ORDER
P.S. Kalsian, Accountant Member
1. These appeals were originally filed by the revenue against the orders of the CIT (A) dated 16.3.95. The appeals were disposed of by the Tribunal vide order dt. 27.7.2000 and appeals were allowed in favour of the revenue. The assessee, however, filed appeal before the Hon’ble High Court against the order of the Tribunal dt. 27.7.2000. The Hon’ble M.P. High Court (Indore Bench) vide order dt. 29.11.20004 set aside the following issue to the file of the Tribunal for re-consideration:-
“Whether the Tribunal was justified in holding that the subsidy received by the assessee under M.P. Naya cinema Gharon ke Nirman ko Protshan Yojna ke Sahayata Anudam Niyam 1982 from the State Government was a revenue receipt after following the judgment of the apex Court in the case of Sahney Steel & Press Works Ltd. v. C.I.T. 228 ITR 253?”
2. Pursuant to the direction of the Hon’ble High Court, both the parties have been heard. The ld. Counsel for the assessee has submitted copy of the scheme circulated by the M.P. Government under M.P. NAYA CINEMA GHARON KE NIRMAN KO PROTSHAN YOJANA KE SAHAYATA ANUDAN NIYAM, 1982. English translation of the scheme submitted by the ld. Counsel for the assessee is reproduced below:-
“Cinem atograph (Certification) Rules, 1984
No. B-5-56-V SR-82, Date 23rd October, 1982.
Rules made under para 5 of Notification No. B-5-14-V-SR-81, date 12th January, 1982 of the Govt. of M.P.
(1) Title: These rules may be called “Grant-in-aid rules of Incentive planning for construction of new cinema houses in M.P., 1982.
(2) Extent: They shall be force in the whole of the Madhya Pradesh.
(3) Effectuality: These rules shall be applicable on such permanent cinema houses, the construction whereof was commenced from 14th January, 1980 or thereafter.
(4) Eligibility for grant-in-aid:
Under these rules, the grant shall be given only to such permanent cinema houses.
(A) the construction whereof was completed accordingly commencing from 14th January of thereafter; and
(B) Continuously for one year (in case of towns having population of 1,00,000 or moreover) or two years (in case of towns having population less than 1,00,000) from the date of exhibition, the entry rates be kept in such a manner that those may not be less than minimum rates and more than maximum rates for various categories of other cinema houses of that towns; and
(c) the proprietors whereof have executed in agreement for exhibition for continue 3 years, as prescribed under Rule 7 and 8 (C).
(5) Extent of ‘Grant-in-aid:
The following ‘grant-in-aid’ shall be given to the proprietors of such newly constructed cinema houses:-
(A) The towns of the state having population 1,00,000 or more, where the sum of money equal to the entertainment duty and additional tax (if any) be paid by him for one year from the date of commencement of exhibition in newly constructed cinema houses;
(B) The towns having population less than 1,00,000 where the sum of money equal to entertainment duty and additional tax (if any) be paid for two years from the date of commencement of exhibition in newly constructed cinema Houses.
Explanation: The word proprietors means any particular person, group of people, any firm or society or joint capital company, who is the owner of cinema house.
1. Provided that, in special Area Development Authority area, the sum of money to be given as grant shall be equal to entertainment duty and additional tax, if any, which had been paid by the newly constructed cinema house for two years from commencement of exhibition therein whether population of there be less some what.
(6) Assessment of instalments of Grant-in-aid amount:
As per Rule 5 the amount shall be paid in one or more such instalments as may be assessed by the Government, at intervals.
(7) Date of first payment:
Eligibility for payment of grant shall be confirmed after one year from the date of commencement of exhibition, provided that requirement as prescribed under Rule 8 (C) and (D) have been fulfilled by the applicant.
(8) Procedure of payment of Grant-in-aid:
(A) The proprietors of such cinema-houses shall be furnished the whole details as required in the application form-B to Collector of their districts for receiving grant-in-aid after the date fixed under Rule-7.
(B) Acknowledgment shall be given by the office of Collector for such application form received, as attached with Form-A.
