1. The two questions which have been referred in this reference under s. 256(1) of the I.T. Act, 1961, are as follows :
'(i) Whether, on the facts and in the circumstances of the case, a sum of Rs. 20,935 was a permissible deduction ?
(ii) Whether, on the facts and in the circumstances of the case a sum of Rs. 47,500 was assessable as capital gains ?'
2. The assessee-company carries on the business of manufacture of chemicals in their factories at Bombay and Ahmedabad. By lease deed dated March 7, 1969, the assessee-company took one shed on lease which was situated on a part of plot No. 100 of Rakhiyal Town Planning Scheme in Ahmedabad District. The lease was for a period of 11 months and 29 days. One of the terms of the lease was that the assessee-lessee was entitled to keep or install machine or furniture and fixtures permanently in the shed leased out, and the assessee was entitled to make permanent alternations and additions in the shed. Assessee was entitled to put windows in the shed. The assessee was also entitled to fix sanitary fittings, electrical fittings, air conditioning, partition cabins and such other works as desired by the assessee but any alterations or additions had to be done within the rules and regulations of the local authority or the Government, as the case may be. There was also a stipulation in the lease that when the lessee hands over possession to the lessor, the premises will be in their original form and the assessee was entitled to remove additions and alterations at its cost.
3. Admittedly, though the lease was not renewed, the assessee continued to be in possession of the leased premises. During the accounting year relevant to the assessment year 1969-70, the assessee spent an amount of Rs. 20,935 for additions and alterations to the shed. Annexure G to the statement of the case which is the bill for additions and alterations in the assessee's factory indicates the nature of the additions and alterations. This amount was claimed as renovation expenditure by the assessee but the Income-tax Officer negatived the claim and allowed depreciation at 5%. These findings have been confirmed by the AAC and the Appellate Tribunal. The first question put in issue the correctness of this decision.
4. The second question arises out of the addition of Rs. 95,000 as capital gains by the ITO. The assessee-company was in occupation of factory premises having a total carpet area of 8,000 sq.ft. since 1947 as a subtenant of Pure Products and Madhu Canning Private Limited. The owner of the building, Shri Umrigar, entered into an agreement with Buildwell Corporation who were to construct a new building by
5. demolishing the old structures. Buildwell Corporation entered into an agreement with the assessee-company according to which the assessee agreed to give vacant possession of the premises occupied by it for which the assessee was to obtain a total carpet area of 1,920 sq. ft. on the third floor of the new building to be constructed, on a payment of a concessional price of only Rs. 3,003 on ownership basis. The agreement specifically referred to the fact that the concessional price was fixed in view of the ready co-operation given by the assessee in giving vacant possession and also in view of the inconvenience that would be suffered by the assessee.
6. The ITO took the market price of the area in the new building at Rs. 98,000 and brought Rs. 95,000 to tax as capital gain. This addition was confirmed by the AAC. In appeal, the Appellate Tribunal, however, held that there was confirmed by the AAC. In appeal, the Appellate Tribunal, however, held that there was no material to come to any finding as regards the market value of be the leasehold rights in 8,000 sq. ft. of carpet area as on April 1, 1954, and taking into consideration the fact that the assessee has been a sub-tenant in the old premises right from 1948 to 1968, the Tribunal accepted the alternative argument of the assessee that 50% of the difference between the market price and the price paid by the assessee of the three flats should be assessee as capital gains.
7. Now, so far as the first question is concerned, Mr. Munim appearing on behalf of the assessee has contended that the expenses incurred for the purpose of repairs and making the necessary additions and alterations, should have been permitted as permissible deduction because that expenditure has not resulted in the acquisition of any capital asset or of any advantage of an enduring character to the assessee.
