What did the Supreme Court decide in CIT v. Chaphalkar Brothers?

The Court held that the entertainment duty subsidy, granted to promote multiplex development, is a capital receipt and not taxable as ordinary revenue.

Why was the subsidy treated as capital?

Because the primary purpose of the subsidy was to encourage setting up or substantial expansion of multiplex theatres—a capital objective.

Does the timing of receiving the subsidy matter for classification?

No. The Court said the purpose of the grant controls, not when the money was received.

Does the source of construction funds or existence of loans affect tax treatment?

No. The subsidy remains capital regardless of how construction was financed or whether loans existed.

What is the practical takeaway for tax exams and practice?

Classify subsidies by their purpose. If the aim is to start a new unit or materially expand, treat it as capital; if to support day-to-day operations, treat it as revenue.

Law Easy

02 November, 2025

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Commissioner of Income Tax v. Chaphalkar Brothers — Capital vs Revenue Subsidy | The Law Easy

Commissioner of Income Tax v. Chaphalkar Brothers

Supreme Court of India Year: 2017 Citation: 400 ITR 279 (SC) Area: Tax Law Reading Time: ~5 min India

Author: Gulzar Hashmi • Publish Date: 01 Nov 2025

PRIMARY_KEYWORDS: capital receipt, entertainment duty subsidy, multiplex subsidy, Supreme Court tax case | SECONDARY_KEYWORDS: revenue vs capital, CIT, subsidy purpose test, income tax classification

Slug: commissioner-of-income-tax-v-chaphalkar-brothers

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Summary Issues Rules Facts Arguments Judgment Ratio Why It Matters Takeaways Mnemonic IRAC Glossary FAQs Related

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Quick Summary

The Supreme Court held that an entertainment duty subsidy, granted to push the growth of multiplex theatres, is a capital receipt. The Court looked at the purpose of the subsidy. Since the aim was to help set up or expand multiplexes (a capital objective), the receipt was not taxable as normal revenue.

Court: SC Case: CIT v. Chaphalkar Brothers 400 ITR 279 (SC)

Issues

Is the entertainment duty subsidy a revenue receipt for routine operations, or a capital receipt aimed at promoting multiplex development?
Should tax treatment depend on the dominant purpose of the grant, regardless of construction funding sources or the timing of receipt?

Rules

Classify a subsidy based on why the government gave it:

If the purpose is to start a new unit or materially expand an existing one → Capital receipt.
If the purpose is to support day-to-day operations → Revenue receipt.
Source of funds and timing of receipt do not change this classification.

Facts (Timeline)

The State announced an entertainment duty subsidy to promote multiplex theatres.

Multiplex projects need heavy capital and take longer to break even.

The subsidy aimed to encourage development of new theatres, especially multiplexes.

Funds were sanctioned even though construction had already begun.

The policy did not tie the subsidy to repayment of building loans.

Arguments

Appellant (Revenue)

Subsidy supports receipts during operations → treat as revenue.
Timing and manner of payment show routine nature.

Respondent (Assessee)

Purpose is to set up/expand multiplexes → capital objective.
Not linked to loan repayment or working expenses.

Judgment

The Supreme Court ruled that the subsidy is a capital receipt. The decisive factor is the primary purpose of the grant: promoting multiplex development. Financing sources and the presence of loans do not alter this result. Appeals were dismissed without extra costs.

Ratio

Purpose test governs. When a subsidy aims at creating or substantially expanding a capital asset or unit, classify it as capital, irrespective of timing or source of funds.

Why It Matters

Gives a clear, student-friendly test to classify subsidies.
Helps industries receiving policy-driven incentives (film, infra, manufacturing).
Useful for exams: links facts → purpose → tax head.

Key Takeaways

Purpose decides capital vs revenue.

Timing and financing are secondary.

Policy to set up/expand = capital receipt.

Routine operations support = revenue receipt.

Mnemonic + 3-Step Hook

Mnemonic: “Build, Boost, Capital.”

Build — If subsidy helps build/expand units → think capital.
Boost — If subsidy boosts daily expenses → think revenue.
Capital — Purpose decides: capital if creation/expansion is the aim.

IRAC Outline

Issue

Is the entertainment duty subsidy capital or revenue?

Rule

Purpose test: aim to set up/expand → capital; routine support → revenue.

Application

Policy intended to encourage new multiplexes; not tied to working expenses.

Conclusion

Capital receipt. Appeals dismissed.

Glossary

Capital Receipt: A receipt linked to creation/expansion of capital assets; usually not taxable as income.
Revenue Receipt: A receipt connected to daily operations; generally taxable.
Purpose Test: Method to classify subsidies by looking at the primary intent of the grant.

FAQs

Subsidy to promote multiplex development is a capital receipt.

No. The purpose of the grant still governs classification.

If the policy’s main aim is unit setup/expansion, it points to capital, even if cash flow eases loan pressure.

State facts → apply purpose test → conclude capital vs revenue with justification.

No. Only when the primary purpose is to set up or materially expand a unit. Otherwise, it can be revenue.

Jump to Section

Quick Summary Issues Rules Facts Arguments Judgment Ratio Why It Matters Key Takeaways Mnemonic IRAC Glossary FAQs Related Cases

Case Meta

CASE_TITLE: Commissioner of Income Tax v. Chaphalkar Brothers

PRIMARY_KEYWORDS: capital receipt; entertainment duty subsidy; multiplex subsidy; Supreme Court tax case

SECONDARY_KEYWORDS: revenue vs capital; purpose test; income tax; CIT

PUBLISH_DATE: 01 Nov 2025

AUTHOR_NAME: Gulzar Hashmi

LOCATION: India

Slug: commissioner-of-income-tax-v-chaphalkar-brothers

Canonical: https://thelaweasy.com/commissioner-of-income-tax-v-chaphalkar-brothers/

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