(C) The Applicant shall execute an agreement in Form-C to the effect that he shall keep the cinema house running for at least 3 years form commencement of exhibition and if he closes earlier to it the whole grant amount received by him may be realised from him as a remaining revenue. During the period of 3 years he may not sale or donate the building and land of cinema.
(D) The instalments of grant amount shall not be paid until the person receiving grant produce bank guarantee equivalent to said amount or solvency certificate of discharged property. If the guarantee violates the condition or for any other reason if there is a condition of realisation of sum of money it may be realised from Bank Guarantee or from the property described in solvency certificate as the first charge and residue revenue.
(E) Within two weeks from the date of receipt of application form collector shall make enquiry, as he thinks fit and send the report with his recommendation to the Commissioner of Excise, M.P.
(F) The Commissioner of Excise shall pass an order upon such application forms, within one month and shall inform to the State Government and Collector, accordingly.
(G) On receipt of order of the Commissioner of Excise, M.P. the Collector to the concerned district shall, as per the orders, provide for the payment to the proprietor of such cinema house within seven days.
(H) The grant-in-aid amount shall be debited from following budget head:- ‘Demand No. 293- State Production Duty and other expenses (3) grant-in-aid for new cinema houses’.
(I) If the owner of any cinema has received any loan from
(i) National Film Development Corpn.
(ii) M.P. State Film Development Corpn. the payment of amount of grant-in-aid shall be made through the concerning society or by the Collector directly to the owner of concerned cinema house.
(J) The State Govt. shall have rights to amend, alter or add to these rules which shall be binding to the proprietor of Cinema who have received the grant-in-aid.
(k) In case of any dispute regarding any provision of these rules, the decision of state Government shall be the final and valid.”
On the basis of this scheme, it is argued by the ld counsel for the assessee that receipt of subsidy under the said scheme is capital in nature.
3. The ld. DR, on the other hand, argued that subsidy in a scheme is given to new cinema houses constructed after 14th January, 1980 to assist the cinema houses and the scheme is not related to any asset or capital out-lay of the cinema houses.
4. We have considered the facts of the case, rival submissions and material on record. It is clear from the scheme of the Govt. for granting subsidy or grant-in-aid that the said scheme is applicable only to permanent cinema houses constructed (sic) after 14.1.1980. According to rules second condition for granting subsidy to such permanent cinema houses is that the rate of ticket should not be lower than charged by other cinema a houses and also rate of ticket should not be higher as compared to any other cinema in the same city for one year in the area population of which is 1,00,000 or more and 2 years for a city whose population is less than 1,00,000. Third condition for granting subsidy is that owners of cinema houses should execute agreement under Rule 7 and 8(C) that they would continuously exhibit picture for three years.
4.1 The amount of subsidy admissible to the eligible cinema houses has been mentioned as under in the scheme:
(i) In case of cinema houses in cities with population of 1,00,000 or more, the subsidy is equal to entertainment tax and additional tax, if any, collected by them for one year.
(ii) In case of eligible cinema houses constructed in cities with population less than 1,00,000 subsidy equal to entertainment tax and additional tax, if any collected for two years.
However, in case of special area development authority, the subsidy is equal to entertainment tax and additional-tax, if any, collected for two years, whatever may be the number of population.
4.2 Subsidy is to be given in instalments as determined by the administration. First payment of subsidy will be paid after one year if the cinema house satisfy the conditions Under Rule 8(C) and 8(D).
4.3 Each eligible cinema house is required to file application in prescribed form to the Collector upto the specified date under Rule 7 with all necessary information. If the cinema house is closed before three years, than all the subsidy will be deposited by such cinema houses. Otherwise, such subsidy will be recovered from such cinema houses. Within a period of three years, owners of the cinema houses will not self or gift the eligible cinema houses. The subsidy will not be given until the owners of the cinema houses secure a bank guarantee and submit a certificate of property having no charge.
