(i) Ld. DR contends that since the assessee obtained the subsidy in dubious manner, to which it was not entitled, 42 ITA no. 1897/Del/2010 M/s PVR Ltd.
therefore, it amounts to illegal receipt in the hands of the assessee and therefore it should be taxed as a normal receipt of revenue and not subsidy.
D. Books of account of the assessee.
(i) Assessee is a listed company. Schedule IX of the annual report only gives a sketchy picture of collective revenue figue of Rs. 4,88,84,692/- as income by way of revenue sharing. No further break up is given in the annual accounts. At the time of revised computation, the bifurcation of this amount was given indicating the amount of entertainment subsidy. The assessee did not categorize the amount explicating as subsidy and camouflaged it in the name of revenue sharing. The amount in question does not bear the character of subsidy as per the documents in public domain. Thus the assessee's disclosure is objectionable.
(ii) The assessee filed its original return of income claiming it to be a revenue receipt in P&L A/c, which indicates that the assessee was aware about its true natue. By filing a letter during the course of assessment proceedings, purporting to revise the computation indicates that the assessee's auditors at the time of filing original return believed the subsidy to be part of its taxable revenue. It is pleaded that the subsidy received by assessee should be considered as normal revenue and not by way of subsidy.
43 ITA no. 1897/Del/2010 M/s PVR Ltd.
E. Subsidy to be treated as revenue receipt:
(i) Ld. DR vehemently argues that in the case of Ponni Sugars & Chemicals Ltd. (supra), the Hon'ble Supreme Court was examining the nature of subsidy in the context of capital versus revenue. The manufacturers were allowed to collect the excise duty on sale of free sugar but pay to the govt. only excise duty payable on the price of levy sugar. Surplus funds generated through sale of incentive sugar were required to be utilized for repayment of term loan. This was the reason which persuaded the Hon'ble Supreme Court to decide the subsidy as capital, being linked to the repayment of loan which is capital in nature.
(ii) The Hon'ble Supreme Court was, therefore, absolutely clear that the amounts were held as capital only because the subsidy was to be utilized for repayment of loans.
This is not the situation in the present case as there is no obligation on either PVR or CCPL to utilize the money/ subsidy in any specified manner.
(iii) The perusal of the aforesaid judgment in true context reveals that the Hon'ble Supreme Court was mentioning the purpose test with respect to the purpose for which the subsidy was utilized. In the case of the appellant, the purpose of subsidy is to help setting up and running of multiplexes. The appellant has not made investment of Rs. 9,53,38,000/- in the multiplex and it has been involved in only running of the multiplex. The running of 44 ITA no. 1897/Del/2010 M/s PVR Ltd.
multiplex is quite obviously a revenue related purpose. Further unlike in Ponni Sugar case there is no restriction on the usage of money retained by the appellant on account of relief from payment of entertainment tax.
(iv) The undue stress on purpose test may otherwise also led to misundertstanding. If the purpose test is interpreted as narrowly as the assessee wishes it to be then in most of the cases it would be found to be capital because primary objective of the Govt. while floating subsidy schemes is to help setting up new industries and help investments in the industries. What is being perceived by appellant, as purpose, is in fact, just a scale of measurement of subsidy which is given in terms of revenue related benefits. The real purpose is to assist the profitability and running of the industry and the reference to investment is to measure the amount of subsidy.
(v) Assessee has relied on the judgment in the case of Reliance Industries case (2010-TIOL-228 Mumbai High court and 88 ITD 273 Mumbai Special Bench). Recently an Hon'ble Supreme Court has remanded the mater back to the Hon'ble Mumbai High Court, directing to decide the questions framed. In all such cases, it has been repeatedly stressed that the particulars of scheme are very relevant to determine whether subsidy is revenue or capital.
(vi) In Ponni Sugar case, the Hon'ble Supreme Court has not reversed the findings of Sahney Steel Case (supra). In the 45 ITA no. 1897/Del/2010 M/s PVR Ltd.
