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TMI Blog2007 (8) TMI 265X X X X Extracts X X X X X X X X Extracts X X X X ..... the respondent-assessee in connection with renovation of his office be treated as capital expenditure or revenue expenditure ? 3. The respondent-assessee is an advocate mainly practising before the Supreme Court of India. For the relevant assessment year 1996-97, he disclosed his professional receipts at Rs. 1,40,78,129 for the previous year. Besides professional receipts, the assessee also derived income from house property, dividend, interest, agricultural income, etc. In all, for the relevant previous year, the assessee claimed an expenditure of Rs. 12,43,902 under the head "Office repairs and maintenance". During the aforesaid period, the assessee, who was occupying a rented premises had carried out certain repairs and renovation in his office premises used for the profession. The Assessing Officer, after considering the aspect of current repairs, treated the said expenditure incurred to the extent of Rs. 7,07,018 as capital expenditure and disallowed the same under section 37 of the Act. Against the decision of the Assessing Officer, dated December 30, 1998, the respondent-assessee preferred an appeal before the Commissioner of Income-tax (Appeals), Jodhpur. The Commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treated as capital expenditure and the Assessing Officer was justified in coming to the conclusion that the said amount is not deductible and that the same is required to be included in the total income of the assessee. Mr. Bissa has relied upon the judgment of the Supreme Court in the case of Assam Bengal Cement Co. Ltd. v. CIT reported in [1955] 27 ITR 34 as well as on the Division Bench decision of the Orissa High Court in Orissa Road Transport Co. Ltd. v. CIT [1970] 75 ITR 126. 5. The learned advocate, Mr. Singhvi, appearing for the respondent, on the other hand, submitted that on appreciation of evidence, it has rightly been held by the Tribunal as well as by the Commissioner (Appeals) that the expenditure in question is a revenue expenditure. It is also submitted that the assessee has not acquired anything by such renovations. Mr. Singhvi further submitted that it is not a case where even by such renovation the respondent has got any benefit by way of reduction in rent. It is submitted that the premises in question is a rented premises and with an object to see that the respondent can properly handle his professional work and in order to see that some more facilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . One test is, however, clear, that is, if the expenditure relates to the domain of running the business concern, then, ordinarily, it would be revenue expenditure. If, on the other hand, the expenditure is made to acquire a certain business or to free the business of the assessee from competition, then the expenditure is one of a capital nature. The ultimate conclusion would depend on the character of the expenditure. The position of law has been very succinctly put in Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34, 47; AIR 1955 SC 89. In para 30, Their Lordships observed thus 'The fact, however, that it was a recurring payment was immaterial, because one had got to look to the nature of the payment which, in its turn, was determined by the nature of the asset which the company had acquired. The asset which the company had acquired in consideration of this recurring payment as in the nature of a capital asset, the right to carry on its business unfettered by any competition from outsiders within the area.' The aforesaid principle applies, in terms, to the present case. The assessee-company acquired the unexpired permits and thereby got rid of competition from private ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the payment for purchase of loom hours was the nature of capital expenditure. The Revenue, however, contended that by purchase of loom hours the assessee acquired a right to produce more than what it otherwise would have been entitled to do and this right to produce additional quantity of goods constituted addition to or augmentation of its profit-making structure. The assessee acquired the right to produce a larger quantity of goods and to earn more income and this, according to the Revenue, amounted to acquisition of a source of profit or income which though intangible was nevertheless a source or 'spinner' of income and the amount spent on purchase of this source of profit or income, therefore, represented expenditure of capital nature. Now, it is true that if disbursement is made for acquisition of a source of profit or income, it would ordinarily, in the absence of any other countervailing circumstances, be in the nature of capital expenditure. But we fail to see how it can at all be said in the present case that the assessee acquired a source of profit or income when it purchased loom hours. The source of profit or income was the profit-making apparatus and this remained u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered the aspect about capital expenditure and revenue expenditure. In the said judgment, the Supreme Court has also considered the decision in Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC) The relevant observations of the Supreme Court at page 472 onwards are as under "The assessee