HIGH COURT OF GUJARAT
Deputy Commissioner of Income-tax
Inox Leisure Ltd.
TAX APPEAL NOs. 167 to 169 OF 2012
JANUARY 8, 2013
Akil Kureshi, J.
These appeals arise out of the common background. They have been heard together and would be disposed of by this common judgement.
2. Facts being identical, we may notice those as stated in Tax Appeal No. 167 of 2012. For the assessment year 2003-04 revenue has challenged judgement of Income Tax Appellate Tribunal (‘the Tribunal’ for short) dated 09.09.2011. Following questions have been presented for our consideration:
“I. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the entertainment tax exemption of Rs. 1,85,06,998/- and Rs. 1,14,47,905/- in respect of Pune and Baroda Multiplexes respectively are capital receipt, which is not exigible to tax for A.Y. 2003-04, without appreciating the fact that the subsidy received by the assessee was after the completion of the cinema house and commencement of operation and used entirely for the business operation?”
II. Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amount set aside by the assessee to provide for meeting liabilities other than ascertained liabilities was not required to be added back while computing the book profit u/s. 115JB of the Act?”
3. With respect to question No. 1, the facts are that the respondent-assessee, a company engaged in the business of operating multiplexes and theatres in Pune and Baroda had, during the previous year relevant to the assessment year under consideration, received an amount of Rs. 1,14,47,905/- by way of exemption from payment of entertainment tax relatable to its Baroda multiplex unit. Such exemption was granted by the State Government under a scheme formulated under a Resolution dated 20.12.1995 titled as “New Package Scheme of Incentive for Tourism Projects 1995 to 2000”. The assessee claimed that such tax exemption was granted for covering the capital outlay and therefore, such receipt was capital in nature. The Assessing Officer, however, treated such receipt as revenue receipt primarily on the ground that such assistance was granted to the assessee after the commencement of the operation of the business and such assistance therefore, was for its business operations. Assessing Officer was of the opinion that the object of the incentive was not to enable the assessee to acquire new plant or machinery but for the purpose of carrying the business operations. Likewise, the assessee also received similar entertainment tax exemption of Rs. 1.85 crores (rounded off) from the State of Maharashtra under its own incentive scheme for its multiplex unit situated at Pune. With respect to such incentive also the revenue contended that the receipt was revenue in nature.
4. Assessee carried the matter in appeal. CIT (Appeals) reversed the decision by reversing the Assessing Officer’s decision and held that the receipt was capital in nature. The Appellate Authority examined the provision of the scheme and noted that the concession in entertainment tax was relatable to the capital investment made. With respect to Pune unit also, the Commissioner held in favour of the assessee.
5. Revenue carried the matter further in appeal before the Tribunal. The Tribunal by the impugned judgement confirmed the view of CIT (Appeals). In the said judgement, the Tribunal principally relied on the decision of Bombay High Court in case of CIT v. Chaphalkar Bros. [Tax Appeal No. 1036 of 2010 and connected appeals dated 08.06.2011] in which, the Bombay High Court had in light of the incentive scheme of the Maharashtra Government for multiplexes, upheld the Tribunal’s decision treating such receipts as capital in nature.
6. Learned counsel for the revenue referred to the scheme of incentive formulated by the State Government and contended that the benefit granted was in the nature of entertainment tax exemption. Such benefit was to be made available only once the multiplex was in operation. Such incentive must therefore, be treated as revenue receipt. He took us through various provisions of the scheme to further contend that the Tribunal committed an error in holding that the receipt was a capital receipt. Counsel also produced, for our perusal, the notification issued by the Maharashtra Government under which, certain incentives were granted to the multiplex theaters in the State from payment of certain taxes. On the basis of such document, counsel contended that the Tribunal committed a grave error in relying on the decision of the Bombay High Court in case Chaphalkar Bros. (supra).
7. On the other hand, learned counsel, Mr. Soparkar for the assessee opposed the appeals contending that looking to the various terms of the scheme and the purpose for which the incentive was granted, the Tribunal rightly held that the receipt was capital in nature. Counsel relied on the decision of Apex Court in case of Sahney Steel & Press Works Ltd. v. CIT  228 ITR 253 and CIT v. Ponni Sugars & Chemicals Ltd.  306 ITR 392 in support of his contentions.
