2014 (9) TMI 255 - AT - Income Tax

ITAT rules for assessee on multiple tax issues, including deductions and revenue treatment

DCIT Cir. 1(2), Baroda Versus M/s. Inox Leisure Ltd.

DCIT Cir. 1(2), Baroda Versus M/s. Inox Leisure Ltd. - TMI Issues Involved:1. Nature of entertainment tax exemption as capital or revenue receipt.2. Deductibility of expenditure on professional fees and stamp duty.3. Eligibility for deduction under Section 80IB.4. Inclusion of provisions for gratuity and leave encashment in book profit under Section 115JB.5. Treatment of loss from cross-currency swap transactions.6. Deductibility of expenditure on abandoned projects.7. Inclusion of certain incomes in computing deduction under Section 80IB.Issue-wise Detailed Analysis:1. Nature of Entertainment Tax Exemption:The primary issue was whether the entertainment tax exemption received by the assessee for multiplexes at Pune and Baroda should be treated as a capital receipt or a revenue receipt. The assessee argued that these exemptions were capital receipts not chargeable to tax, citing the New Package Scheme of Incentives for Tourism Projects and various supporting documents. The AO contended that since the exemption was granted after the commencement of business operations, it should be treated as a revenue receipt. The CIT(A) and ITAT, however, concluded that the subsidy was intended to promote the construction of new cinema complexes, thus qualifying as capital receipts. This conclusion was supported by the decision of the Hon'ble Bombay High Court in the case of M/s. Chaphalkar Brothers, Pune.2. Deductibility of Expenditure on Professional Fees and Stamp Duty:The AO disallowed the expenditure on professional fees for trademark registration and stamp duty for loans as capital expenditure. The CIT(A) allowed the deduction, referencing the Supreme Court decisions in CIT vs. Finley Mills Ltd. and India Cements Ltd. The ITAT upheld this view, noting that the expenditure on trademark registration and stamp duty for obtaining loans is revenue in nature, as established by various judicial precedents.3. Eligibility for Deduction under Section 80IB:The AO denied the deduction under Section 80IB, arguing that the built-up area of the multiplexes did not meet the prescribed minimum requirements. The CIT(A) reversed this decision, stating that the AO had incorrectly excluded common areas from the built-up area calculation. The ITAT remanded the issue back to the AO for fresh consideration, emphasizing the need for technical assistance from experts to ascertain compliance with the statutory requirements.4. Inclusion of Provisions for Gratuity and Leave Encashment in Book Profit under Section 115JB:The AO added back provisions for gratuity and leave encashment to the book profit under Section 115JB, considering them unascertained liabilities. The CIT(A) and ITAT disagreed, following the precedent set by the Bombay High Court in Echjay Forgings (P) Ltd., which held that provisions made on an actuarial basis are ascertained liabilities and should not be added back in the computation of book profit.5. Treatment of Loss from Cross-Currency Swap Transactions:The AO treated the loss from cross-currency swap transactions as speculative and disallowed it. The CIT(A) allowed the claim, noting that the transactions were connected to a bank loan for the Baroda unit and were not speculative in nature. The ITAT remanded the issue back to the AO for reconsideration in light of the judgments in CIT vs. Wood Ward Governor India and V.S. Dempo & Company, which were not available to the AO earlier.6. Deductibility of Expenditure on Abandoned Projects:The assessee claimed deductions for expenditures on abandoned projects at Gurgaon, Andheri, and Allahabad, arguing that they were revenue expenditures incurred in the course of expanding the existing business. The AO and CIT(A) disallowed the claims, treating the expenditures as capital in nature. The ITAT reversed this decision, citing the Delhi High Court's ruling in CIT vs. Priya Village Roadshows Ltd., which allowed similar expenditures as revenue expenses for abandoned projects in the same line of business.7. Inclusion of Certain Incomes in Computing Deduction under Section 80IB:The assessee's appeals included grounds related to the exclusion of gains from cross-currency swap transactions and interest income from the computation of deduction under Section 80IB. The assessee did not press these grounds during the hearing, and they were dismissed as academic.Conclusion:The ITAT provided a detailed analysis and rulings on each issue, often referencing relevant judicial precedents. The appeals resulted in a mix of affirmations, reversals, and remands for further consideration, ensuring a comprehensive and fair adjudication of the matters at hand.