1966 (11) TMI 8 - HC - Income Tax

Hotel - expenditure incurred - Whether the assessee was entitled to deduct the sum of Rs. 60, 000 as revenue expenditure under clause (i) or (xv) of section 10(2) - Held no

Summary

Issues Involved:
1. Whether the sum of Rs. 60,000 is deductible as revenue expenditure under Section 10(2)(i) of the Indian Income-tax Act, 1922.
2. Whether the sum of Rs. 60,000 is deductible as revenue expenditure under Section 10(2)(xv) of the Indian Income-tax Act, 1922.

Issue-Wise Detailed Analysis:

1. Deductibility under Section 10(2)(i):
The primary contention was whether the sum of Rs. 60,000 could be considered as rent under Section 10(2)(i). The court examined the lease agreement between the assessee and the lessor, noting that the assessee was not obligated to make any additions or new constructions but could do so with the lessor's permission. The cost of these additions was solely borne by the assessee, and the lessor had no right to demand additional rent for these improvements. The court emphasized that rent is distinct from a premium and represents the consideration for the use and occupation of the premises. Since the Rs. 60,000 was spent on constructing additional rooms to benefit the hotel business and was not an obligatory payment to the lessor, it could not be considered rent. The court concluded that the expenditure was intended to bring an enduring advantage to the business, thus disqualifying it as rent under Section 10(2)(i).

2. Deductibility under Section 10(2)(xv):
The alternative argument was whether the expenditure could be considered as revenue expenditure under Section 10(2)(xv). The court reiterated that for an expenditure to qualify under this clause, it must not be in the nature of capital expenditure and should be laid out exclusively for the business. The court referred to several precedents to determine whether the expenditure was capital or revenue. It noted that the nature of the expenditure, the business context, and the objective behind the expenditure are critical factors. The court found that the Rs. 60,000 spent on constructing additional rooms was meant to provide an enduring benefit to the business, thus classifying it as capital expenditure. The court highlighted that even if the benefit was not everlasting, the right to occupy the additional rooms for ten years or more constituted an enduring benefit. Consequently, the expenditure did not qualify as revenue expenditure under Section 10(2)(xv).

Conclusion:
The court concluded that the sum of Rs. 60,000 was in the nature of capital expenditure and not deductible under either Section 10(2)(i) or Section 10(2)(xv) of the Indian Income-tax Act, 1922. The question was answered in the negative and in favor of the department, with the assessee required to pay the costs of the reference.