Sahney Steel case, very clear and unambiguous finding has been given that subsidy which helps running the industries should be treated as revenue.
(vii) The assessee's case is absolutely identical to the Sahney Steel Case. There, it was linked to production here it is linked to running of multiplex. There it was sales tax waiver here it is entertainment tax waiver. Thus Sahney Steel is very much a good law as said by Hon'ble Supreme Court in Ponni Sugar. Considering the aforesaid position in law, the subsidy claimed to have been received should be treated as revenue. Assessee's reliance on all other cases is as misplaced and inapplicable as discussed in the Ponni Sugar case.
(viii) Coming to the Hon'ble Bombay High Court judgment in the case of M/s Chaphalkar Brothers (supra), ld. DR contends that there are material differences between U.P. and Maharastra state Entertainment tax. In Chaphalkar case proper facts were not represented before ITAT. Therefore, the Bombay High Court judgment cannot be held to be applicable to assessee's case.
Order of CIT(A) is relied on.
11.1. Coming to the alternate ground of the assessee to allow entertainment tax subsidy u/s 43B, ld. DR contends that assessee has claimed that even if a subsidy is held to be revenue even then also it is not taxable on account of sec. 43B as deemed payments should have been considered to have been made. It has relied on the judgment in the case of J.B. Boda & Co. Ltd. 223 ITR 271.
46 ITA no. 1897/Del/2010 M/s PVR Ltd.
11.2. The appellant's argument is totally misconceived as section 43B is not an enabling section to claim an expenditure. This section provides an additional filter before allowing certain expenses mentioned in that section. It may be noted here that the assessee did not debit entertainment expenditure in its books of account nor the AO made any disallowance by invoking section 43B. The cases cited by the appellant are also in totally different context and for different sections and situations and, therefore, they are not applicable to the appellant's case.
11.3. Since the assessee has not debited the expenditure, the deduction u/s 43B can be availed on assumption. It can be claimed only when the assessee has debited the expenditure to its P&L A/c, which is not a statutory deferment of the expenditure. In this case there is no statutory deferment, therefore, on assumption the benefit of statutory deferment cannot be give. It is pleaded that this ground of the assessee deserves to be dismissed.
11.4. Apropos the ground of ESOP and ESPS , reliance is placed on the order of ld. CIT(Appeals).
11.5. Adverting to ground no. 6, about applicability of Explanation 10 to Sec. 43(1), ld. DR pleads that AO initially held the subsidy to be capital in nature and therefore, held the same to be covered by Explanation 10 to Sec. 43(1). Therefore, he reduced the claim of depreciation holding that capital subsidy in question was given by the Govt. to help the assessee in meeting the cost of assets. The ld. CIT(Appeals) since held the subsidy to be revenue in nature, therefore, the application of Explanation 10 to Sec. 43(1) becomes automatically redundant. Ld. DR pleads:
(i) Assuming that the ITAT holds the subsidy to be capital in nature, then as a logical consequence, the cost of the asset should be 47 ITA no. 1897/Del/2010 M/s PVR Ltd.
reduced by that amount. Assessee in support has relied on the Hon'ble Supreme Court judgment in the case of CIT Vs. P.J. Chemicals Ltd. (1994) 210 ITR 830 (SC) and other judgments. In the assessee's case, the notification clearly indicates that the subsidy is being given to the capital cost of multiplex within a specified period which signifies that the subsidy, if held, to be capital, will be attributable to be given towards the capital cost of the multiplex.
(ii) The computation of subsidy is linked with the cost incurred by the assessee for setting up of multiplex.
(iii) Consequently the subsidy, being for reduction of the capital cost, is to be construed as an indirect method to subsidize the cost of the asset. Therefore, AO was justified in reducing the capital cost of the assets of the multiplex on pro rata basis.
