The UP Scheme under which the assessee claims exemption to the extent of entertainment tax subsidy, claiming it to be capital receipt, is clearly designed to promote the investors in the cinema industry encouraging establishment of new multiplexes. A subsidy of such nature cannot possibly be granted by the Government directly. Entertainment tax is leviable on the admission tickets to cinema halls only after the facility becomes operational. Since the source of the subsidy is the public at large which is to be attracted as viewers to the cinema halls, the funds to support such an incentive cannot be generated until and unless the cinema halls become functional.
The State Government had offered 100% tax exemptions for the first three years reduced to 75% in the remaining two years. Thus, the amount of subsidy earned would depend on the extent of viewership the cinema hall is able to attract. After all, the collections of entertainment tax would correspond to the number of admission tickets sold. Since the maximum amount of subsidy made available is subject to the ceiling equivalent to the amount invested by the assessee in the construction of the multiplex as also
the actual cost incurred in arranging the requisite equipment installed therein, it naturally follows that the purpose is to assist the entrepreneur in meeting the expenditure incurred on such accounts. Given the uncertainties of a business of this nature, it is also possible that a multiplex owner may not be able to muster enough viewership to recover all his investments in the five year period.
Seen in the above light, we are of the considered view that it was unreasonable on the part of the Assessing Officer to decline the claim of the assessee about the subsidy being capital receipt. Such a subsidy by its very nature, was bound to come in the hands of the assessee after the cinema hall had become functional and definitely not before the commencement of production. Since the purpose was to offset the expenditure incurred in setting up of the project, such receipt (subject, of course, to the cap of amount and period under the scheme) could not have been treated as assistance for the purposes of trade.
The facts that the subsidy granted through deemed deposit of entertainment tax collected does not require it to be linked to any particular fixed asset or that is accorded “year after year”do not make any difference. The scheme makes it clear that the grant would stand exhausted the moment entertainment tax has been collected (and retained) by the multiplex owner meeting the entire cost of construction (apparatus, interiors etc. included), even if it were “before completion of five years”.
As held by the Supreme Court in the case of Sahney Steel (supra), the character of the subsidy is to be determined having regard to the purpose for which it is granted. The “purpose test”, referred to in Ponni Sugars (supra) when applied to the case at hand, leaves no room for doubt that the assistance in the form of entertainment tax exemption is shown to have come in the hands of assessee to enable it to set up the new unit which renders it a receipt on capital account. The periodicity (year to year) of the
subsidy, its source (collections from the public at large) and the form (deemed deposit) are irrelevant considerations.
The factual matrix in Ponni Sugars (supra) is nearer home to the case at hand which is distinguishable from the case of Sahney Steel (Supra). In Sahney Steel (supra), the incentives were linked to production which is the prime reason why the subsidy of sales tax was held to be operational subsidy or revenue in nature.
Indeed, in Ponni Sugars (supra), the fact that the amount received as subsidy was required necessarily to be utilized only for repayment of term loans for setting up of the new unit was one of the important factors taken into account for treating it to be capital receipt. The case at hand is not very different. As observed earlier, the subsidy is meant to liquidate the cost incurred in setting up of the multiplex cinema hall and for making it operational by installing the requisite apparatus. The flow of subsidy stops as soon as the expenditure on such account is met in entirety.
For the foregoing reasons, we find that ITAT in the impugned orders has taken a correct view of law on the basis of available facts to conclude that the assessee is entitled, in terms of the UP Scheme, to treat the amounts collected towards entertainment tax as capital. The question of law raised in these appeals is, thus, answered in the negative against the revenue/appellant.
The appeals of the Revenue challenging the view taken by CIT and ITAT are, thus, liable to be dismissed. This court, however, is of the view that the matter cannot end only with such result of the process. We notice that the Assessing Officer having declined to grant the benefit under the scheme to the assessee (claiming the amounts collected as entertainment tax to be capital receipts), the first and the second appellate court concluded their respective orders (in appeals brought by the assessee and revenue respectively) by holding that the claim of the assessee was correct. It appears that there has been no exercise undertaken to find on facts as to the expenditure incurred by the assessee in the cost of construction and setting up of the cinema hall to make it functional so as to assess the extent of capital subsidy it can claim over the assessment years in question on account of entertainment tax exemptions.
Thus, while dismissing the appeals of the Revenue, we direct the Assessing Officer to do the needful in the above regard for finalizing the assessments for the periods in question.