Income-tax Officer v. Laxmi Talkies
[Citation -1984-LL-0804-2]

Citation 1984-LL-0804-2
Appellant Name Income-tax Officer
Respondent Name Laxmi Talkies
Court ITAT-Ahmedabad
Relevant Act Income-tax
Date of Order 04/08/1984
Judgment View Judgment
Keyword Tags administrative expenditure • test of enduring benefit • business consideration • commercial expediency • revenue expenditure • diversion of income • capital expenditure • enduring advantage • co-operative bank • business premises • trading activity • business purpose • registered firm • rented premises • lease agreement • revenue nature • business asset • capital nature • capital asset • lease deed • lease rent • new asset
Bot Summary: 2,17,285 According to the ITO, the said expenditure prima facie shows that an enduring advantage is obtained by the assessee who was a lessee and the said expenditure could not be allowed as a revenue expenditure. The Appellate Tribunal was of the view that the assessee must have made some structural changes in the shop and held that the expenditure was allowable neither as an expenditure on current repairs under section 30(a)( i) of the Income-tax Act, 1961, nor under section 37 as it was an expenditure of capital nature.... ... that expenditure incurred by an assessee on renovating, furnishing or remodelling of a business premises can be allowed as deduction under section 3 7 , if the expenditure is not of a capital nature. If an expenditure is for the initial outlay or for acquiring or bringing into existence an asset or advantage of an enduring benefit to the business that is being carried on, or for extension of the business that is going on, or for a substantial replacement of an existing business asset, it would be a capital expenditure, whereas if, on the other hand, the expenditure, although for the purpose of acquiring an asset or advantage, is for the running of the business or for working out that asset with a view to produce profit, it would be revenue expenditure. The Tribunal, after examining the details of the expenditure, arrived at the finding that the expenditure had been incurred in carrying out repairs to the picture house. Sixthly, expenditure incurred on repairs for proper upkeep of a picture house is said to have been incurred on ground of commercial expediency and in course of ordinary commercial trading activity of the assessee, such an expenditure was allowable as a business expenditure. The main source of income of the assessee is the realisations from sale of cinema tickets from the customers and t h e expenditure on repairs which the assessee was required to incur was a necessary expenditure in course of his business or in the process of profit earning. The expenditure has a nexus with the income which the assessee earns and the impugned expenditure in the circumstances of the case must be held to have been incurred for the purpose of business as well as in the process of business.


This appeal which is filed by revenue relates to assessment year 1976-77. We first take up for consideration two grounds which are set out hereunder: "1. learned Commissioner (Appeals) has erred in law and on facts in holding that administrative expenditure claimed at Rs. 15,000 is very reasonable. He further erred in deleting addition of Rs. 7,500 made under section 40A(2) of Income-tax Act, 1961 (the Act). 2. On facts and in law, learned Commissioner (Appeals) has failed to consider fact that concerns of Poonjabhai Vanmalidas and Jayalaxmi Harilal Children Trust, to whom payments were made, are concerns in which partners of assessee-firm are interested as beneficiaries are closely connected with partners and, hence, provisions of section 40A(2) are clearly applicable." assessee, registered firm, carried on business of exhibition of cinema films. It, inter alia, claimed deduction of sum of Rs. 15,000 as administrative expenses which were partly paid to Poonjabhai Vanmalidas and partly to Jayalaxmi Harilal Child Trust. According to ITO, partners of firm were interested as beneficiaries of latter trust and they were closely connected. Therefore, according to him, said payment was not made out of business consideration but was part of diversion of income in form of administrative expenses. He, therefore, disallowed 50 per cent of said expenses by applying provisions of section 40A(2). 2. Being aggrieved assessee carried matter in appeal before Commissioner (Appeals) who held that said expenditure was incurred by assessee under written agreement for rendering management and secretarial services. He, therefore, held that disallowance was not justified. 3. Being aggrieved revenue has come up in appeal before us. Our attention was drawn to decision of Tribunal in case of L. N. Talkies v. ITO [IT Appeal Nos. 972, 973 and 1519 (Ahd.) of 1979, dated 6-9-1980] in which identical issue was considered and decided. No distinguishing features were placed before us. Therefore, respectfully following said decision, we uphold decision of Commissioner (Appeals). 