1965 (3) TMI 82 - HC - Income Tax

Summary

Issues Involved:
1. Whether the expenditure of Rs. 16,323 incurred by the assessee for putting up wooden panels in the lounge, staircase, and restaurant was of a capital nature or revenue nature.

Issue-Wise Detailed Analysis:

1. Nature of Expenditure (Capital vs. Revenue):
The primary issue in this case was to determine whether the expenditure of Rs. 16,323 incurred by the assessee for putting up wooden panels in the lounge, staircase, and restaurant was of a capital nature or revenue nature.

Background and Lease Agreement:
The assessee was the lessee of a cinema building known as "Regal Theatre" in Connaught Circus, New Delhi, under a lease deed executed on July 14, 1949, for a period of 10 years. The lease deed contained relevant clauses:
- Clause 6 prohibited additions or alterations without the lessor's consent.
- Clause 8 required the lessee to keep the premises in good condition and return them in the same condition, except for fair wear and tear.
- Clause 9 obligated the lessor to carry out annual white and color washing and necessary repairs.

Assessee's Actions and Claims:
The assessee incurred Rs. 18,640 for paneling, of which Rs. 7,340 was for replacement and Rs. 11,300 for decoration. The assessee claimed deduction of these amounts under section 10(2)(xv) of the Indian Income-tax Act, 1922, arguing that the expenditure was for business purposes and was "revenue expenditure."

Income-tax Officer's Decision:
The Income-tax Officer disallowed the expenditure, reasoning that:
- Paneling amounted to fixtures, which were capital expenditure.
- The building was on lease, and the assessee could remove and sell the fixtures if the lease was not renewed.
- The lease deed required the lessor to undertake repairs, so the lessee should have claimed the expense from the lessor.

Appellate Assistant Commissioner's Decision:
The Appellate Assistant Commissioner allowed part of the expenditure (Rs. 350 for petty repairs and Rs. 1,427 for decoration) as revenue expenditure but disallowed the remaining Rs. 16,323. The Commissioner found that:
- The paneling was necessary to conceal ugly patches and cracks.
- Previous similar expenses were allowed as revenue expenditure.
- Landlords in New Delhi were reluctant to undertake major repairs, forcing tenants to do so.
- The fixtures had negligible scrap value after removal.

Income-tax Appellate Tribunal's Decision:
The Tribunal reversed the Appellate Assistant Commissioner's decision, holding that the expenditure was for creating an enduring asset and thus was capital expenditure.

High Court's Analysis:
The High Court examined various judicial tests and principles to distinguish between capital and revenue expenditure. The court noted that:
- The Tribunal acknowledged the business purpose of the expenditure.
- The lease was short-term, and the fixtures had negligible value after removal.
- The assessee could not reconstruct the walls due to lease terms and had to maintain the cinema's presentable condition for business purposes.

Conclusion:
The High Court concluded that the expenditure was of a "revenue nature" because:
- The lease was short-term, and the fixtures did not create an enduring asset.
- The expenditure was necessary for maintaining the cinema's condition, akin to whitewashing or repainting, which would be considered revenue expenditure.

Judgment:
The High Court answered the question in the negative, holding that the expenditure incurred by the assessee for putting up wooden panels was not of a capital nature but of a revenue nature. The Tribunal's decision was reversed, and the Appellate Assistant Commissioner's decision was restored. There was no order as to costs of the reference.