Apex Court held ‘Purpose test’ is crucial factor to determine whether subsidy is capital or revenue in nature

CIT vs. Chaphalkar Brothers Pune (Supreme Court)

Brief Facts of the Case

• The Assessee, Chaphalkar Brothers Pune, one of the appellant from batch of appeals from Maharashtra and West Bengal, was engaged in the business of Multiplex Theatre in Pune, Maharashtra.
• The Govt. of Maharashtra, by way of ordinance before 4^th December, 2001, introduced subsidy scheme in the form of exemption of entertainment duty in Multiplex Theatre Complexes newly set up, for a period of three years, and thereafter payment of entertainment duty @25% for the subsequent two years.
• The object and reason of the ordinance [which later on became part of Bombay Entertainment Duty (Revised) Act, 2001] was to promote construction of new cinema houses in the state as the concept of a complete Family Entertainment Centre, more popularly known as Multiplex Theatre Complex, has emerged in recent times. Since it was highly capital intensive and their gestation period is quite long, Government decided to grant concession in entertainment duty to these Multiplex Theatre Complexes.
• Here, The Assessing officer found that aforesaid scheme was really to support the on-going activities of the multiplex and not for its construction, since the scheme took the form of a charge on the gross value of the ticket and contributed towards the day to day running expenses; and thus held that it was in the nature of revenue receipt. CIT(A) upheld the Assessment Order.
• The ITAT summarized that broadly speaking the subsidy can be of two types: (i) for the purpose of helping the growth of an industry; and (ii) for the purpose of supplementing the profits of an industry; and held that on close examination undisputedly it was noticed that the scheme in question has fallen in the first category. Though the collection was in the form of an entertainment Duty via sale of tickets for a limited period but its utilization was predetermined and granted with an assurance to cover up the cost of construction. HC dismissed the revenue’s appeal and upheld ITAT Order. Aggrieved by the order revenue appealed before the Apex Court.

Revenue contention