4. next ground reads as follows: "The learned Commissioner (Appeals) has erred in law and on facts in holding that expenditure incurred by assessee on account of renovation of theatre, stamp duty, interest payments, etc., amounting to Rs. 2,49,508 is admissible deduction as revenue expenditure." On scrutiny of statement of accounts attached with return, ITO found that assessee claimed expenditure of Rs. 2,17,285 under head Theatre renovation and repairing expenses. On further scrutiny of details filed he found that said amount was made up of undermentioned items: Rs. 1. Renovation 1,87,585 expenses 2. Cost of 29,700 fans, regulators, etc. 2,17,285 According to ITO, said expenditure prima facie shows that enduring advantage is obtained by assessee who was lessee and, therefore, said expenditure could not be allowed as revenue expenditure. He further pointed out that assessee had taken on lease business premises for monthly rent of Rs. 3,400 with effect from 15-2-1975 for period of three years up to 21-6-1978. Thereafter, exhibition of films was stopped due to heavy repairs which were required to be incurred by assessee. ITO observed that lessee paying rent of Rs. 3,400 per month would not incur such heavy expenditure when he had taken same on lease period of three years only. In other words, according to ITO, total expenditure incurred by assessee as aforesaid far exceeded lease rent payable by it. According to ITO, lessor was HUF of Shri Vinubhai Panchal who had obtained loan of Rs. 10 lakhs from Ahmedabad Co-operative Bank for purpose of improvement of his property, including another theatre styled L.N. Talkies, 49 per cent of stamp duty was paid by assessee and balance was paid by L.N. Talkies. Thus, it was clear that funds of HUF were utilised for purpose of renewing theatre. Since said repairs really related to property belonging to HUF, claim of assessee was not tenable on this ground also. That apart, on merit, ITO stated that quality and character of expenditure show that it was of capital nature and in this connection has relied on decisions in cases of Sri Ram Talkies v. CIT [1966] (Cal.). ITO also dealt with another claim made by assessee for treating building as plant for purpose of depreciation. He rejected this claim on ground that theatre building cannot be treated as plant at all. ITO further pointed out that according to relevant clauses of agreement of lease, viz.,clauses 4, 5 and 8, responsibility of repairs was that of lessor and not of assessee. Therefore, claim of assessee was not at all tenable. Further, nature of repairs show that they were not current repairs but major repairs which have resulted in enduring benefit and, therefore, expenditure was clearly of capital nature. He, therefore, disallowed claim in respect of aforesaid amount and as corollary disallowed expenditure on stamp duty, interest, etc., amounting to Rs. 11,402. 5. Being aggrieved assessee carried matter in appeal before Commissioner (Appeals), before whom it was contended that assessee had undertaken substantial repairs of damaged and obsolete cinema hall and auditorium. details in this regard were filed before Commissioner (Appeals). It was next submitted that assessee had undertaken repairs under clause 5 of agreement which permitted him to carry out alterations and additions. It was next pointed out that according to decision of Supreme Court in case of Empire Jute Co. Ltd. v. CIT [1980] . 6. Being aggrieved revenue has come up in appeal before us. learned departmental representative submitted that assessee was merely lessee and, therefore, was tenant in building belonging to HUF of Vinubhai Panchal. lease rent of Rs. 3,400 was paid per annum and lease deed was for period of three years only. It was, therefore, impossible or improbable to accept proposition that lessee would incur expenditure equivalent to five years rent over property which it was to utilise for period of three years only. It was next pointed out that responsibility of carrying out repairs was on lessor. However, it was open to lessee to undertake alterations of major nature with written consent of lessee. However, no such consent seems to have been obtained. Even assuming that assessee had undertaken repairs of its own, according to lease agreement, it was authorised to incur expenditure equivalent to two months rent only and nothing more. Therefore, entire expenditure which was incurred against letter and spirit of agreement must be held to be expenditure not connected with business of assessee. In other words, according to learned departmental representative, there was no responsibility cast on assessee to incur said expenditure. In case assessee thought fit to incur such expenditure, it was de hors business of assessee and, therefore, cannot be allowed as expenditure for purpose of business. Secondly, assuming for sake of argument that impugned expenditure was incurred for purpose of business, it was not ordinary repairs expenditure which could be described as current repairs within meaning of section 30 of Act. And lastly, even if it is held that said expenditure was incurred wholly and exclusively for purpose of business, said expenditure being capital in nature was not allowable by virtue of provisions of section 37(1) of Act. Amplifying last contention, learned departmental representative pointed out that principle laid down in case of Assam Bengal Cement Co. Ltd. v. CIT [1955] (Raj.), in support of his claim. 