1985 (7) TMI 22 - HC - Income Tax

Summary

Issues Involved:
1. Whether the expenditure of Rs. 16,748 incurred for the loft in rented premises is a revenue expenditure or capital expenditure.
2. Whether the tea expenses were in the nature of entertainment expenditure disallowable u/s 37(2B) of the Income-tax Act, 1961.

Summary:

Issue 1: Expenditure for Loft Construction
The assessee, a registered partnership firm, claimed expenses of Rs. 16,748 for constructing a loft in their leased office premises. The Income-tax Officer disallowed this claim, categorizing it as capital expenditure. The Appellate Assistant Commissioner upheld this disallowance. However, the Income-tax Appellate Tribunal ruled that the expenses were for making the leased premises more suitable for business purposes and thus should be treated as revenue expenditure. The Tribunal observed that the loft was a new construction but emphasized that the improvements made in leased premises, which cannot be taken away upon surrender of the lease, should be charged to revenue account. The High Court agreed with the Tribunal, stating that the expenditure aimed at improving the efficiency of the business operations rather than acquiring a capital asset. The court referenced various precedents, including Empire Jute Co. Ltd. v. CIT and Assam Bengal Cement Co. Ltd. v. CIT, to support its conclusion that the expenses were for facilitating the trading operations and thus chargeable to revenue account.

Issue 2: Tea Expenses
The assessee also claimed Rs. 3,307 for supplying tea to customers, which the Income-tax Officer disallowed. The Appellate Assistant Commissioner restricted this disallowance to Rs. 2,000. The Tribunal deleted the addition, ruling that the tea expenses did not involve wasteful expenditure. The High Court referred to CIT v. Patel Brothers & Co., concluding that the tea expenses were not in the nature of entertainment expenditure disallowable u/s 37(2B) of the Income-tax Act, 1961. The court answered this question in the affirmative, favoring the assessee and against the Revenue.

In conclusion, the High Court ruled in favor of the assessee on both issues, determining that the loft construction expenses were revenue expenditure and the tea expenses were not disallowable u/s 37(2B).