1970 (10) TMI 8 - HC - Income Tax

Assessee, a partnership firm took the cinema hall, with shops and out-houses on lease - damage to the stage and screen by collapse of lintel - whether expenditure incurred for reconstruction of lintel, stage and screen and also widening the stage and screen is a permissible deduction

Issues Involved:
1. Whether the expenditure of Rs. 9,418 is a permissible deduction under the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

Issue 1: Permissibility of Expenditure as Deduction
The central question referred to the court was whether the expenditure of Rs. 9,418 incurred by the assessee, a partnership firm operating Jagat Cinema, is a permissible deduction under the Income-tax Act, 1961, for the assessment year 1962-63.

Factual Background:
- The assessee leased Jagat Cinema under a lease deed dated December 20, 1956, for a period from January 1, 1957, to December 31, 1961.
- Clauses (6), (10), and (11) of the lease deed outlined the responsibilities of the lessee regarding maintenance and repairs.
- During the relevant year, the lintel near the stage collapsed, causing damage to the screen and stage. The assessee reconstructed the lintel and enlarged the stage and screen, incurring a total expenditure of Rs. 11,418.
- The Income-tax Officer allowed Rs. 2,000 as normal repair expenses but disallowed the balance of Rs. 9,418, treating it as capital expenditure.

Tribunal's Observations:
- The Tribunal noted the distinction between "repairs" and "current repairs" under sections 10(2)(ii) and 10(2)(v) of the Income-tax Act, 1922.
- It concluded that repair expenses incurred under a lease agreement do not usually result in a capital asset or benefit of an enduring nature for the lessee.
- The Tribunal found that the enlargement of the stage and screen did not bring a benefit of enduring nature to the assessee, who was primarily exhibiting pictures in the cinema building.

Court's Analysis:
- The court examined whether the entire amount of Rs. 11,418 could be considered as expenditure on repairs.
- It determined that the amount spent on restoring the lintel, stage, and screen to their original condition could be considered repairs. However, the additional expenditure for widening the stage and screen was deemed to be for improvements, not repairs.
- The court referred to the dictionary definition of "repair" and cited precedents like Highland Railway Co. v. Balderston and Rhodesia Railways Ltd. v. Income-tax Collector, which differentiate between restoring to original condition (revenue expenditure) and improvements (capital expenditure).

Application of Section 37(1) of the Income-tax Act, 1961:
- According to section 37(1), any expenditure laid out wholly and exclusively for business purposes, not being capital expenditure, is deductible.
- The court noted that the entire expenditure was for business purposes. However, the revenue contended that the portion spent on widening the stage and screen was capital expenditure.
- The court reasoned that since the expenditure was incurred in the last year of the lease and the lessee had no enduring benefit or compensation for the improvements, it could not be deemed capital expenditure.
- The court emphasized that the nature, purpose, and benefit of the expenditure should be considered to determine whether it is capital or revenue expenditure. It cited the Supreme Court's observations in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax to support this approach.

Conclusion:
- The court concluded that the expenditure for widening the stage and screen did not create an asset or advantage of enduring benefit for the assessee's business.
- Therefore, the expenditure could be claimed as a permissible deduction under section 37(1) of the Income-tax Act, 1961.

Judgment:
- The court answered the question in the affirmative, i.e., in favor of the assessee, allowing the deduction of the expenditure.
- Each party was directed to bear its own costs.

Question answered in the affirmative.

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