7. We have carefully considered rival submissions. question whether item of expenditure is on capital account or revenue account is vexed question. However, in order to determine controversy before us, we refer to certain decisions which have bearing on controversy. said decisions are: 1. Kalyanji Mavji & Co.s case (supra): In this case assessee-firm owned several collieries carrying on business in coal. One of collieries was requisitioned for military use and occupied from 1942 and released in 1955. During that period assessee continued carrying on its business by working other collieries. Upon derequisition assessee incurred expenditure of Rs. 1,61,742 in renovating building, reconditioning machinery and clearing land of debris accumulated over number of years. claim was disallowed as capital expenditure by department and Tribunal on ground that said expenditure was of capital in nature. But High Court on reference allowed same and affirming decision of High Court it was held that no new asset was brought into existence nor was advantage of enduring benefit of business acquired by expenditure and expenditure was revenue in character. It m y be pointed out that in this decision their Lordships had considered earlier decision in Assam Bengal Cement Co. Ltd.s case (supra) and have held that said decision had no application inasmuch as in instant case expenditure was incurred in course of existing business and for purpose of resuming operation of colliery. expenditure was incurred wholly and exclusively for purpose of business and was not capital in nature. expenditure, therefore, which was incurred in course of process of profit earning was revenue in character. 2. Girdhar Dass & Sons v. CIT [1976] (All.). facts were these: "The assessee, who was carrying on business in rented building, carried o u t repairs to building with consent of landlord. cost of repairs amounted to Rs. 10,000 odd in assessment year 1964-65, Rs. 9,000 odd in 1965-66 and Rs. 1,000 in 1966-67. Appellate Tribunal was of view that assessee must have made some structural changes in shop and held that expenditure was allowable neither as expenditure on current repairs under section 30(a)( i) of Income-tax Act, 1961, nor under section 37 as it was expenditure of capital nature. . . . . . . that expenditure incurred by assessee on renovating, furnishing or remodelling of business premises can be allowed as deduction under section 3 7 , if expenditure is not of capital nature. When owner incurs expenditure on addition or alteration in building which enhances its value, expenditure can be of capital nature. But if tenant incurs expenditure on rented building for its renovation or alteration, he does not acquire any capital asset, because building does not belong to him. Ordinarily, such expenditure will be of revenue nature. . . ." (p. 339) 3. CIT v. Bharat Cinema [1980] (Punj. & Har.): "Whether item of expenditure is of capital or revenue nature depends on findings arrived at in each case. If expenditure is for initial outlay or for acquiring or bringing into existence asset or advantage of enduring benefit to business that is being carried on, or for extension of business that is going on, or for substantial replacement of existing business asset, it would be capital expenditure, whereas if, on other hand, expenditure, although for purpose of acquiring asset or advantage, is for running of business or for working out that asset with view to produce profit, it would be revenue expenditure." (p. 165) It was held that expenditure was revenue in nature. 4. CIT v. Jagat Cinema [1971] 81 ITR 488 (Delhi): "The assessee took on lease cinema hall with shops and out-houses for period January 1, 1957, to December 31, 1961. Under terms of lease assessee had to remove talkie equipment and fittings on termination of lease and repairs, annual white-washing and painting had to be made b y assessee, lessor contributing fixed sum of Rs. 120 towards annual whitewashing and painting. During previous year ending December 31, 1961, relevant to assessment year 1962-63, lintel near stage of cinema hall collapsed causing damage to screen and stage. assessee spent sum of Rs. 11,418 towards reconstruction of lintel and restoration of stage and screen, and while doing so assessee increased dimensions of screen and stage. Of this amount Income-tax Officer only allowed sum of Rs. 2,000 towards repairs and disallowed balance as capital expenditure. Tribunal, however, on appeal, allowed entire expenditure. On reference of question whether balance of expenditure, viz., Rs. 9,418, was permissible deduction: (i)that so much of amount as was spent on reconstruction of lintel and restoration of stage and screen to state in which they were before collapse could legitimately be held to have been incurred on repairs; (ii)that balance of amount spent for widening screen and stage was not capital expenditure as object of incurring expenditure was not to bring into existence asset or advantage for enduring benefit of business of assessee, expenditure was incurred in last year of lease and there was nothing to show that assessee was entitled to remain in possession of cinema hall on expiry of period of lease or that assessee in fact continued in possession of hall after that period; nor waist shown that assessee was entitled to any compensation from lessor for improvement effected by assessee." (p. 488) 5. Kisenchand Chellaram (India) (P.) Ltd.s case (supra): "The assessee took three buildings on lease and effected improvements to them by construction of partition walls, wall panelling, show windows, etc. Its claim for deduction of expenses incurred therefor as revenue expenditure was negatived by ITO and AAC. Tribunal, however, held that as assessee was not owner of premises, and as there was no long lease in favour of assessee, assessee could not be said to