Facts of the Case

The Revenue filed a batch of four appeals under Section 260A of the Income-tax Act challenging a common order dated 23.10.2024 passed by the Income Tax Appellate Tribunal for Assessment Years 2008-09, 2009-10, 2010-11 and 2014-15. The ITAT had dismissed the Revenue’s appeals and allowed the cross objections filed by PVR Ltd.

The assessee, PVR Ltd., is engaged in the business of exhibition of films through multiplexes. It received Entertainment Tax Subsidy from the Governments of Uttar Pradesh, Madhya Pradesh and Maharashtra under incentive schemes framed to promote construction and development of new multiplex theatre complexes. Under these schemes, the assessee was permitted to retain the entertainment tax collected on sale of cinema tickets instead of depositing the same with the respective State Governments, subject to limits and time periods prescribed under the schemes.

The Assessing Officer treated the retained entertainment tax as a revenue receipt chargeable to tax, holding that the subsidy was not linked to any capital outlay, that the multiplexes were operated from leasehold premises, and that the benefit accrued only after commencement of operations. The additions were deleted by the Commissioner of Income Tax (Appeals) and the ITAT upheld the same.

Issues Involved

Whether the Entertainment Tax Subsidy retained by the assessee under State Government incentive schemes constituted a capital receipt or a revenue receipt chargeable to tax, and whether any substantial question of law arose in view of binding judicial precedents.

Petitioner’s Arguments

The Revenue contended that the subsidy was operational in nature since it was granted after commencement of business and was linked to the collection of entertainment tax on sale of tickets. It was argued that the assessee was not the owner of the multiplex buildings, depreciation was claimed by the lessors, and the subsidy was not directly relatable to acquisition of any capital asset.

Respondent’s Arguments

The assessee submitted that the issue was squarely covered by binding decisions of the Supreme Court and High Courts. It was argued that the dominant purpose of the subsidy schemes was to encourage construction of capital-intensive multiplexes and that the form or timing of the subsidy was irrelevant. Reliance was placed on the Supreme Court decisions in CIT v. Ponni Sugar and Chemicals Ltd. and Commissioner of Income Tax-1, Kolhapur v. Chaphalkar Brothers Pune, as well as High Court decisions in Inox Leisure Ltd. and earlier orders in the assessee’s own case.

Court Order / Findings

The Delhi High Court examined the impugned order of the ITAT and noted that the Tribunal had correctly applied the purpose test to determine the nature of the subsidy. The Court observed that the object of the State Government schemes was to incentivise setting up of multiplex theatre complexes, which are capital-intensive projects with long gestation periods.

The Court referred to the Supreme Court’s decision in Chaphalkar Brothers Pune, wherein it was held that entertainment duty exemptions granted to promote construction of multiplexes constitute capital receipts, applying the purpose test laid down in Ponni Sugar and Sahney Steel. The Supreme Court had categorically held that the source, form or timing of the subsidy is immaterial, and what is determinative is the object for which the subsidy is granted.

The High Court held that the subsidy schemes involved in the present case were identical in purpose and substance to those considered by the Supreme Court. Accordingly, the questions sought to be raised by the Revenue were fully covered against it by binding precedent.

Important Clarification

The High Court reiterated that for determining whether a subsidy is capital or revenue in nature, the decisive factor is the purpose for which the subsidy is granted. Incentives granted to encourage setting up of capital-intensive infrastructure such as multiplexes constitute capital receipts, irrespective of the mechanism through which the subsidy is disbursed.

Final Outcome

The appeals filed by the Revenue were dismissed. The Delhi High Court held that no substantial question of law arose for consideration and upheld the order of the ITAT treating the Entertainment Tax Subsidy received by PVR Ltd. as a capital receipt not chargeable to tax.

Link to download order https://www.mytaxexpert.co.in/uploads/1769757436_THEPR.COMMISSIONEROFINCOMETAXCENTRAL1VsPVRLTD.pdf 

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