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TMI Blog1976 (1) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... f the vacant plot of land in front of the existing building known as Ashu Bhavan as per plan to be approved by the lessors and the building was to be of very good type and the expenditure was estimated at Rs. 60,000 in the minimum. This masonry structure undertaken to be built by the assessee was to vest in the lessor on the expiry of the term of the lease (i.e., 12 years 11 months) and it was further expressly stipulated that failure to raise the construction within the time indicated would entail forfeiture of the lease, During the year, assessee claimed deduction of a sum of Rs. 38,397 said to have been spent on the aforesaid head and the same was pressed to be accepted as revenue expenditure. The Income-tax Officer treated the expenditure to be of capital nature and rejected the claim for deduction. Before the Appellate Assistant Commissioner, assessee reiterated his claim for deduction. Alternately, he claimed depreciation. The Appellate Assistant Commissioner was of the view that the fact that the expenditure was required to be incurred by the assessee under the covenant of lease did not alter the true nature of the expenditure. On an analysis, he came to the conclusion tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen was) delivered the opinion of the Full Bench by saying : " It is not easy to define the term 'capital expenditure' in the abstract or to lay down any general and satisfactory test to discriminate between a capital and a revenue expenditure. Nor it is easy to reconcile all the decisions that were cited before us, for each case has been decided on its peculiar facts. Some broad principles can, however, be deduced from what the learned judges have laid down from time to time. They are as follows : 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 : vide Lord Sands in Commissioners of Inland Revenue v. Granite City Steamship Company [1927] 13 TC 1, 14 (C Sess). In City of London Contract Corporation v. Styles [1887] 2 TC 239, 243 (CA), Bowen L.J. observed as to the capital expenditure as follows : ' You do not use it "for the purpose of" your concern, which means, for the purpose of carrying on your concern, but you use it to acquire the concern.' 2. Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al or the income of the concern is certainly in the nature of capital expenditure. The question however arises for consideration where expenditure is incurred while the business is going on and is not incurred either for extension of the business or for the substantial replacement of its equipment. Such expenditure can be looked at either from the point of view of what is acquired or from the point of view of what is the source from which the expenditure is incurred. If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n mainly depends upon the form of the contract entered into by the assessee, and its construction. A close examination of the relevant clauses, 3, 4, 5, 11 and 13 of the lease agreement dated August 4, 1956, establish the following facts : The assessee was not under any obligation to make at their cost any additions or new constructions, but it only provided that they may, if they deemed necessary for their business, but with the consent and permission of the lessor. It expressly provided that the entire cost shall be borne by the assessee, and for no part of it the lessor was liable. The lessor shall have no right to demand additional or enhanced rent for the additions effected by the lessee as aforesaid. The lessee was at liberty to sublet any portion of the premises on their risk, but they will be responsible for all the, defaults of the sub-lessees. On the termination of the lease, the lessee was at liberty to take away fittings and fixtures such as electric fans, wash basins, wooden screens and other fittings of a detachable nature. Thus, the right of the lessee was only to the detachable fittings, but the structures and additions made to the building should remain as par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igation on the assessee-lessee to raise the structure. Clause (xv) of the covenant of lease provided : " That in the event of the lessee not completing the proposed building as aforesaid within the stipulated period of eighteen months from the date of these presents or within such further period extended by the lessors for the purpose, the lessors shall have the right to terminate the lease." It is thus clear that the construction undertaken by the assessee was an obligation which the lessee had undertaken to perform in order to keep up the leasehold where the hotel business was being run. This, in our view, brings about a substantial distinction and, therefore, the Andhra Pradesh decision referred to above would not assist in resolving the dispute arising on the facts of this case. In the case of Travancore Sugars and Chemicals Ltd. v. Commissioner of Income-tax [1966] 62 ITR 566, the Supreme Court considered whether the claim in question was a deductible revenue expenditure or a capital expenditure. The facts were these : The promoters of the assessee-company, which was floated to take over the assets of certain undertakings run by the Government of Travancore, entered in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the capital value of the assets ; and (iii) the payment was not related to, or tied up, in any way, to any fixed sum agreed between the parties as part of the purchase price of the three undertakings. In the case of Commissioner of Income-tax v. S. B. Ramakrishnan [1969] 74 ITR 761 (Mad), the facts were the following : The assessee, in order to obtain a lease of a new building, paid a sum of Rs. 1,001 to the landlord as an extra payment, over and above the stipulated rent, and claimed deduction of the same as a revenue expenditure. The claim was disallowed by the departmental authorities but allowed by the Tribunal on the view that the expenditure was akin to the payment of rent for the new premises. The Madras High Court held that the expenditure not having been incurred for the purpose of bringing into existence any asset or advantage of an enduring character and the payment not having been made in order to secure the lease for any term of years but only for the purpose of continued running of the business, though in a new premises, the sum of Rs. 1,001 was deductible in arriving at the assessee's income. In the case of Lakshmiji Sugar Mills Co. (P.) Ltd. v. Commissioner ..... X X X X Extracts X X X X X X X X Extracts X X X X
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