12. Learned counsel for the assessee , in rejoinder, vehemently argues that ld. DR is trying to make out a new case by representing to treat the income in question not the subsidy but by way of illegal/ other receipt. Both the authorities after elaborate deliberation have held the income in question to be subsidy. The only question adjudicated by both authorities is about the nature being capital or revenue. Therefore, ld. DR cannot be allowed to go beyond the final findings of ld. CIT(Appeals), more so, when revenue is not in appeal against his order. Therefore, the argument of ld. DR in this behalf have no legs to stand.
12.1. Apropos the decision of Hon'ble Bombay High Court M/s Chapalkar Brothers (supra), it is contended that it completely covers and clinches the issue in favour of the assessee. Bombay Entertainment Duty Act is in parimateria with the U.P. Entertainment Tax Act and the definition clauses 48 ITA no. 1897/Del/2010 M/s PVR Ltd.
are by and large same. Ld. DR except endeavoring to create some doubts has not been able to demonstrate as to why Hon'ble Bombay High Court judgment should not be followed.
12.2. Ld. counsel apropos rejoinder on ground 6 contends that the assessee filed first appeal before ld. CIT(Appeals) pleading that the subsidy was not given directly or indirectly to reduce the cost of any asset, therefore, depreciation should not have been reduced. Ld. CIT(Appeals) on hearing the appeal of the assessee held that the subsidy was revenue in nature and therefore the explanation becomes inapplicable. However, in order to hold the subsidy as revenue in nature, ld. CIT(Appeals) himself has held that subsidy is not granted to meet the cost of any asset.
13. We have heard rival contentions and gone through the relevant material available on record. We propose to decide the various issues, arising out of this appeal in the following paragraphs:
The entertainment subsidy
(i) Facts have been narrated above. First we would like to deal with the argument of the ld. DR in relation to the plea that the receipt in question should not be treated as subsidy, but as an illegal receipt or regular receipt of income. We are unable to accept the contention of ld. DR as the department is not in appeal before the ITAT against the order of CIT(A), we refrain ourselves from entertaining such a plea, without there being a specific ground taken by revenue. Both the authorities have ultimately held the receipt in question to be entertainment subsidy only. AO held it to be capital receipt and ld. CIT(Appeals) by using his power of enhancement 49 ITA no. 1897/Del/2010 M/s PVR Ltd.
held it to be revenue in nature. In our considered view, as long as the receipt in question has been held to be entertainment subsidy in the hands of the assessee, it is of no use to devolve into some alleged discrepancies in the assessee's application for license and eligibility to entertainment tax and assessee's revenue sharing agreement. The fact of the matter remains that the revenue sharing agreement and the Govt. of U.P. notification holding the assessee as eligible for subsidy is on the record and ultimately accepted by both the authorities. We, therefore, confine ourselves to the issue about the nature of subsidy being capital or revenue, therefore, we do not wish to go into other issues about the discrepancies in application, assessee's eligibility for subsidy or income being illegal in nature.
(ii) Coming to the nature of subsidy, ld. CIT(Appeals) held it to be revenue in nature:
(a) relying on the judgment of Hon'ble Supreme Court in the case of Sahney Steel 228 ITR 253 (SC);
(b) It has been further held that the grant received by assessee was not related to any asset or capital out lay as the payment of subsidy was made after completion of multiplex theatre based on its running for a period of three years.
(c) The amount of subsidy was only quantified to the limit of cost of asset and the amount of entertainment tax collected by the assessee.
50 ITA no. 1897/Del/2010 M/s PVR Ltd.
(d) The benefit is given on the basis of collecting the E. Tax from the cinema viewers, which is a trading receipt. Retaining it and not paying a trading receipt to the Govt. amounts to revenue receipt.
(e) Since the entertainment subsidy is trading receipt the consequent subsidy will be revenue in nature only.
(iii) The assessee in the original return had offered the amount as revenue receipt. In our considered view as the facts emerge, the multiplex scheme of the U.P. Govt. came by way of amending rules of the earlier Cinematographic Act. Earlier the incentives were given for construction of new cinema halls and by new scheme it was given for construction of multiplexes.
