1. The assessee, in this case, carries on the business of exhibiting films in a theatre called Naval Talkies, Panipat. The assessee had originally purchased a ginning factory in the year 1937. The factory itself was constructed in 1901. The assessee ran the factory till 1940 and after the ginning factory was stopped the factory premises were converted into a cinema theatre in 1945. Originally, the amount invested in the building was Rs. 17,871. The building was, however, extensively repaired and renovated during the period from October 29, 1960, to March 4, 1961, during which time it was not used for exhibiting films. Large amount of expenditure was incurred by the assessee on renovation and extensive repairs. Machinery worth Rs. 16,002 was purchased and new furniture of Rs. 27,889 was fitted. Sanitary fittings of the value of Rs. 5,225 were also newly put in. This expenditure was capitalised with regard to which there is no dispute. The assessee, however, claimed expenditure incurred on the following items as revenue expenditure :
(a) Repairs to walls by scrapping them at various places and plastering them using bricks, cement, etc.
(b) Repainting of the hall.
(c) Repairs to flooring and roofing wherefrom sheet had to be replaced.
(d) Repairs to doors and windows.
(e) Repairs on the stage, sides, etc.
2. The total expenditure incurred on these items came to Rs. 62,977. In addition, the entire electrical wiring was replaced and the cost thereof was Rs. 13,604.
3. The ITO declined to allow this expenditure as revenue expenditure. He treated this as capital expenditure and allowed depreciation on the sum of Rs. 62,977. In appeal by the assessee, the AAC confirmed the said allowance and he observed that what the assessee had done was renovation of the building and a new hall was made out of the old one. The AAC referred to the remarks of the auditors that what was carried out was not ordinary repairs, but as a matter of fact the entire cinema hall was renovated so as to give a new life to it. The AAC also took into account the disparity between the original cost of the building and the amount spent on repairs which was claimed as revenue expenditure.
4. The assessee then appealed before the Income-tax Appellate Tribunal. The Tribunal took the view that the expenditure incurred by the assessee was allowable either as current repairs or revenue expenditure incurred for the purpose of business. The Tribunal found that no new asset was brought in by incurring the expenditure, and 'it only served the purpose to enable the assessee to run the theatre very efficiently'. The Tribunal found that there were no structural alterations made by the assessee and all that he had done was that some sheets from the roof were replaced by iron sheets, some portions of the floor were newly cemented and the walls remained the same, except that they received a coat of paint and the electrical wiring also had to be replaced as it was old. Thus, the Tribunal held that the expenditure was of a revenue nature and the entire sum of Rs. 62,977 should have been allowed. Arising out of this order of the Tribunal, the following question has been referred to the High Court under s. 66(1) of the Indian I. T. Act, 1922, at the instance of the revenue :
'Whether, on the facts and in the circumstances of the case, in computing the income of the assessee for the material year the sum of Rs. 62,977 or any portion thereof is deductible ?'
5. Arguing on behalf of the revenue, Mr. Joshi has contended that the items in respect of which expenditure was claimed as revenue expenditure could not be considered in isolation and the nature of the work carried out in respect of the structure had to be considered in its totality. According to the learned counsel, what the assessee has done is that he has completely renovated the factory hall and converted it into a fully equipped cinema theatre. It is contended that the assessee had clearly secured an advantage of enduring benefit and, therefore, the expenditure incurred could not be called as expenditure incurred on repairs and was, therefore, clearly in the nature of capital expenditure. He has referred to the decision of this court in New Shamrock Spinning and . v. CIT : 30ITR338(Bom) and Sri Rama Talkies v. CIT : 59ITR63(AP) .
6. According to Mr. Munim, who appeared on behalf of the assessee, the amount of Rs. 62,977 was clearly an amount spent on repairs in respect of items earlier referred to and could not be classified as capital expenditure.
7. At the outset it is necessary to mention that it was stated before us that the claim made by the assessee was under s. 10(2) (xv) of the Indian I. T. Act, 1922, and according to the learned counsel, if the expenditure was not of a capital nature he was entitled to the deduction thereof because it was laid out or expended wholly and exclusively for the purpose of the business of the assessee. Under s. 10(2) (xv) any expenditure not being an allowance of the nature described in any of the cls. (i) to (xiv), and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purpose of such business, profession or vocation is made allowable for the purposes of computation of profits or gains of the business. Since it is not claimed that the expenditure in question was allowable under s. 10(2) (v) and since it cannot be seriously disputed that the moneys were expanded wholly and exclusively for the purpose of the business of the assessee, unless it is found that the expenditure was of a capital nature the assessee would be entitled to the allowance of the expenditure as revenue expenditure. What is, therefore, to be ascertained is whether the expenditure in question is in the nature of capital expenditure. But before we go to that question, it is necessary to ascertain the exact nature of the work which was carried out by the assessee and the purpose for which the expenditure in question was incurred.
