TMI Blog1977 (9) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... ng necessary alterations for converting it into an " A " class theatre and equipping it with all necessary equipments including electric fittings, fans, water tank and furniture as per the rules under the Cinematograph Act for making the said building fit and useful for cinema show. Under this agreement all materials as well as all alterations effected to the premises except the machinery were to be regarded as a part of the premises and were to belong to Richpal after the expiry of the period of lease. The assessee was not to pay the monthly rent, till half of the amount spent on the alterations made in the building to make it fit for exhibiting cinema shows, to Richpal was adjusted and Richpal was to pass a receipt against the amount of expenditure to the assessee. The remaining amount was to be adjusted for payment in the monthly rent proportionately. The agreement of lease further provided that after the expiry of the period of the lease the assessee would be entitled to extend the lease for a further period of two years and the rent of the leased premises was to be enhanced to 25% of the momthly rent payable during the second five years. There was an express provision that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... another sum of Rs. 5,541, which was referable to the rent from January 1, 1959, to May 12, 1959, was not adjusted. The total of all these sums came to Rs. 1,29,009 out of which under the terms of the deed of lease a set-off was permitted only in respect of the sum of Rs. 80,000. The balance of Rs. 49,009 was adjusted to the profit and loss account of the assessee in the year ended July 31, 1963, and for the assessment year 1964-65, he claimed a deduction of this amount on the ground that it was revenue expenditure incurred wholly and exclusively for the purposes of business. The ITO rejected the claim holding that he was not in a position to verify the quantum of expenditure and further the expenditure was in the nature of capital expenditure and not in the nature of " current repairs ". In an appeal before the AAC, the genuineness of the quantum of expenditure was not questioned; but he disallowed the deduction of expenditure holding that it was not of a revenue nature as it brought into existence a capital asset, since the benefit from the expenditure would enure to the assessee during the period of lease of 11 years. In second appeal before the Tribunal, the only contentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it, it was of an enduring nature. On the other hand, Mr. Dewani on behalf of the assessee contended that, as found by the Tribunal, the business of the assessee to conduct cinema theatre and to exhibit the films had already commenced. This expenditure had to be incurred pursuant to the terms of the agreement between the assessee and Richpal with a view to continue the business and not with a view to acquire a new and enduring benefit. He, therefore, submitted that but for the assessee agreeing to bear this expenditure he would not have been in a position to continue his business of exhibiting the films which had already started. He, therefore, submitted that the Tribunal was right in taking the view that the expenditure incurred was of a revenue nature. At the outset, it may be stated that it is common ground between the parties that deduction in respect of the sum of Rs. 49,009 had not been claimed by way of repairs under the provisions of s. 30 of the I.T. Act, 1961, but it is claimed as a permissible deduction falling under s. 37(1) of the Act. That section provides that any expenditure (not being expenditure of the nature described in ss. 30 and 36 and s. 80VV and not being i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, 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 ...... 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 ...... The expressions 'enduring benefit' or ' of a permanent character ' were introduced to make it clear that the asset or the right acquired must have enough durability to justify its being treated as a capital asset. 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 the business. Again, it is to be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. Fixed capital is what the owner turns to profit by keeping it in his own possession. Circulating or floating capital is what he makes profit of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount was not spent in current repairs to the theatre but on improvements of great magnitude carried out for giving an enduring advantage to the assessee to keep pace with or outstrip in the competition with a new theatre which had recently sprung up, and the expenditure did not fall within the scope of s. 10(2)(v) of the Act. It was not allowable under s. 10(2)(xv) as substantial improvements were made to the building and the land appurtenant thereto, with the sole object of getting an enduring benefit for the business and the expenditure must be deemed to be in the nature of a capital expenditure. In the present case, it should not be overlooked that what the assessee agreed to take on lease from Richpal was merely a godown together with the lands on both the sides. He has agreed to convert this property into an 'A' class cinema theatre for exhibiting films and under the agreement he was to incur an expenditure of Rs. 40,000 to Rs. 50,000 with a right to reimburse the same from rent as provided under the terms of the agreement. However, it is the case of the assessee, which is not disputed before us, that the expenditure incurred was much more than Rs. 50,000 and dispute arose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee claimed deduction of a sum of Rs. 38,397 to have been spent on the aforesaid head and the same was pressed to be accepted as revenue expenditure. The ITO treated the expenditure to be of capital nature and rejected the claim for deduction. In appeal, the AAC 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 analysis, he came to the conclusion that part of the payment could be taken as rent paid in advance and accordingly came to hold that the expenditure was of capital nature. He declined to accept the claim of depreciation in view of the fact that the asset was not owned by the assessee. The Tribunal in further appeal held that since the lease had to enure for twelve years, the assessee was entitled to have depreciation admissible in a sum calculated at 1/11th of the expenditure reckoned with the year of construction as deferred revenue expenditure. In a reference to the Orissa High Court, it was held that though the Tribunal was not justified in allowing depreciation at 1/11th of the expenditure reckoned with the year of construction as deferred rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be borne by the assessee himself. Such expenditure is not incurred or borne by him with a view to continue his business or to preserve the same. In fact, it was the generosity on the part of Richpal to agree to bear an expenditure of Rs. 80,000 because under the terms of the agreement of lease the reimbursement was to be allowed to the assessee only to a maximum amount of Rs. 50,000. The sum of Rs. 49,009 which ultimately came to be borne by the assessee under the terms of the agreement entered into in the year 1963, was expended by the assessee with a view to convert the godown into an 'A' class cinema theatre. Any expenditure of that nature is of a capital nature because but for such an expenditure the business of exhibiting films in a cinema theatre cannot be carried on by the assessee. As the expenditure incurred was for converting a godown into a cinema theatre, it cannot be treated as a revenue expenditure simply because the agreement between the parties, in view of the disputes, ultimately came to be arrived at in the year 1963. The very nature of the expenditure itself is such that during the period of the lease it brings into existence an enduring benefit or advantage to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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