4.4. After receipt of application from the owner of the cinema houses, the Collector of the District will make such enquiries as he may consider necessary and obtain necessary information to make recommendations to the Commissioner of Excise, who will make recommendations to the Commissioner of Excise, who will make payment of subsidy under intimation to the Collector. If the owners of the cinema houses have taken loans from Rashtriya Film Development Corpn.; or M.P. State Film Development Corpn, them the subsidy will be given through them.
5. Now the question arises whether the subsidy or grant-in-aid received by the assessee from the Govt. as mentioned above is a revenue receipt of capital receipt. The issue whether grant-in-aid or subsidy received from the Govt. is revenue receipt or capital receipt has been considered by the Hon’ble High Courts and Supreme Court in the following cases:-
6.1 In the case of Merinoply & Chemical Ltd. v. CIT , the fact of the case were that the assessee was engaged in manufacture and sale of plywood and blockborad. The assessee received transport subsidy at the rate of 50% of the actual cost of the transport and the issue before the Hon’ble Calcutta High Court was whether such transport subsidy was capital receipt or revenue receipt. In this case the scheme was available not only to new units but to existing units which has substantial expansion or diversification after the commencement of the Scheme. The ITAT noted in, particular, the mode of computation of the transport charges as the clue to the intention underlying the scheme. The scheme required strict check to ensure actual consumption of the raw materials and finished goods transport of which the subsidy had been given. It required a system of scrutinizing the consumption of the raw materials and the output of the finished goods. The Tribunal found that the scheme was related not only to the transport charges in curred but indirectly also to consumption of raw materials and the ultimate out put of the final product. The Tribunal came to the conclusion that the scheme of transport subsidies was in separable connected with the business of transport carried on by the assessee. The transport expenditure was an incidental expenditure of the assessee’s business and it was that expenditure which the subsidy recouped and the purpose of recoupment was to make up possible profit deficit for operating in a backward area. Therefore, the subsidies were inseparably connected with the profitable conduct of the business and the Tribunal held that the transport subsidy represent receipt of Revenue nature. The decision of the Tribunal was confirmed by the Hon’ble Calcutta High Court. This decision was also followed by the Calcutta High court in the case of Sarda Plywood Industries Ltd. v. CIT (1999) 239 ITR 354. In this case, the Hon’ble Calcutta High Court also considered the decision of the Andhra Pradesh High Court in the case of CIT v. Sahney Steel & Press Works Ltd. . In the case of Sahney Steel & Press Works Ltd. (supra), the Hon’ble Andhra Pradesh High Court in respect of sales-tax refund received by the assessee under a Government order issued by the State Government of Andhra Pradesh held that the payment would constitute the income of the assessee. As the assessee had a right and was entitled to recover the incentives through a court of law, the refund allowed was inseparably connected with the busines carried on by the assessee. The benefits were available only from the date the industrial under-taking commenced production and for a period of five years. There was no room or basis for dissociating the subsidy from the business of the assessee as the subsidy was given for setting up and development of business and not for any other purpose. The subsidy granted was also to attract industries to enhance employment potential, economic prosperity and income of the State. The decision of the Andhra Pradesh High Court in the case of saney Steel & Press Works Ltd. (supra) has been affirmed by the Hon’ble Supreme Court. The Hon’ble Calcutta High Court also considered the basic question, that is, whether the subsidy is intended artificially to supplement the trading receipts, so as to enable the recipients to maintain their trading solvency, if so there is no escape from taxation by pleading that the receipt in any case should be capital since its purpose is promotion of growth of industries in backward areas or creation of employment in less attractive zones of industrial operation. In this case, the Hon’ble Calcutta High Court also considered the observation of Viscont Simon-IRC v. Corporation of London (1953) 34 TC 293 at page 328 as under:
“Payment in the nature of a subsidy from public funds made to an undertaker to assist in carrying on the undertaker’s trade or business are trading receipts, i.e., are to be brought into account in arriving at the balance of profits or gains.”
