1. The following two questions have been referred for decision under Sec-tion 66(1) of the Indian Income-tax Act, 1922:
'1. Whether, on the facts and in the circum-stances of the case, the amount of Rs. 6,991 is allowable as a deduction in the assessment year 1959-60?
2. Whether, on the facts and in the circum-stances of the case, the amount of Rs. 15,275 is allowable as a revenue expenditure?'
The facts raising these questions may be shortly stated: The assessee is a registered firm and the owner of a cinema theatre. The land on which the theatre was constructed belonged to another firm. It was taken on lease for a period of 10 years commencing from 1-5-1940, on an annual rent of Rs. 750. The assessee did not vacate the land at the expiry of the lease period with the result that the managing partner of the lessor firm brought a suit in ejectment with a further claim for mesne profits in the Court of the District Judge Krishna at Masulipatam. The asses-see thereupon started negotiations with the partners of the lessor firm. He was successful in obtaining a sale deed for 98 out of 160 shares in the land. He entered into an agreement of sale with regard to 39 shares more, but that transaction did not materialise into a registered sale deed. He therefore brought a suit for specific performance. His efforts for purchase of the remaining 23 shares which belonged to the managing partner of the firm did not meet with success.
While so, the District Court granted a decree for eviction fixing, at the same time, mesne profits payable at Rs. 2000 per annum from 1-5-1950. The suit for specific performance brought by the assessee with regard to 39 shares was dismissed. The assessee went in appeal to the High Court and applied for stay of the execution pro-ceedings of the District Court's decree for eviction. The stay was granted on 29-7-1957 subject to certain conditions. The assessee was directed to deposit in cash in court the mesne profits on 62 shares (39 plus 23) at the rate of Rs. 1500 p a. together with arrears for the years 1950 to 1957 and furnish security for the balance due according to the rate allowed by the lower Court to the satisfaction of the District Court, Masulipatam He accordingly deposited a sum of Rs. 6,991 in the Court. He debited this sum forthwith in his books to the Court expenses account. But on the last day of his accounting year for the assessment year 1959-60 (i.e.) on 9-11-1958, he reversed the entry by charging the said amount to the profit and loss account. Then he claimed this amount of Rs. 6,991 as rent paid in the assessment year 1959-60 being expenditure deductible in the year of account.
The assessee claimed in that year some further allowance in relation to items of expenditure in connection with the theatre. It appears he had carried out extensive renovations to the theatre incurring a total expenditure of Rupees 15,275. The object of these extensive improvements in the theatre was, according to the assessee himself, two-fold; firstly, to save itself from competition from another theatre that had newly come up and secondly, to conform to the regulation of the authorities concerned. According to the assessee the expenditure incurred in this be half was a revenue expenditure. The Income-tax Officer did not accept his claim in relation to either amounts. The Appellate Assistant Com-missioner also agreed with him. On further ap-peal, the Appellate Tribunal found in relation to the first item that the amount paid was not rent which could be an allowable deduction. It represented profits for unlawful occupation and was deposited pending final settlement of dispute in court. It was besides a provisional and not a final payment. Above all as the liability was incurred under the decree of the District Court long prior to the present assessment year and the amount represented the arrears of several years also it cannot be an allowable deduction even if it were rent. On the second point, it found that the expenditure, in view of the facts and circumstances of the case, was in the nature of capital expenditure and hence not an allowable deduction. The aggrieved assessee therefore applied for reference.
2. Of the two questions referred, the first question turns upon the application of Section 10(2)(i) and the second question on Section 10(2)(v) and 10(2) (xv) of the Indian Income-tax Act. Section 10 so far as is material for this case runs thus:
'10(1) The tax shall be payable by an assessee under the head 'Profits and gains of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried by him.
(2) Such profits or gains shall be computed after making the following allowances, namely:
(i) any rent paid for the premises in which such business, profession or vocation is carried on provided that when any substantial part of the premises is used as a dwelling house by the assessee the allowance under this clause shall be such sum as the Income-tax Officer may determine having regard to the proportional annual value of the part so used;
(ii) to (iv) ***
(v) in respect of current repairs to such buildings, machinery, plant or furniture, the amount paid on account thereof;
(vi) to (xiv) ***
(xv) any expenditure (not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, 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.'
