Subsidy purpose test: entertainment tax incentive for new multiplexes was treated as a capital receipt, not revenue.

The character of an entertainment tax subsidy depends on the object of the incentive scheme. Where the scheme is designed to promote the setting up of new multiplexes and to offset construction and installation costs needed to make the project operational, the subsidy is a capital receipt. Its source, recurring nature, and collection through deemed deposit by retention of entertainment tax do not change that character. The decisive test is the purpose of the subsidy, not the payment mechanism or timing, so the receipt was treated as capital and not revenue.

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Issues: Whether the entertainment tax subsidy received under the Uttar Pradesh incentive scheme was a capital receipt or a revenue receipt.

Analysis: The character of a subsidy depends on the purpose for which it is granted. Where the object of the scheme is to promote setting up of new multiplexes and to offset the cost of construction and installation necessary to make the project operational, the receipt is on capital account. The source of the subsidy, the fact that it is given year after year, and the mechanism of deemed deposit through retention of collected entertainment tax do not alter its character. The decisive consideration is the object of the scheme, not the form of payment or the time when it is received.

Conclusion: The entertainment tax subsidy was a capital receipt and not a revenue receipt; the finding was in favour of the assessee and against the Revenue.

Ratio Decidendi: The nature of a subsidy is determined by its purpose, and a subsidy intended to facilitate setting up of a new unit or project is a capital receipt even if it is quantified or disbursed through a revenue-linked mechanism.

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