1970 (12) TMI 32 - HC - Income Tax

Expenditure on repairs and modernization of cinema house by the lessee replacement of old wooden chairs by steel ones - expenditure brought into existence an asset of an enduring nature therefore amount spent should be treated as capital expenditure

Summary

Issues Involved:

1. Whether the amount of Rs. 49,097 was rightly held by the Tribunal as an expenditure of a capital nature.
2. Whether the expenditure incurred was in the nature of repairs and replacement.

Issue-wise Detailed Analysis:

1. Capital vs. Revenue Expenditure:

The primary issue in this case was whether the expenditure of Rs. 49,097 incurred by the assessee was of a capital nature or a revenue nature. The assessee, a registered firm in the business of distributing films and running a cinema house, claimed this amount as an expenditure solely incurred for business purposes. The Tribunal held it to be of a capital nature. The breakdown of the expenditure included costs for frames for chairs, cloth for chairs, sanitary fittings, electrical fittings, oils and paints, and cement and other materials.

The Income-tax Officer rejected the assessee's contention, treating the amount as capital expenditure. Upon appeal, the Appellate Assistant Commissioner allowed a deduction of Rs. 4,555 for current repairs, reducing the capital expenditure to Rs. 44,542. The Tribunal further increased the permissible deduction to Rs. 6,555, holding the balance of Rs. 42,542 as capital expenditure.

The court examined the nature of the expenditure, referencing various legal precedents. It was noted that the tests to determine whether an expenditure is capital or revenue are not conclusive and must be applied based on the specific facts of each case. The key consideration is whether the expenditure brings into existence an asset or advantage of enduring benefit to the trade.

2. Nature of Repairs and Replacement:

The assessee argued that the expenditure was for replacing old wooden chairs with new iron cushioned chairs and constructing additional facilities like a verandah, office, side room, and bathrooms. The Tribunal focused on the chairs, noting that replacing old and worn-out chairs with brand new ones could not be considered a mere repair or replacement but rather an improvement of an enduring nature. The court agreed, stating that the replacement of wooden chairs with steel chairs was an outlay for earning profits and better business, not a recurring expense, thus constituting a capital expenditure.

The court also observed that the construction of the verandah, office, side room, and bathrooms brought into existence an asset of an enduring nature, aligning with the objective of modernizing the cinema hall. Therefore, these expenditures were rightly treated as capital in nature.

Conclusion:

The court concluded that the expenditure of Rs. 42,542 was of a capital nature, bringing into being an advantage of an enduring nature. The Tribunal's decision was upheld, except for the amount found to be on account of repairs. The question referred to the court was answered in the negative, in favor of the department and against the assessee, with no order as to costs.