(iv) In the cases of Pramod Kumar Shukla; Sharda Chitra Mandir; Kalpana Palace; and Sadichha Chitra (supra), such type of subsidy for construction of new cinema halls, has been held by Hon'ble Allahabad and Bombay High Court to be capital in nature.
(v) In our view the Hon'ble Supreme Court in the case of Ponni Sugars & Chemicals Ltd. (supra) has laid down the tests which are mentioned herein above. Looking at them, the basis of the scheme is very important to determine the nature of subsidy. The new scheme of multiplex under Cinematographic Act and the fact that earlier the new cinema halls construction subsidy was held to be capital in nature fortifies our view.
51 ITA no. 1897/Del/2010 M/s PVR Ltd.
(vi) Due to onslaught of cable television, there being steep decline of cinema viewers, Govt. desired to give fresh incentive to new cinema halls albeit new modern cinema halls which are known as multiplexes. Thus, the purpose of the amended cinematograph scheme was like its earlier purpose and intended to promote the cinema industry by construction of cinema halls which have multi screens and are known as multiplexes. Looking at the purpose of the earlier scheme, in our view the purpose of new scheme, is also to promote the cinema industry by setting up of long term operational and modern multiplexes equipped with the latest technology as far as possible. Thus applying the purpose test the entertainment subsidy in question is capital in nature.
(vii) The mode of payment of subsidy is not important and merely because it is linked with the collection of entertainment tax, will not be decisive to ascertain its character. This is so because the Govt. by amended scheme desired the construction of new multiplexes and further modulated the scheme in such a manner that these multiplexes work for a longer time i.e. 5 years. The incentive was released in such a manner that it will ensure the long term operation i.e. attracting the viewers and collection of E. Tax. One of the ways could have been to give upfront subsidy, in that case Govt. could not have ensured the long term operation. In order to promote the scheme, release of incentive required operators to put in 52 ITA no. 1897/Del/2010 M/s PVR Ltd.
their best efforts. The release of subsidy upfront would have come directly from the coffers of the Govt. To avoid such pressure, instead it has been provided in the form of viewership and entertainment tax collection.
(viii) The Hon'ble Supreme Court has clearly held that mode and method of release of subsidy will not determine the character. Similarly, the source of the subsidy is also irrelevant i.e. whether the subsidy comes directly from the coffers of the Govt. or it is sourced from instalment of E. Tax. It was modulated in such a way that the assessee derived it from alternate resources which in this case is cinema viewers or thereby entertainment tax collection. The scheme was designed to promote the investors in entertainment industry to establish new multiplexes. The object and purpose is to promote ailing cinema industry as a whole. In our considered view, Hon'ble Supreme Court judgment in Ponni Sugars & Chemicals Ltd. (supra) answers the question before us and is fully applicable to assessee's case
(ix) The issue is further clinched by Hon'ble Bombay High Court in the case M/s Chapalkar Brothers (supra), which has clearly held the subsidy given for construction of multiplexes to be capital in nature and merely because it was linked to entertainment subsidy and not with repayment of loans, cannot be held to be revenue in nature.
(x) Facts in the case of Sahney Steel & Press Works Ltd. Vs. CIT (1997) 228 ITR 253 (SC), relied on by ld. DR, are on 53 ITA no. 1897/Del/2010 M/s PVR Ltd.
different footing. In that case incentives were production incentives in the sense that assessee was entitled to such incentives only after it went into production. The scheme was not to make any payment directly or indirectly for the setting up of the industries. It was only after the industries had been set up and production had been commenced that the incentives were to be given. On these facts, the Hon'ble Court held that amounts received were production incentive and operational subsidies and not capital subsidies. Subsidy payment were held to be revenue in nature. The facts being distinguishable to assessee' case, ratio of Ponni Sugar & Chemicals is applicable to assessee's case.
(xi) In view of direct judgments of Hon'ble Bombay High Court in M/s Chapalkar Brothers (supra); and that of Hon'ble Supreme Court judgment in the case of Ponni Sugars & Chemicals Ltd. (supra), which has approved many such judgments cited in the body of the order, we hold that the subsidy received by the assessee is capital in nature. This ground of the assessee is allowed.