6.2 The Hon’ble Calcutta High Court in Merinoply & Chemical Ltd.’s case (supra) at page 514 laid down general principle for considering whether the grants-in aid or subsidy from the Government is taxable or not. The proposition of law laid down by the Hon’ble High Court is as under:
“Thus, for determining whether a particular subsidy is taxable or not, the test to be applied is one fairly laid down viz, The motive behind the grant of subsidy is not conclusive. Factually the case here is different. It is transparent that there is a difference between subsidising the Capital outlay & subsidsing the running business. Viewed straight forwardly the Tribunal’s approach rests on this distinction. To our mind, it is preeminently tortuous to argue that there is hardship or entrepreneurial in setting up a new industry in the backward areas. The purpose of the subsidy is to mitigate such hardship. Now mitigation can take two forms-one of the forms may be that the very capital outfit is subsidized either wholly or partly out of the public fund. There is no question to be asked as to whether such subsidy should be a capital receipt, But where the subsidy is meant to fill the whole or the shortfall in the return from the industry so set us as recompense for undertaking the unknown risks and odds in establishing industries in backward are as, the subsidy would definitely be in the form of replenishment of the profit to remove its deficiency attributable to the backwardness of the areas where the industry operates. In both the cases, the entrepreneur is meant to be assisted by lending financial support so that the industry so set as up can stand on its legs and overcome the handicap.
Where the subsidy is a one-time support by supply of part of capital, the subsidy cannot come in for taxation as revenue but where it is a recurrent recoupment of profit insufficiency it has but to be treated as a payment for augmentation of the Revenue of the undertaking set up”
6.3 In the case of CIT v. Udaya Picture (P) Ltd. (1997) 255 ITR 394 (Ker). The facts of the case were that the assessee was a private limited company engaged in the business of production of cinematography films. During the accounting year relevant to the assessment year 1979-80, the assessee had received a sum of Rs. 37,500/- as subsidy from the Kerala state Government for producing new regional films. In the return filed by the assesssee, this amount was shown as a capital receipt but the Commissioner of Income-tax invoked the powers available under Section 263 of the Income-tax Act, 1961 for enhancing the assessment. The Commissioner of Income-tax accordingly directed the Income-tax officer to include the subsidy of Rs. 37,500 in the total income of the assessee. Being aggrieved by the order of the Commissioner, the assessee filed and appeal before the Income-tax Appellate Tribunal. The Tribunal ultimately held that the subsidy received by the assessee is not taxable. The Hon’ble High Court also considered the ratio laid down by the Hon’ble Andhra Pradesh High Court in the case of Sahney Steely & Press Ltd. (supra) and reversed the decision of the Tribunal and held as under, as per head note:
“Held, reversing the decision of the Tribunal, that the entitlement to the subsidy sprang from the business carried on by the assessee and the amount was received during the course of conduct of the business. What was received by the assessee from the Government was not a capital receipt but a subsidy and, therefore, it was income liable to tax”. 225 ITR 395.
6.4 The decision of the Andhra Pradesh High Court in the case of Sahney Steel & Press Works Ltd. (supra) has been affirmed by the Hon’ble Supreme Court. The fact of the case are the under a notification issued by the Andhra Pradesh Government certain facilities and incentives were to be given to all the new industrial undertaking which commenced production on or after January 1, 1969 with investment capital (excluding working capital) not exceeding Rs. 5 crores. The incentives were to be allowed for a period of five years from the date of commencement of production. The incentives available to the new industrial undertakings were:
(a) Refunds of sales tax on raw material, machinery and finished goods limited by the state Government subject to 10 per cent of the equity capital paid up in the case of public limited companies and the case of others.
(b) Subsidy on power consumed for production to the extent of 10 percent.
(c) Exemption from payment of water rate on water drawn from sources not maintained at the cost of Government or any local body.
(d) Refund of water rate in respect of water drawn from a Government source or from a source maintained by any local body but returned purified to it.
