2018 (4) TMI 132 - AT - Income Tax

Entertainment tax subsidy deemed capital receipt, not for daily expenses. Department's appeals dismissed.

The DCIT, Circle-2, Uttarakhand Versus Shipra Hotels Ltd.

The DCIT, Circle-2, Uttarakhand Versus Shipra Hotels Ltd. - TMI Issues Involved:1. Whether the entertainment tax collected should be treated as a capital receipt or revenue receipt.Issue-wise Detailed Analysis:1. Treatment of Entertainment Tax Collected:The primary issue in these appeals was whether the Ld. CIT(A) was justified in treating the entertainment tax collected by the assessee as a capital receipt. The assessee, engaged in running a hotel, trading IMFL, real estate, and operating a mall and multiplexes, revised its return of income to show the entertainment tax receipt as a capital receipt instead of a revenue receipt.The A.O. argued that the entertainment tax subsidy granted by the State of U.P. was given after the multiplex had started operations, with the purpose of helping the multiplex run profitably, thus classifying it as a revenue receipt. This treatment placed the subsidy outside the purview of Section 80IB of the I.T. Act, as it was considered 'attributable' rather than 'derived' from the business.The assessee contended that the subsidy was granted under the U.P. Government's incentive scheme for the promotion of multiplex construction, limited to the cost of construction (excluding land). The assessee cited three Allahabad High Court judgments supporting the classification of such subsidies as capital receipts.The Ld. CIT(A) agreed with the assessee, noting that the subsidy was linked to capital investments in setting up multiplexes, intended to offset the capital cost incurred by the owner/operator. The Ld. CIT(A) directed the A.O. to treat the receipt as a capital receipt, reduce the cost of the relevant block of assets (Building and Machinery), and adjust the claim of depreciation accordingly.The Department appealed, arguing that the subsidy was for meeting day-to-day business expenses and thus should be treated as revenue receipt. The assessee countered by referencing the Supreme Court judgment in CIT-1, Kolhapur vs. M/s. Chaphalkar Brothers, Pune, which ruled that similar subsidies were capital receipts.The Tribunal examined the rival submissions and the material on record, including the Supreme Court judgment, which emphasized the 'purpose test' to determine the nature of the subsidy. The judgment clarified that the object of the subsidy was to promote the construction of multiplexes, a capital-intensive endeavor, and not to support day-to-day operations. The Tribunal concluded that the entertainment tax subsidy received by the assessee was indeed a capital receipt, aligning with the Supreme Court's ruling.Consequently, the Tribunal dismissed the Department's appeals for the assessment years 2008-2009, 2009-2010, and 2010-2011, upholding the Ld. CIT(A)'s decision to treat the entertainment tax collected as a capital receipt.Conclusion:In conclusion, the Tribunal affirmed that the entertainment tax subsidy granted under the U.P. Government's incentive scheme for multiplex construction should be treated as a capital receipt. This decision was based on the purpose of the subsidy, which was to promote the construction of multiplexes, a capital-intensive activity, rather than to support day-to-day business operations. The Department's appeals were dismissed, and the Ld. CIT(A)'s orders were upheld.