The main legal point established in the judgment is the classification of grant-in-aid as a capital receipt based on its purpose and correlation with the amount of entertainment tax.

( 1 ) IN IT Ref. No. 46 of 1995 the Tribunal, Allahabad, has referred the following question of law under Section 256 (1) of the IT Act, 1961, hereinafter referred to as the Act, for opinion to this court :

"whether, in the facts and circumstances of the case, the Tribunal was justified in law in holding that the grant-in-aid of Rs. 3,06,711 received by the assessee under the scheme of State of U. P. introduced with the object to promote the construction of permanent cinema buildings in the backward areas as revenue receipt in the hands of the assessee ?"

( 2 ) IN the IT Appeal No. 5 of 2001, the appellant had raised five questions of law which, according to it, are substantial questions of law. However, the decision on the question referred by the Tribunal under Section 256 (1) of the Act would also decide the aforementioned IT appeal. The reference and the appeal, as they raise a common question of law, have been heard together and are being decided by a common judgment.

( 3 ) FOR the sake of brevity, the facts of the IT Ref. No. 46 of 1995 are given below : the applicant is a registered partnership firm and is engaged in the business of cinema exhibition. During the relevant asst. yr. 1990-91 the cinema building was completed and business was started. For the asst. yr. 1990-91, it had filed the return on 29th Aug. , 1990, showing a loss of Rs. 2,57,830 and subsequently it had filed a revised return under Section 139 (6) of the IT Act showing a loss of Rs. 3,01,820. The ITO vide order dt. 5th March, 1991 completed the assessment at the income of Rs. 21,921. The ITO has disallowed the supervision charges for construction of cinema building, depreciation on cinema building @ 33. 33 per cent and has also held that the grant-in-aid of Rs. 3,06,752, received by the assessee from State government for the construction of permanent cinema building in backward area, is a revenue receipt and not a capital receipt as claimed by the assessee. Being aggrieved by the order dt. 5th March, 1991, it filed an appeal before the CIT (A)-I, kanpur. The GIT (A), Kanpur, vide his order dt. 22nd Nov. , 1991, allowed the appeal in part, granted the relief with regard to the supervision charges, depreciation on building and also held, that the grant-in-aid was a capital receipt and hence directed the AO to treat the grant-in-aid as capital receipt. Feeling aggrieved by the order passed by the GIT (A), Kanpur, the ITO filed an appeal before the tribunal which has been partly allowed on 26th Nov. , 1993. The Tribunal has held that the grant-in-aid received by the applicant is a revenue receipt. The IT Appeal relates to the subsequent asst. yr. 1991-92 and the amount of subsidy involved is rs. 4,50,276.

( 4 ) WE have heard Sri Rakesh Kumar, learned counsel for the assessee and Sri Shambhu Chopra, for the Revenue.

( 5 ) LEARNED counsel for the applicant submitted that the State Government with a view to encourage construction of permanent cinema theatre during a specified period vide Government order dt. 21st July, 1986 had announced a scheme of subsidy/grant-in-aid. Acting on the said scheme, it had constructed a permanent cinema building in a backward area, namely, Bharuwa sumerpur in the District Hamirpur and was allowed grant-in-aid in terms of the aforementioned government Order. According to him, the grant-in-aid/subsidy was nothing but a capital receipt as it related to the construction of permanent cinema building in a backward area and, therefore, a capital receipt, in support where of he relied upon following decisions :

(1) Sahney Steel and Press Works Ltd. and Ors. v. CIT, (1997) 228 ITR 253 (SC) (2) CIT v. Meat Products of India Ltd. (1999) 238 ITR 987 (Ker) (3) CIT v. Baiarampur Chini Mills Ltd. (1999) 238 ITR 445 (Cal ).

( 6 ) SRI Shambhu Chopra, learned counsel for the Revenue, however, submitted that as the grant-in-aid/subsidy was correlated with the amount of entertainment tax it was nothing but a trade receipt and the T