6.5 The Hon’ble Supreme court considered the salient features of the scheme formulated by the Andhra Pradesh Government was that the incentives were not available, unless and until production hand commenced. The availability of the incentive would be limited to a period of five years from the date of commencement of production. The incentives were to be given by way of refund of sales tax and also by subsidy on power consumed for production, etc. Refund was also provided for water rate in respect of water drawn from Government sources. The important point noted in this case was that all the incentives were production incentives in the sense that the assessee will be entitled to these only after it goes into production. The scheme was not to make any payment directly or indirectly for the setting up of the setting up of the industries. It is only after the industries had been set up and production has been commenced that the incentives were to be given. The Hon’ble Supreme Court considered that the manner in which incentives were given is of no consequence for determining the question whether the subsidy was revenue or capital receipt. The refund of sales tax was in respect of taxes levied after commencement of production and upto a period of five years from the date of commencement of production. The Hon’ble Supreme Court held that it is difficult to hold these subsidies as anything but operational subsidies. These subsidies were given to encourage setting up of industries in the State of Andhra Pradesh by making the business of making production and sale of goods in the State more profitable.
In the case of Sahney Steel & Press Works Ltd. (supra) the Hon’ble Supreme Court at pages 262 and 263 held as under:
“It is not the source from which the amount is paid to the assessee which is determinative of the question whether subsidy payments are of revenue of capital nature. The first proposition stated by Viscount Simon in Ostime’s case (1964) 14 ITR (Suppl.) 45 (HL) is that if payments in the nature of subsidy from public funds are made to the assessee to assist him in carrying on his trade or business, they are trade receipt. The sales tax upon collection forms part of the public funds of the state. If any subsidy is given, the character of the subsidy in the hands of the recipient whether revenue of capital will have to be determined by having regard to the purpose for which the subsidy is given. If it is given by way of assistance to the assessee in carrying on of this trade of business, it has to be treated as trading receipt. The source of fund is quite immaterial.
For example, if the scheme was that the assessee will be given refund of sales tax on purchase of machinery as well as on raw material to enable the assessee to acquire new plant and machinery for further expansion of its manufacturing capacity in a backward area, the entire subsidy must be held to be capital receipt in the hands of the assessee. It will not be open to the revenue to contend that the refund of sales tax paid on raw materials or finished products must be treated as revenue receipt in the hands of the assessee. In both the cases, the Government is paying out of public funds to the assessee for a definite purpose. If the purpose is to help the assessee to set up its business or complete a project as in Seaham Harbour Dock Co’s case (1931) 16 TC 333 (HL), the monies must be treated as having been received for a capital purpose. But if monies are given to the assessee for assisting him in carrying out the business operation and the money is given only after and conditional upon commencement of production, such subsidies must be treated as assistance for the purpose of the trade.”
6.7 In the case of Jagapathy Art Picture v. CIT the facts of the case that the assessee received subsidy from the Government of Andhra Pradesh for the production of Telgu films. Under the subsidy scheme subsidy was paid to the producer only after the picture has been certified by the Central Board of Film Censors. The Tribunal held that it was a revenue receipt. The Hon’ble Madras High Court as per Head Note held as under:
“Held that the subsidy was not paid during the course of the production and was not meant to assist the producer in financing the moving which was filmed in the state. The payment made to the assessee was in the circumstances merely a supplementary trade receipt, the assessee’s eligibility for receiving the subsidy being the prior production of the picture in the State of Andhra Pradesh and its certification by the Central Board of Film Censors. The amount paid only to encourage people like the assessee to choose Andhra Pradesh as the locale for their movies. Therefore, the Tribunal was right in holding that the amount of subsidy of Rs. 1 lakh received by the assessee from the Government of Andhra Pradesh was a revenue receipt and taxable as such.”
6.8 In the case of CIT v. Chindwara Fuels , the assessee received sales tax subsidy from the Government. The subsidy was granted to the assessee as sales tax refund after commencement of production. Hon’ble Calcutta High Court followed the decision of the Hon’ble Supreme Court in the case of Sahney Steel & Press Works Ltd. (supra) and held that since the sales tax subsidy was received after production commenced in the industry of the assessee, the same could not be treated as capital receipt and was not exempt from tax.