have obtained enduring benefit and, accordingly, directed allowance. On reference: Held, that on facts, Tribunal was right in its conclusion that amounts spent were revenue expenditure." (p. 380) 6. S. Zoraster & Co.s case (supra): "The assessee, which ran picture house, spent amount of Rs. 85,624 i n carrying out repairs for upkeep of picture house. amount was spent on painting, wood penelling and marble flooring. Tribunal, after examining details of expenditure, arrived at finding that expenditure had been incurred in carrying out repairs to picture house. Tribunal held that amount was allowable as business expenditure. On Tribunal held that amount was allowable as business expenditure. On reference: ****** (iii)that expenditure was motivated by commercial expediency. Even if it were held that advantage which might last for few years had been acquired expenditure had been met in course of ordinary commercial trading activity of assessee. expenditure was, therefore, allowable as business expenditure under section 10(2)(xv)." (p. 559) It may be stated that in all above decisions, decision of Supreme Court in Assam Bengal Cement Co. Ltd.s case (supra) has been considered. It may be pointed out that decision relied upon on behalf of revenue in case of Tajmahal Hotel (supra) had no application to facts of case inasmuch as in that case on facts it was found that assessee had carried out improvement in existing building by making new constructions of new rooms for comfort and convenience of guests. It was on these facts that expenditure was held to be of capital nature. 7. Empire Jute Co. Ltd.s case (supra): "(ii)There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, nonetheless, be on revenue account and t h e test of enduring benefit may break down. It is not every advantage of enduring nature acquired by assessee that brings case within principle laid down in this test - What is material to consider is nature of advantage in commercial sense and it is only where advantage is in capital field that expenditure would be disallowable on application of this test. If advantage consists merely in facilitating assessees trading operations or enabling management and conduct of assessees business to be carried on more efficiently or more profitably while leaving fixed capital untouched, expenditure would be on revenue account, even though advantage may endure for indefinite future. test of enduring benefit is, therefore, not certain or conclusive test and it cannot be applied blindly and mechanically without regard to particular facts and circumstances of given case. (iii)What is outgoing of capital and what is outgoing on account of revenue depends on what expenditure is calculated to effect from practical and business point of view rather than upon juristic classification of legal rights, if any, secured, employed or exhausted in process, question must be viewed in larger context of business necessity or expediency." (p. 2) Following broad principles emerge from above decisions: firstly, expenditure which is incurred in course of process of profit earning is revenue in character. Secondly, expenditure on renovating, refurnishing and remodernizing business premises can be allowed as deduction on revenue account when tenant incurs such expenditure on rented premises inasmuch as it does not acquire any capital asset thereby, more so when building does not belong to him. Thirdly, when expenditure is incurred for running of business and does not involve any extension of business or substantial replacement of existing business asset, such expenditure would be revenue expenditure. Fourthly, expenditure on restoration of stage screens to put same in condition in which they were before repairs were undertaken could be legitimately be held to have been incurred on repairs and did not bring into existence any asset or enduring benefit. Fifthly, when assessee is not owner of premises and there was no long lease in favour of assessee, such assessee does not obtain enduring benefit as result of expenditure incurred on partition walls, show-windows, etc. Sixthly, expenditure incurred on repairs for proper upkeep of picture house is said to have been incurred on ground of commercial expediency and in course of ordinary commercial trading activity of assessee, such expenditure was allowable as business expenditure. Lastly, test of enduring benefit is not necessarily conclusive test to be applied blindly and mechanically without regard to particular facts and circumstances of given case and that whether expenditure is on capital account or revenue account would depend upon practical and business point of view rather than juristic classification of legal rights. question must be viewed in larger context of business necessity or expediency. 