The point to be considered is, whether the amount of Rs. 6,991 deposited by the assessee under the orders of the court represents the rent paid for the premises within the meaning of section 10(2)(i). Certainly it is not, either in name or in fact. Admittedly, the lease period had expired by the end of April 1950. Thereafter the assessee continued in possession much against the will of the lessor. That is why he was sued in ejectment in a court of law. The reliefs claimed included mesne profits both past and future. As the assesses had purchased the interest of certain sharers he of course became the owner of the land to that extent. As regards the remaining portion the Court granted a decree of eviction and mesne profits having assessed the quantum of mesne profits for the entire land at Rupees 2,000 per year. It granted such relief for the period commencing from 1-5-1950 from which date his possession was unlawful. It is clear therefore what was directed to be paid in the decree was not rent in its popular or legal sense but only mesne profits. In the application for stay of execution of the decree, the conditional order passed also directed the assessee to deposit in cash provisionally the decretal amount of mesne profits in part and furnish security for the balance. The amount so deposited can in no sense of the term be called rent within the meaning of Section 10(2)(i). It was manifestly mesne profits. Further, it was a provisional payment and not a final payment and was subject to final result of the appeal. Therefore it can never constitute an allowable deduction under Section 10(2)(i). The answer to the first question must necessarily be in the negative.
3. Then we come to the second question which relates to the expenditure of Rs. 15,275. The learned counsel Mr. Anantha Babu contends that this expenditure cannot be deemed to be of a capital nature as the Appellate Tribunal was inclined to hold. It is essentially a revenue expenditure and an allowable deduction either under Section 10(2)(v) being current repairs, or, at any rate, under Section 10(2)(xv) of the Income-tax Act. The first point therefore that falls for consideration is, whether the expenditure falls within the ambit of Section 10(2)(v). It would indisputably be within the scope of that provision if it is expenditure incurred essentially on ordinary repairs as are needed for the maintenance and upkeep of the building or theatre. Such an expenditure having regard to its nature must be one in respect of current repairs within the meaning of that term in the said provision. It may be noted that the expression used, namely, 'current repairs' is peculiar to Indian Law. The English statute does not contain any section which uses that expression. There the expression used is 'repairs'. So the English authorities are not of much assistance in understanding the connotation of current repairs.
The view taken by the High Courts in India in relation to the true meaning and implication of this term is not at all uniform, and is conflicting enough. The Allahabad High Court in Ram-kishen Sunderlal v. Commr. of Income-tax : 19ITR324(All) referred with approval the observations of Buckley L J. in Lurcott v. Wakely and Wheeler, (1911) 1 KB 905 which are to the effect that 'repair' and 'renew' are not words expressive of clear contrast, for repair involves renewal and it may be restoration by renewal or replacement of subsidiary parts of a whole, that renewal, as distinguished from repair, may be said to be re-construction of the entirety, meaning by the entirety, not necessarily the whole but substantially the whole subject-matter and that the question of repair in every case is one of degree and the test is, whether the act to be done is one which in substance is the renewal or replacement of defective parts or renewal or replacement of substantially the whole. Accepting this connotation of the term 'repairs' the learned Judges observed that the qualifying expression 'current' employed in the Indian statute indeed restricts its meaning to petty repairs usually carried out periodically and does not take in repairs or renewals made after long intervals on extensive scale involving enormous outlay. This narrow interpretation put on the term 'current repairs' did not find favour with the Bombay, Patna, Punjab and Nagpur High Courts.
The Madras and Calcutta High Courts too did not accept this view. In Commr. of Income-tax v. Sri Rama Sugar Mills : 21ITR191(Mad) Satyanarayana Rao, J., observed that the dictionary meaning of the word 'current' is not petty but it means 'belonging to the present time prevailing'' and therefore the restricted construction as was placed by the Allahabad High Court cannot be put on that term so as to confine it only to 'petty' repairs usually carried out periodically and not to include repairs or renewal costing a large sum of money which was spent after the machinery has been run for a number of years. He further observed that the test whether a thing is a repair or not is 'to see whether the act actually done is one which in substance is a replacement of defective parts or a replacement of the entirety or a substantial part of the subject-matter' Raghava Rao, J. the other member of the Bench also did not accept the meaning put on the expression 'current repairs' by the Allahabad High Court.
4. The Nagpur High Court in Bansilal Abirchand S and W Mills v. Commr. of Income-tax also did not accept the view taken by the Allahabad High Court. There the question was, whether the expenditure incurred on the replacement of a cylinder in a sizing machine of the mills and also spent on renovation of the wooden flooring of the spinning department of the mill constituted revenue expenditure. The learned Judges said that they were and formed an allowable deduction as expenditure incurred for current repairs. In the Bombay case New Shorrock Spg. and Mfg. Co., Ltd. v. Commr. of Income-tax : 30ITR338(Bom) where certain parts of the majority of the looms used in the textile mills were replaced as a device for keeping certain tension for the working of the looms and the new parts used were comparatively lighter in weight conforming to international standards and were superior to the old parts and were used because the old parts were not available in the market and besides the cost of preparation of similar type would have been disproportionately high and the old parts were being replaced after a lapse of 60 years, Chagla, C. J. observed that the expenditure was an allowable deduction under Section 10(2)(v).