8. The learned counsel appearing on behalf of the Revenue has, however, contended that the expenditure incurred is not merely for carrying out repairs but that the expenditure incurred is not merely for carrying out repairs but that certain additions and alterations have been made and the expenditure must, therefore, be treated as of capital nature. Now, it is true that expenditure incurred could not be said to be in the nature of current repairs permissible under s. 30 of the I.T. Act, but that does not conclude the controversy. If the assessee is able to establish that the repairs were intended to provide the necessary facilities for carrying on the business, then the expenditure incurred for putting the sheds in a usable state must be treated as wholly and exclusively incurred for the purpose of business. Merely because a brick wall has been constructed or cement plaster has been put on the walls, the assessee cannot be said to have acquired any asset of an enduring character. It has to be remembered that the assessee is not the owner of the sheds. The agreement between the assessee and the lessor is that the assessee was entitled to remove the fittings at the time of handing over vacant possession to the lessor. If the terms of the lease are strictly complied with, the walls will have to be demolished, the windows will have to be removed and the brick-work will have to be replaced. Such constructions made exclusively for the purpose of the proper utilisation of the premises taken on lease cannot be said to bring into being any asset of an enduring character or any benefit of any enduring character. A dividing wall or plaster to the wall or construction of a gate can, by no stretch of imagination, be treated as capital assets in the hands of a lessee. Indeed, any prudent businessman would like to see that his property is protected and, with that end in view, would construct a compound wall and a gate. The expenditure so incurred is obviously for the purposes of protecting the property of the assessee.
9. Mr. Munim has relied on a decision of the Punjab and Haryana High Court in CIT v. Bhagat Industries Corporation Ltd. . The expenses incurred in that case were for 'renovation of living room, bathroom, back verandah, study, kitchen-cum-pantry, stairway, dining room etc.,' While dealing with such expenditure, the Division Bench took the view that the mere fact that the repairs made are of a durable nature would not make the expenditure a capital expenditure. In CIT v. Rama Krishna Steel Rolling Mills : 95ITR97(Delhi) , the Division Bench of the Delhi High Court took the view that expenditure incurred for effecting the repairs which are necessary for carrying on the assessee's business but in respect of which no undertaking has been given by him, does not come within the scope of s. 10(2)(ii) of the Indian I.T. Act, 1922, but such a claim can be allowed under the general cl.(xv) of s. 10(2). That was a case in which repairs were carried out to the roof of the premises which became necessary for protecting its machinery from rain and wind and the expenses were allowed as properly deductible under s. 10(2)(xv) of the Indian I.T. Act, 1922.
10. In Girdhari Dass and Sons v. CIT : 105ITR339(All) , a Division Bench of the Allahabad High Court pointed out that if a tenant incurs an expenditure on a rented building for its renovation or alteration, he does not acquire any capital asset because the building does not belong to him and ordinarily such expenditure will be of a revenue nature. In that case, the assessee had made some structural changes inside the establishment premises and the Division Bench held that such structural changes do not create a capital asset or bring into existence an advantage of enduring nature and the expenditure was incurred for the purpose of facilitating the carrying on of its business and must, therefore, be held to be of a revenue nature. The Supreme Court in Assam Bengal Cement Co. Ltd., v. CIT : 27ITR34(SC) , had taken the view that the word 'enduring' means 'enduring in the way that fixed capital endures' and it does not denote a benefit that endures in the sense that for a good number of years it relieves the assessee of a revenue payment. The above decisions and the view which we have taken will clearly indicate that the tax authorities and the Tribunal were in error in treating the expenditure of Rs. 20,935 as of capital nature. The first question will, therefor, have to be answered in the affirmative and in favour of the assessee. So far as the second question is concerned, the learned counsel for the Revenue and the assessee are agreed that having regard to the view of this court in CIT v. Mrs. Shirinbai P Pundole : 129ITR448(Bom) , the assessee had incurred no liability to capital gains. In Shirinbai Pundole's case, this court has taken the view that the surrender of the tenancy right in exchange for an ownership flat in the building did not attract capital gains tax under s. 45 of the I.T. Act.1961. Accordingly, question No. 2 has to be answered in favour of the assessee.
11. The two questions referred are answered as follows :
Question No. 1 - In the affirmative and in favour of the assessee.
Question No. 2 - In the negative and in favour of the assessee.
12. Assessee to get the costs of this reference.