8. It is in light of above principles that controversy before us is required to be considered and determined. There are two broad aspects of matter. In first place it is case of revenue that expenditure as incurred by assessee could not be said to have been incurred for its business purpose because liability to undertake repairs was that of HUF- owner of property in question, therefore, claim of deduction of said expenditure even if revenue in character does not arise at all. Secondly, assuming that expenditure was allowable in hands of assessee on facts of case, impugned expenditure towards renovation and repairs resulted in enduring benefit and, therefore, was capital in nature. Now, so far as first aspect of matter is concerned, k reliance was placed on various clauses of lease agreement under which lessor was required to undertake repairs and lessee if desired to undertake repairs and was required to obtain lessors permission or consent in writing and expenditure that lessee do incur was restricted to two months rent (sic). These clauses show that primary responsibility of undertaking repairs was that of lessor. But it does not mean, in our opinion, that lessee who had incurred expenditure in course of its business or in profit-earning process, such expenditure cannot be deducted against its income. Now, assessee admittedly carries on business of exhibition of cinema films and for this purpose h s undertaken on lease cinema hall in question. Proper upkeep, maintenance, presentable look and comfortable arrangements for visitors and suitable amenities are ingredients in case of cinema hall which is maintained for exhibition of films. main source of income of assessee is realisations from sale of cinema tickets from customers and, therefore, t h e expenditure on repairs which assessee was required to incur was necessary expenditure in course of his business or in process of profit earning. expenditure has nexus with income which assessee earns and, therefore, impugned expenditure in circumstances of case must be held to have been incurred for purpose of business as well as in process of business. expression purpose of business is very wide in its scope. It takes into expression purpose of business is very wide in its scope. It takes into its sweep such expenditure which assessee is required to incur in its capacity as trader and out of commercial expediency, that is to say for facilitating carrying on of business whether directly or indirectly. Even assuming for sake of arguments that assessee as lessee had incurred said expenditure without permission of landlord or in contravention of lease agreement, nonetheless it would qualify for deduction inasmuch as breach of agreement would be matter of dispute between landlord and tenants and it does not, therefore, disqualify claim for deduction of expenditure if it otherwise fulfils test laid down above. We are fortified in this view by decision in case of CIT v. Ramakrishna Mills (Coimbatore) Ltd. [1974] (Mad.). In that case payment made in infringement of section 348 of Companies Act, 1956, was allowed as deduction under section 10(2)(xv) of Indian Income-tax Act, 1922 on ground that one cannot travel beyond provisions of 1961 Act and deny benefit of deduction under that section on ground that payment is unauthorised or has been pro-hibited by some other statute. In instant case, there is no prohibition from incurring said expenditure under any statute but if at all breach of agreement in such situation, occurs claim for deduction of expenditure if otherwise incurred in course of business cannot be denied to assessee. 9. Now coming to second aspect of matter, viz., character or quality of expenditure as incurred by assessee that is to say whether said expenditure is capital or revenue in character, decisions which we have referred to above and principles which we have derived clearly show that expenditure in question is allowable on revenue account. We have examined details filed by assessee and we are satisfied that entire expenditure was towards repairs and renovation without bringing into existence any new asset or extension to existing asset. expenditure incurred show that assessee had demolished flooring and staircase railings and had replaced same by R.C.C. work. In other words, old flooring has been removed and same is replaced by new tiles. Similarly, old wooden staircase has been removed and replaced by concrete stair case. screen has been replaced and cement plastering has been done. All these expenditures are connected with repairs of existing accommodation and, therefore, our conclusion is that impugned expenditure did not bring into existence any asset or advantage of enduring nature and, therefore, must be held to be on revenue account. Our decision in this regard would cover assessees claim for renovation expenses amounting to Rs. 1,87,585 only. balance expenditure of Rs. 29,700 relates to cost of fans, regulators, etc. It is not clear from details placed before us, whether new fans were installed or existing fans were replaced. Therefore, for limited purpose we send matter to ITO to examine details and allow claim for deduction in respect of expenditure as is relatable to replacement of fans and regulators. If, however, examination of details shows that additional fans were installed by assessee, such expenditure on fans and regulators should be capitalised and depreciation be allowed at usual rates, keeping in mind proviso to section 32(1)(ii) of Act. 10. ITO in view which he took, viz., that expenditure on renovation and repairs was not allowable as revenue expenditure, disallowed assessees claim for deduction in connection with stamp duty, interest, etc. Since we have held that expenditure is allowable on revenue account as corollary, expenditure incurred towards stamp duty, interest, etc., would be allowable as expenditure on revenue account and on this point also we uphold decision of Commissioner (Appeals). 11. In result, appeal is treated as partly allowed. *** Income-tax Officer v. Laxmi Talkie
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