The term 'current repairs' according to the learned Chief Justice means expenditure which is not for the purpose of renewal or restoration but for the purpose of preserving or maintaining an already existing asset which does not bring into being a new asset or does not give to the assessee a new or different advantage and they must be repairs which are attended to as and when the need arises. He further observed that if the assessee does not attend to the need in time and allows the repairs to get accumulated, then it could not be said that when he is expending money on those repairs he is spending on the current repairs. The Patna High Court in Commr. of Income-tax v Darbhanga Sugar Co. Ltd. : AIR1956Pat134 where a sum of Rs. 17,256 spent on machinery repairs by way of replacement of certain parts on account of fair wear and tear, Ramas-wamy, J. held that a renewal may be repair or reconstruction, according as the replacement is only of defective parts or of the entire machinery or substantial part of the entire machinery. He further observed that the word 'current' in Section 10(2)(v) is used in contradistinction to past or arrears of repairs. In this view, he differed from the view taken by Raghava Rao, J. in the Madras case that current repairs meant expenditure on repairs of the machinery in a running condition and if the repairs were effected after the machinery came to a stand still, it will not be regarded as current repairs'. He differed from the view taken by the Allahabad High Court also on the ground that Section 10(2)(v) did not refer to the magnitude of expenditure.
The Punjab High Court expressed its dissent from the view taken by the Allahabad High Court on the construction of the term 'current repairs' meaning as petty repairs in Commr. of Income-tax v. S. B. Ranjit Singh . That was a case where large amounts were expended in re-surfacing with concrete the approach roads to the Imperial hotel and was claimed allowable deduction under Section 10(2)(v). The High Court observed that notwithstanding that the expenditure is particularly heavy in a particular year on account of the fact that it is undertaken to remedy the effect of several years of wear and tear or neglect and Though expen-diture may not be necessary for some time to come after the repairs have been effected, it is not capital expenditure but only a revenue expenditure.
5. These are the various authorities that have been cited at the Bar. It would appear that though the restricted connotation of the expression 'current repairs' used in the Allahabad High Court has not been accepted by most of the High Courts, the view of these courts in relation to the same expression nevertheless is far from being uniform. The Calcutta High Court reviewed all the authorities in Humayun Properties Ltd. v. Commr. of I. T. : 44ITR73(Cal) and reached the following conclusions in relation to the expression 'current repairs':
(1) that the current repairs are the necessary repairs which are needed for the maintenance of the building and machinery etc., referred to in Section 10(2)(v). They are not luxury repairs, the element of need being implicit in the expression. As they must be such as are needed periodically, the accumulation of repairs will not ordinarily satisfy the test. Further, the need for such repairs must have arisen in order to make the repairs current repairs.
(2) Inasmuch as the idea latent in current repairs is periodicity and recurrence, when the expenditure is incurred to bring into existence a new asset or an advantage of an enduring nature, it cannot be regarded as an expenditure on current repairs.
(3) The degree of improvement brought about and the change effected in the identity of the existing asset as the result of the expenditure incurred should afford a test in order to determine whether the asset has become a new or a substantially new asset
6. Applying the above tests, the learned Judges held that the expenditure claimed as allowable deduction in that case was not incurred for repairs much less on current repairs and the case did not attract the provisions of Section 10(2)(v). If may be noticed that the case was concerned with the amount spent on extensive renovation of two show houses. The assessee himself had shown in his account books this expenditure as expenditure on renovation as distinct from the expense for current repairs which was separately entered. Of course, this by itself could not be conclusive against the assessee in law. The Income-tax Officer as a matter of fact found that the purpose of the renovation was to make halls more attractive and comfortable to the public. In fact it was designed to increase the value and running capacity of the halls. He further found that most of the expenses represented expenses of capital improvement in nature such as new electric installations, purchase of new shanks, basins etc. In these circumstances the learned Judges held that the expenditure incurred was not on repairs much less on current repairs.