In the case of M.A.M. Ramaswamy v. CIT . The facts of the case were that the assessee was the owner of horses. He received subsidy from the Madras Race club under a scheme framed by the club under which the pre-condition for claiming a subsidy was that the horses in respects of which subsidy was claimed should have participated in a minimum of four races during the racing season. The subsidy was of an amount equivalent to the basic training fee to the owner, as also the payment of a specified sum per horse per month for the trainers. It was claimed by the assessee that the subsidy so received was of capital nature and did not fall within the revenue field. The Hon’ble Madras High Court applied the decision of Sahney Steel & Press Works Ltd.’s case (supra) and as per Head note held as under:
“Held that the income from winnings of horse races is taxable under the head “Income from other sources”, in view of the definition of “income” in Section 2(24)(ix) of the Income-tax Act, 1961. The subsidy receive by the assessee from the race club was a subsidy, which enabled him to continue his operations as a horse owner whether as business or as hobby and it was conditional upon the participation of the horses in the races run by the club. In the circumstances, the subsidy given must be regarded as assistance given by the race club for the purposes of enabling the owner of horses to earn income from other sources. It was revenue receipt.”
6.9 In the case of Tamilnadu Sugar Corporation Ltd. v. CIT the assessee received purchase tax subsidy from the State Government. The assessee returned the same as part of its income and claimed that the same be excluded in the computation, of the total income, since the subsidy paid, was for setting up of sugar factories, Again the Hon’ble Madras High Court followed the decision of Sahney Steel & Press Works Ltd.’s case (supra) and held as under:
“Held dismissing the petitions, that under the scheme subsidy equivalent to the quantum of purchase tax was given to the sugar factories for a period of five years from the date of the commencement of production. The subsidy was given by way of assistance to the sugar factories on the commencement of production and it was not given for setting up of the factories and the subsidy was given only to tide over the difficulties that may be experienced by the management in the actual running of the sugar factories. The object behind the grant of subsidy was not to set up a new sugar factory, but to run the factory efficiently. In other words, the subsidy was given so that the management may not be in trouble in the running of the sugar factories in initial years, The measure of payment of subsidy was also closely interlinked with the purchase of sugarcane by the factory which showed that the subsidy was granted for the continuous running of its business and not for the setting up of the sugar factory. Therefore, the amounts constituted revenue receipts.”
6.10 The decision of the Supreme Court in the case of Sahney Steel & Press Works Ltd. (supra) and the following decisions are squarely applicable to the case of the assessee:
1. Udayan Picture (P) Ltd’s case (supra)
2. Jagapathy Art Picture’s case (supra)
3. Chindwara Fuel’s case (supra)
4. M.A.M. Ramaswamy’s case (supra) and
5. Tamilnadu sugar Corporation Ltd’s case (supra).”
7. In the case of the assessee, the subsidy or grant-in-aid received by the assessee is not related to any asset or capital outlay. The payment of subsidy is made to the assessee after completion of cinema house and also on the condition that cinema house will run for a period of three yeas. If cinema house is not run for a period of three years, the subsidy granted to the assessee is recoverable, which shows that subsidy is an incentive for running of the cinema house. Even after construction of cinema hall no subsidy is admissible if cinema house is not run for a period of three years. The purpose of subsidy is, therefore, to assists the assessee to run the business of cinema house. The subsidy is not given for constructing the cinema house or to complete the construction of cinema house but to assist the assessee in the business operations only after the new cinema houses are constructed after 14.1.80 in the specified areas. The payment of subsidy is nothing but supplementary trade receipts. The assessee is also free to use the subsidy in the business as the assessee may like. The assessee is not required to spend the subsidy amount for any particular purpose. Subsidy is not given for bringing into existence any new capital asset but grant-in-aid is given after commencement of the business of running the cinema houses. The amount of subsidy is given equal to the entertainment tax or additional tax, if any, collected by the assessee, which is a part of trading receipt. The amount of subsidy is also different in case of each cinema houses because the entertainment tax and additional tax, if any, collected by each cinema house may be different. It is, therefore, clear from the scheme of the subsidy that subsidy is given to assist the assessee to run the business after the cinema house is constructed after 14.1.80 and, therefore, subsidy is a revenue receipt. The order of the CIT (A) is reversed and order of the A.O. is confirmed.
8. In the result both the appeals of the revenue are allowed.