AHMEDABAD, APR 05, 2013: THE issues before the Bench are - Whether tax exemption granted by the State Governments under a specified scheme for promoting capital investments in the multiplex units, can be considered as revenue in nature, merely because the assessee has received the funds after commencement of its operations and Whether provision of gratuity liability of a company is required to added back to its book profit u/s 115JB, although the provision for gratuity is made on the basis of actuarial calculations. And the answers go in favour of the assessee.

Facts of the case

Tax exemption grant from State Government - capital or revenue receipt

The assessee, is engaged in the business of operating multiplexes and theaters in Pune and Baroda had, received an amount 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 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 AO, however, treated such receipt as revenue receipt 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. Likewise, the assessee also received similar entertainment tax exemption from the State of Maharashtra under its own incentive scheme for its multiplex unit situated at Pune, which was also considered as revenue in nature by the Department. On appeal, the CIT(A) of the respective jurisdiction reversed the orders of the AO.

On further appeal by the Revenue before the Tribunal, the Tribunal relied on the decision of Bombay High Court in case of Commissioner of Income Tax, Kolhapur Vs. M/s. Chaphalkar Brothers, Pune 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.

Still aggrieved, the Revenue filed this appeal before the High Court. The Revenue contended that incentive formulated by the State Government was in the nature of entertainment tax exemption, and such benefit was to be made available only once the multiplex was in operation. Such incentive must therefore, be treated as revenue receipt.

In the counter argument, the counsel for the assessee supported the reasoning given by the CIT(A) and the Tribunal, and relied on the decision of Apex Court in case of Sahney Steel and Press Works Ltd. and ors. vs. Commissioner of Income Tax and Commissioner of Income Tax Vs. Ponni Sugars and Chemicals Ltd.

Addition of gratuity liability u/s 115JB

The assessee made a provision for its gratuity liability, which has been added back by the AO for the purpose of computation of the assessee’s income u/s 115JB of the Act. On appeal, both the CIT(A) and the Tribunal upheld the contentions of the assessee.

Still aggrieved, the Revenue filed this appeal before the High Court.

The counsel for the assessee contended that the amount was made on the basis of actuarial calculations, and was thus, ascertained for meeting the liabilities, and therefore, cannot be added back to the book profit of the assessee.

Having heard the parties, the High Court held that,

Tax exemption grant from State Government - capital or revenue receipt

+ 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;

+ in case of Sahney Steel and Press Works Ltd. and ors. Vs. Commissioner of Income Tax 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 Commissioner of Income Tax Vs. Ponni Sugars and Chemicals Ltd. 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;

+ 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;

+ 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 theaters 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 up;

+ 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 Commissioner of Income Tax, Kolhapur Vs. M/s. Chaphalkar Brothers, Pune in which, relying on the decision in case of Sahney Steel and Press Works Ltd. and ors. vs. Commissioner of Income Tax and Commissioner of Income Tax Vs. Ponni Sugars and Chemicals Ltd., the Bombay High Court upheld the Tribunal’s decision;

+ 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;

Addition of gratuity liability u/s 115JB

+ having heard 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 Commissioner of Income Tax Vs. Echjay Forgings Pvt. Ltd 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;

+ 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.

(See 2013-TIOL-270-HC-AHM-IT)