in the present case has spent the amounts in question in order to construct a new building after demolishing the old building. The new building, however, from inception was to belong to the lessor and not to the assessee. The assessee, however, had the benefit of the existing lease in respect of the new building at the agreed rent for a period of 39 years. The Tribunal has found, as a fact, that the rent as stipulated in the lease was extremely low. It has said that the area of the building was somewhere about 7,000 sq. ft. The rental rate for the area in which the building was situated was much higher and would be not less than Rs. 12,000 as against which the maximum rent the assessee would be paying was only Rs. 2,000. This concessional rent was on account of the fact that the new building was constructed by the assessee at its own cost. In order to decide whether this expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ether by spending the money any advantage of an enduring nature has been obtained or not will depend upon the facts of each case. Moreover, as the above passage itself provides, this test would not apply if there are special circumstances pointing to the contrary. This court in the above case summarised the tests as follows (page 44) '1. Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment. 2. Expenditure may be treated as properly attributable to capital when it is made not only once and for/all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade . . . If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether. 3. Whether for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [1980] 125 ITR 293 (SC), the assessee was carrying on the business of manufacture and sale of sugar. It had its factory in U. P. The assessee paid a contribution towards meeting the cost of construction of roads in the area around its factory under a sugarcane development scheme. The question was whether this amount was deductible in computing the assessee's profits. The court held that it was. Because although the advantage secured was of long duration, it was not an advantage in the capital field because no tangible or intangible asset was acquired by the assessee ; nor was there any addition to or expansion of the profit-making apparatus of the assessee. The amount was contributed for the purpose of facilitating the business of the assessee and making it more efficient and profitable. It was, therefore, revenue expenditure. In the case of CIT v. Associated Cement Companies Ltd. [1988] 172 ITR 257 (SC), the respondent-company entered into an agreement to supply water to the municipality and provide water pipelines as also to supply electricity for street lighting and put up a transmission line for that purpose. The assessee also agreed to concrete the main road from the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n enduring asset, was accepted and the Division Bench of the Calcutta High Court found that the expenses incurred in putting up the wooden panelling did not result in any enduring benefit to the assessee and, therefore, was deductible as a revenue expenditure. 13. In the case of CIT v. Raj Spinning and Weaving Mills Ltd. [2005] 272 ITR 487, the relevant observations made by the Division Bench of this court are as under (page 494) "In CIT v. Madras Auto Service (P.) Ltd. [1998] 233 ITR 468 the Supreme Court recorded its agreement with the principles laid down in CIT v. Associated Cement Companies Ltd. [1988] 172 ITR 257 (SC) ; CIT v. Bombay Dyeing and Manufacturing Co. Ltd. [1996] 219 ITR 521 (SC) ; L. H. Sugar Factory and Oil Mills P. Ltd. v. CIT [1980] 125 ITR 293 (SC). The principle was applied in a case where the assessee obtained certain premises for a period of 39 years. Under the terms of the agreement it was entitled to demolish the construction of the leased premises and reconstruct the premises for its own business requirement. On construction of such premises, it was to become the property of the lessor and the assessee was to pay the ren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncurring expenditure by seeking exemption from or reduction in incurring of other expenses which would have been ordinarily allowable as revenue expenditure of the assessee's business, such expenses are to be treated as having been incurred wholly and exclusively for the business of the assessee and revenue expenditure. Such expenses cannot be construed as a capital expenses." 14. Considering various case law on the subject, we are of the opinion that in the instant case, the assessee, who is a lessee of the premises, has carried out certain renovations in order to see that the office premises is kept in a proper condition : the professional activities are carried out effectively and smoothly for which certain repairs were carried out by the assessee in the rented premises. In our view, the quantum of expenditure is not relevant for determining the issue in question. On appreciation of evidence both the fact-finding authorities, i.e., Commissioner of Income-tax (Appeals) as well as the Tribunal, have found that the expenditure in question was a revenue expenditure. The expenditure incurred by the assessee was not for the purpose of bringing into existence any such asset or adva ..... X X X X Extracts X X X X X X X X Extracts X X X X
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