8. Having thus heard learned counsel for the parties with respect to question No.1, we may notice the relevant features of the incentive scheme of the State Government. The preamble to the resolution records that based on the new tourism policy and in order to give boost to tourism sector by attracting higher investment in the areas with tourism potential and to generate employment opportunities, the State Government has introduced the package scheme of incentives for tourism projects for the period 1995 to 2000. Under Clause 3 of the scheme, only a new tourism unit or expansion of an existing unit was made eligible for incentives. It was further provided that the new project should have separately identifiable capital investment and should not be an expansion of the existing project. Expansion of an existing project would also be eligible for incentives provided the existing tourism unit increases its investment in fixed capital or capacity by at least 50% or more. Clause 4.4 of the scheme defines ineligible investment which included the working capital, goodwill, pre-operative expenses etc. Clause 4.5 defines eligible capital investments to include lands as required for the project, building used for eligible unit including administrative building etc., plant and machinery, the cost of development of the environment of the location of the eligible unit, installation charges etc.
9. Clause 8 of the scheme pertains to investments and provides a tax holiday of 5-10 years to new units and expansion of existing units in respect of the specified taxes up to 100% of the capital investment. One of the taxes specified for exemption is entertainment tax. Clause 8.1 of the scheme pertains to period of eligibility and provides that the quantum of incentives shall not exceed 100% of eligible capital investment and if the limits of incentives expire before the eligible period, the unit would not be allowed to avail of any further benefit. For the purpose of different units, the tax exemption period varied between 5 to 10 years. Clause 11 pertains to procedure for claiming incentives and provides that the competent authority, after scrutinizing the application for exemption, would issue eligibility certificate so as to enable the units to obtain the benefits.
10. From the above noted provisions of the scheme it can be clearly seen that the entire purpose of granting tax exemption was for giving the boost to the terrorism sector. This was to be achieved by attracting higher investment in areas with tourism potential. In order to achieve such purpose, exemption from various taxes as may be applicable was granted. It is true that the exemption was to be computed in terms of tax otherwise payable by the industry. However, the purpose of such exemption was to meet with the capital outlay already undertaken by the assessee. This clearly comes out from various provisions of the scheme. For example, the scheme was applicable only to the new project or to a existing project provided investment in fixed capital or capacity was increased atleast by 50%. Thus, the very eligibility for seeking exemption was linked with new investment being made in fixed capital. Further though the scheme envisaged a certain period spanning for 5 to 10 years during which such exemption could be availed depending on the category of the unit, such exemption would cease the moment the total incentives touched 100% of the eligible capital investments. In other words, the upper limit of total incentive which the unit could receive from the State Government in the form of tax waiver would not exist 100% of the eligible capital investment regardless of the residue of the period of its exemption eligibility as per the scheme. From the combined reading of salient features of the scheme, we have no doubt in our mind that the incentive was being offered for recouping or covering a capital investment or outlay already made by the assessee.
11. In case of Sahney Steel & Press Works Ltd. (supra) the Apex Court held and observed that the character of the subsidy in the hands of the recipient whether revenue or capital will have to be determined having regard to the purpose for which the subsidy was given. It is of course true that the said decision, certain sales tax exemption was treated as revenue in nature. However, the said decision came up for consideration subsequently before the Apex Court in case of Ponni Sugars & Chemicals Ltd. (supra) wherein it was observed that the character of receipt of a subsidy in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is granted. In other words, one has to apply the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. If the object of the subsidy is to enable the assessee to run the business more profitably then the receipt is on revenue account. On the other hand, if the object of the assistance under the scheme is to enable the assessee to set up a new unit or expand the existing unit then the receipt of subsidy would be of capital account.
12. Considering the above decision of the Supreme Court and applying the ratio laid down therein to the scheme under consideration, we are of the opinion that the Tribunal committed no error.
13. Insofar as Maharashtra scheme is concerned, our task is much easier. To begin with the scheme itself is very specific in its purport and intent. Under notification dated 20.09.2001, by which such scheme was promulgated by the State of Maharashtra, it is provided that lately people prefer to see movies at home. Multiplex theatres are, therefore, required to be given incentive. These complexes are highly capital incentive and their gestation period is also quite longer. The Government, therefore, finds a need to support such complexes by offering incentives in the form of entertainment duty. The eligible units were, therefore, offered incentive in terms of entertainment tax exemption at different ratio for different purpose of its operation. Full exemption from payment of such tax was offered for first three years; 75% of the duty was waived for subsequent two years whereas from the sixth year, full duty would have to be paid.