13.1. Coming to the alternate submission about the applicability of Sec. 43B, since we have held the subsidy to be capital in nature, the alternate ground does not survive.
13.2. Coming to the next ground about applicability of Explanation 10 to sec. 43(1), ld. counsel has relied on Hon'ble Supreme Court judgment in the case of CIT Vs. P.J. Chemicals Ltd. (supra) and ITAT Vishakhapatnam Bench judgment in the case of Sasisri Extractions Ltd. Vs. ACIT (2008) 307 ITR (AT) 127. The scheme of the U.P. Govt. has been spelt out above. The 54 ITA no. 1897/Del/2010 M/s PVR Ltd.
incentive does not refer to acquire any particular asset; the object and purpose of the scheme was to promote the cinema industry by promoting the construction of multiplexes to ward of effects of cable television. 13.3. Hon'ble Supreme Court judgment in the case of CIT Vs. P.J. Chemicals Ltd. (supra) has held that "actual cost" should be interpreted in a liberal manner. The purpose of the U.P. Govt. being to promote the cinema industry as a whole, only because the basis for determining the subsidy is capped at the capital assets, will not mean that he scheme is to meet the cost of any specified asset directly or indirectly. Therefore, the amount of such subsidy cannot be held to reduce the actual cost of asset u/s 43(1) Explanation 10 of the Act.
13.4. Ld. DR has filed written submission, which we have referred hereinabove in para 11E(ii). While arguing it to be revenue subsidy, has pleaded that there was no obligation on assessee to utilize the subsidy in any specified manner. Similarly, ld. CIT(Appeals) also while holding the subsidy to be revenue in nature, has given a finding that the subsidy was not relatable to any specific asset of the multiplex. 13.5. Department cannot aprobate and reprobate on the same issue. While stressing the subsidy as revenue in nature both ld. CIT(Appeals) and ld. CIT(DR) have offered a view that subsidy was not intended to be utilized in specified manner. The view make it clear that the subsidy was not provided for meeting the cost of any asset.
13.6. In view of these facts and circumstances, we hold that E. 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. (supra) 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 55 ITA no. 1897/Del/2010 M/s PVR Ltd.
indirectly reduce the cost of any asset, only because the amount of subsidy was linked with the capital cost of assets.
13.7. In view of Hon'ble Supreme Court judgment in the case of P.J. Chemicals Ltd. (supra); ITAT Vishakhapatnam Bench judgment in the case of Sasisri Extractions Ltd. (supra) 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. 13.8. Coming to the issue of ESOP and ESPS, facts have been mentioned above. Respectfully following coordinate Bench of ITAT Delhi judgment in the case of DCIT Vs. Ranbaxy Laboratories Ltd. (2009) 124 TTJ (Del) 771; and Mumbai ITAT judgment in the case of H.P. Industry (supra), we hold that the provision made by assessee without actually paying them to the employees cannot be allowed as deduction. This ground of the assessee is dismissed.
13.9. Coming to the issue of applicability of Sec. 14A, Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra), has held that Rule 8D is prospectively applicable from A.Y. 2008-09. Therefore, the same will not be applicable in this year. The disallowance, if any, u/s 14A, can be made by AO by scientifically establishing the direct or indirect nexus of expenses attributable to the earning of the exempt income. In the assessment order, the AO has not provided any such working or nexus to enable us to come to a definite view in the matter. In view thereof, we set 56 ITA no. 1897/Del/2010 M/s PVR Ltd.
aside the issue back to the file of AO to decide the same afresh in accordance with law and our observations above.
14. In the result, assessee's appeal is partly allowed for statistical purposes.
Order pronounced in open court on 20-04-2012.
Sd/- Sd/- ( A.N. PAHUJA) ( R.P. TOLANI) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 20-04-2012. MP Copy to : 1. Assessee 2. AO 3. CIT 4. CIT(A) 5. DR