8. It is not in dispute that what is now called a cinema theatre was originally a place where a ginning factory was located. The amount invested in the building is shown to be Rs. 17,871 in 1937. The premises were used as cinema theatre since 1945. The assessee has filed details of the expenditure incurred both with regard to the building itself and the installation of the machinery. The assessee has himself stated that the expenses were incurred for the purpose of renovation of the Naval Talkies. If the expenses incurred by the assessee are carefully scrutinised it becomes obvious that what is now being described as repairs was really in the nature of a large scale operation of putting the building in a proper shape as a well equipped theatre. The assessee has purchased new machinery, new furniture has been installed and new sanitary fitting have also been installed. New electrical fittings have also been installed. It is in the light of these that the so-called repairs to the walls, flooring, roofing, doors and windows and the repainting of the hall has to be considered. It may be that if an item like repairs to doors and windows, or repairs to flooring is taken or considered separately in isolation, it could be said that the assessee had repaired the flooring or he had repaired the doors or windows. But when we consider these works in totality in the light of the fact that the theatre itself has been closed for about 4 months to enable the assessee to carry out the renovation, it is obvious that such kind of work cannot be described merely as repairs. The statement filed by the assessee shows that more than 72,000 bricks have been consumed by it and 428 bags of cement have been used. It is obvious from the quantity of the stores used that there was a large scale operation of the renovation of the theatre building and it is obvious that what was originally a mere hall, where ginning factory may have been located, has now been substantially converted into a well-equipped cinema theatre. The question is, whether expenses so incurred could be treated as expenses for repairing building. The degree of improvement and the change effected in the identity of the existing structure can always be taken into account for determining whether the asset in its present form is substantially a new asset and whether it has resulted in an advantage of enduring nature as a result of the expenses incurred. We may, with advantage, refer to the decision of this court in New Shorrock Spinning Company's case : 30ITR338(Bom) , where while dealing with the provisions of s. 10(2) (v), the Division Bench has formulated the test which is to be applied when the question arises, whether the expenditure incurred is one for repairs or it is of capital nature. The Division Bench in that case has observed as follows (p. 343) :
'The expression 'repairs' must be understood in contradistinction to renewal or restoration. The test that has to be applied is that as a result of the expenditure which is claimed as an expenditure for repairs what is really being done is to preserve and maintain an already existing asset. The object of such expenditure is not to bring a new asset into existence, nor is its object the obtaining of a new or fresh advantage. But if the amount spent was for the purposes of bringing into existence a new asset or obtaining a new advantage, then such an expenditure would not be an expenditure of a revenue nature but it would be a capital expenditure.'
9. As already pointed out, on the facts as disclosed in this reference, it is patent that when the assessee decided to spend Rs. 1,25,000 odd on the premises which he acquired for only about Rs. 17,000 he was converting that asset into a theatre fairly well equipped and he clearly wanted to have a new advantage which would be of an enduring character because the assessee was the owner of the theatre.
10. In Sri Rama Talkies v. CIT : 59ITR63(AP) , the question which was required to be decided by the Andhra Pradesh High Court was whether a sum of Rs. 15,275 spent on extensive renovation of a theaters could be claimed as deductible expenditure either under s. 10(2)(v) or s. 10(2)(x) of the Indian I. T. Act, 1922. In that case, on the facts, it was found that the entire compound which was hitherto filled with earth and sand was laid with Cuddappa slabs; the compound walls were raised in height with grill work; all the electric wiring was remodelled, the roofing was fixed with Sale-tax and the entire building was recolours with distemper. The aim and object of the expenditure was to save the theatre from the competition of another theatre, 'Alankar', which had newly sprung up in the vicinity. The Andhra Pradesh High Court took the view that when the expenditure was not on necessary repairs, which were required for the maintenance of the theatre but were luxury repairs, and were improvements of great magnitude carried out with the set purpose of giving an enduring advantage to the assessee to keep pace or outstrip in competition with a new theatre which had recently sprung up, the expenditure of this nature cannot fall within the scope of s. 10(2) (v). Even with regard to the claim under s. 10(2) (xv), the Andhra Pradesh High Court took the view that any amount expended in the construction of the building or in the extension of the same or in making substantial improvement therein would be an expenditure of a capital nature and if any expenditure is made for getting an advantage of enduring benefit to the business, that would also be an expenditure of a capital nature. It was pointed out that the aim and object of the expenditure will determine the character of the expenditure, whether it is a capital expenditure or a revenue expenditure.
11. Applying the ratio of the two decisions cited above, it is obvious that the object of the assessee was clearly to make such substantial improvements that it could get an advantage of enduring benefit and the assessee clearly wanted to have a fairly well-equipped theatre in the place of a hall where originally there was a ginning factory. By no stretch of imagination can the extensive work carried out be termed as repairs merely intended to maintain the building in its proper state of repairs.
12. The error into which the Tribunal has fallen lies in the fact that items of repairs seem to have been viewed independently of the total nature of the repair carried out by the assessee and the purpose for which the work was carried out. In the view which we have taken, the answer to the question referred to us must be in the negative and against the assessee.
13. The Tribunal in the concluding portion of its judgment observed that the depreciation given would be withdrawn. Since we have held that the amount of Rs. 62,977 is in the nature of capital expenditure, appropriate computation with regard to depreciation will now be made.
14. The assessee to pay the costs of the revenue