14. The very purpose of the scheme thus was to give incentive to the multiplex units which were found to be highly capital incentive. The very scheme was considered in case of Chaphalkar Bros. (supra) in which, relying on the decision in case of Sahney Steel & Press Works Ltd. (supra) Ponni Sugars & Chemicals Ltd. (supra) the Bombay High Court upheld the Tribunal’s decision making following observations:
“5. Since the object of subsidy was to promote construction of multiplex theater complexes, in our opinion, receipt of subsidy would be on capital account. The fact that the subsidy was not meant for repaying the loan taken for construction of multiplexes cannot be a ground to hold that subsidy receipt was on revenue account, because, if the object of the scheme was to promote cinema houses by constructing multiplex theaters, then irrespective of the fact that the multiplexes have been constructed out of own funds or borrowed funds, the receipt of subsidy would be on capital account. In the light of the aforesaid objects of the Scheme framed by the State Government, the decision of the Income Tax Appellate Tribunal that the amount of subsidy received by the assessee is on capital account cannot be faulted. Accordingly, both the appeals are dismissed with no order as to costs.”
15. In this respect also looking to the salient features of the scheme noted above as also the decision of the Bombay High Court interpreting this very scheme in context of the same situation, we uphold the decision of the Tribunal in this respect.
16. Coming to the question No. 2, we notice that the same arises out of the Tribunal’s decision to uphold the CIT(A)’s view that the provision of Rs. 5,10,000/- made by the assessee towards its gratuity liability cannot be added back for the purpose of computation of the assessee’s income under Section 115JB of the Act. Section 115JB of the Act as is well known pertains to special provision for payment of tax by certain companies. Sub-section (1) of Section 115JB of the Act provides that a minimum alternative tax to be paid by the companies as computed under the said provision. Sub-section (2) of Section 115 JB requires every company for the purposes of the said section to prepare its profit and loss account in accordance with the provisions of paras 2 and 3 of Schedule 6 of the Companies Act. Explanation 1 to said section provides that for the purposes of the said section, “book profit” means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by various items specified in Clauses (a) to (i) provided therein. Clause (c) thereof reads as thus:
“(c) The amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities;”
In other words, if an amount is specified for provision which is for meeting with the liabilities not ascertained such provision so made shall have to be added back to the book profit of the company. Put it differently, if such provision is made for ascertained liability, no such addition back shall be made. In this context, the Tribunal was called upon to decide whether the assessee having made provision of Rs. 5,10,000/- towards gratuity would be covered under Clause (c) to Explanation 1 to Section 115JB of the Act. The Tribunal relied on the decision of the Bombay High Court in case of CIT v. Echjay Forgings (P.) Ltd.  251 ITR 15 and confirmed the view of the CIT(A).
17. Having heard learned counsel for the parties and having perused documents on record, we notice that CIT(A) as well as the Tribunal both noted that such provision for payment of gratuity was made on the basis of actuarial valuation method to this aspect. The revenue has not been able to make any dispute. If we proceed on that basis, law to our mind, seems fairly well settled. Bombay High Court in case of Echjay Forgings (P.) Ltd (supra) in the context of similar provisions made in Section 115JB of the Act examined whether the provision of gratuity liability of a company is required to added back to its book profit. In this context, it was held that the assessee had made the provision for gratuity on the basis of actuarial calculations. He, therefore, cannot be said that the provision for gratuity is not ascertained liability.
18. In case of Bharat Earth Movers v. CIT  245 ITR 428 the Apex Court held that the amounts set apart by an assessee to meet its liability on account of leave encashment of employees is not a contingent liability. It was observed that what should be certain is the incurring of the liability which should also be estimated with reasonable certainty though the actual quantification may not be possible then. Its requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date.
19. Likewise in case of Metal Box Co. of India Ltd. v. Their Workmen  73 ITR 53 (SC), the Apex Court examined the question whether it is legitimate in such a scheme of gratuity to estimate the liability on an actuarial valuation and deduct the same in profit and loss account while working out the net profit of a company and further whether such appropriation amounts to a reserve or provision. The Supreme Court held that an assessee can while working out its net profits, provide from its gross receipts his liability to pay a certain sum towards gratuity liabilities of the employees. If such liability is properly ascertainable and it is possible to arrive at proper discounted present value.
20. In case of Rotork Controls India (P.) Ltd. v. CIT  314 ITR 62, the Supreme Court in the context of an assessee making provision for estimated expenditure towards warranty observed that provision is a liability which can be measured only by using substantial degree of estimation. Such provision is recognized when an assessee had a present obligation as a result of past events, and it is possible that any outflow of resources will be required to settle the obligation and further a reliable estimate can be made of the amount of obligation.
21. Considering the above judicial pronouncements and the facts on hand, we have no hesitation in upholding the Tribunal’s view that though actual payment of gratuity may be made at a later point of time upon periodical release of the employees from service, it is provision having been made on actuarial basis it cannot be stated to be an uncertained liability so as to add it back in terms of Clause (c) to Explanation 1 to Section 115JB.
In the result, all the tax appeals are dismissed.