We respectfully agree with the principles enunciated by the learned Judges as emerging from the authorities on the subject. We indeed notice that the facts of the present case bear a close analogy with those in the Calcutta case, for the expenditure in question in the instant case in a large measure, represents, expenses on capital improvement. As the Income-tax Officer himself has found, the entire compound which was hitherto filled with earth and sand was laid with Cuddapah Slabs; the compound walls were raised in height with grill work; all the electric wiring was re-modelled, the roofing was fixed with celo-tax and the entire building was re-coloured with distemper. The aim and object of the expenditure, as the Income-tax Officer has found and the assessee himself has admitted, was to save the theatre from the competition of another theatre, Alankar, which had newly sprung up in the vicinity. No doubt the assessee had further averred that the expenditure had become necessary in order to conform to the regulations of the authorities concerned; but this plea, he failed to substantiate.
Thus, 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 a set purpose of giving an enduring advantage to the assessee to keep pace or out-strip in the competition with the new theatre which had recently sprung up, the expenditure of this nature cannot fall within the scope of Section 10(2)(v). Even if there were a few items which could come within the scope of Section 10(2)(v), it is clear that the assessee did not take care to specify them separately but mixed them with expenses on substantial improvements so closely that it is difficult to mate out what part thereof could be allowable deduction. In such a case, it is idle to contend that certain portion of the expenses on items ought to have been held as allowable deduction.
7. We next consider whether the said items come under Section 10(2)(xv). In order to at-tract sub-clause (xv), it must be established that the expenditure is not an allowable deduction coming in any of the clauses (i) to (xiv) and fur-ther it is not in the nature of capital expenditure or personal expenses of the assessee and was laid out wholly and exclusively for the purpose of business. The claim under sub-clause (v) being negatived, it may be safely held on the facts of the case that it does not fall within any of the sub-clauses (i) to (xiv). The only question that would remain is, whether it is not an expenditure in the nature of a capital expenditure. If it be an expenditure of that nature, it is not an allowable deduction under sub-clause (xv) even though the expenditure may be wholly or exclusively laid out for the purposes of business. The expression ''capital expenditure' of course is not defined in the Act. But, as observed by the Supreme Court in Pingle Industries Ltd v. Commr. of Income-tax : 40ITR67(SC) the distinction between capital and revenue expenditure is well recognised in Income-tax law and is based on certain principles which arc easy of application and which emerge from the various cases. A synthesis was attempted by the Pull Bench of the Lahore High Court in In re Benarasidas Jagannath where Mahajan, J. (as he then was) summarised the position and the various tests which emerge. This summary was approved of by the Supreme Court in Assam Bengal Cement Co. Ltd. v. Commr. of Income-tax : 27ITR34(SC) . Bhagwati, J. there observed thus:
'In cases where the expenditure is made for the initial outlay or for extension of a business or a substantial replacement of the equipment, there is no doubt that it is capital expenditure. A capital asset of the business is either acquired or extended or substantially replaced and that outlay whatever be its source whether it is drawn from the capital or the income of the concern is certainly in the nature of capital expenditure. The question however arises for consideration where expenditure is incurred while the business is going on and is not incurred either for extension of the business or for the substantial replacement of its equipment. Such expenditure can be looked at either from the point of view of what is acquired or from the point of view of what is the source from which the expenditure is incurred. It the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits if is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether if is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence. It is only in those cases where this test is of no avail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. If it was part of the fixed capital of the business it would of the nature of capital expenditure and if it was part of its circulating capital it would be of the nature of revenue expenditure. These tests are thus mutually exclusive and have to be applied to the facts of each particular case in the manner above indicated.'
8. We are concerned in this case with the expenses on theatre. It admits of little doubt that any amount expended in the construction of the building or in the extension of the same or in making substantial improvement therein would, according to the test enunciated, be an expenditure of a capital nature. So also if any expenditure is made for getting an advantage of enduring benefit of the business, that would also be an expenditure of a capital nature. The aim and object of the expenditure will determine the character of the expenditure, whether it is a capital expenditure or a revenue expenditure. In this case, it is clear that substantial improvements were made in the building and the land appur-tenant thereto including the compound wall with the sole aim and object of getting an enduring benefit of the business. The Appellate Tribunal in such circumstances has held that the ex- penditure was in the nature of capital expendi-ture. We are of the view that on the facts andcircumstances of the case and having regard tothe nature of the substantial improvements madein the capital asset at an enormous outlay, theexpenditure must be deemed to be in the natureof a capital expenditure and not a revenue ex-penditure We therefore answer the second ques-tion in the negative. The reference is answeredaccordingly. The assessee shall pay the costs ofthe reference. Advocate's fee is fixed at Rupee 250.