1. The common contention in both these appeals is that the AAC had erred in deleting the additions of Rs. 52,650 and Rs. 9,267 made by the ITO in the assessment years 1977-78 and 1978-79, respectively.
2. The assessee is a firm. It was constituted under a partnership deed dated 5-1-1976. It was carrying on its business at 34, Mahatma Gandhi Marg, Allahabad. These premises had been taken over on lease from the HUF of Harish Tandon of 54, Rani Mandi, Allahabad. It will be relevant to mention here that the partners of the assessee firm are Harish Tandon, the karta of the above HUF, Smt. Rajni Tandon, mother of Harish Tandon and Smt. Padma Tandon, wife of Shri Harish Tandon. In other words, the same persons who constitute the HUF of Harish Tandon and who are the landlord of 54, Mahatma Gandhi Marg, Allahabad, are also the partners of the assessee-firm carrying on the business from the same premises. The nature of the business carried on by the assessee-firm is mentioned in Clause (3) of the partnership deed, which is reproduced below : That the business of the firm shall be of commission agents, distributors and procuring of agencies in various items including that of electrical goods and appliances, publishing and distribution of books, dealing in paper, medicines and Pharmaceuticals, cloths and garments, manufacture of steel furniture, shutters, etc., business of real estate, procuring properties on lease, letting out of properties, operation of hotels, motels, etc. The firm can do such other business either in addition to or in substitution of any or all of the aforesaid business which the partners may decide to do from time to time.
3. Subsequently, the assessee entered into an agreement with the Punjab and Sind Bank. As per the terms of this agreement, the bank agreed to advance certain amounts to the assessee, which the latter was to utilise in the renovation and reconstruction of 34, Mahatma Gandhi Marg, with a view to make it fit for the use by the Bank itself. After the completion of the renovation and the reconstruction, the premises were to be let out to the bank on a monthly rent of Rs. 5,035. The assessee incurred an expenditure of Rs. 52,650 in the assessment year 1977-78 and Rs. 9,267 in the assessment year 1978-79 on such reconstruction and renovation. The ITO has mentioned in the assessment order that the assessee had constructed a new mazzanine floor and had incurred further expenditure on electric wiring, paint work, installation of shutters, major sanitary and wood work and other constructions, etc. However, before incurring such an expenditure, the assessee had also approached the landlord and the latter had given the permission for incurring of the expenditure vide its letter dated 15-5-1975 in the following terms.
Further to the oral discussion, we hereby grant you permission for renovation and repairs, etc., according to the specification of Punjab and Sind Bank to whom you are going to sublet the property under reference and we have no objection whatsoever in your carrying out your such repairs. However, such expenses will not be reimbursable and on the expiry of the lease, the property, as it stands on such date, shall become the property of the lessor without any charge or claim on your part.
The assessee claimed the above expenses as allowable deductions in the respective assessments. The ITO was of the view that the expenses were capital in nature and, therefore, could not be allowed in the computation of the assessee's income. It was submitted before him that the premises in question were rented property of the assessee itself and, therefore, no asset or any advantage of enduring nature had come into existence so as to categorise the expenses as capital expenditure.
It was also submitted before him that the entire expenses were allowable as revenue expenses. The ITO rejected this claim. He observed that the expenses had been incurred to bring the premises up to the requirements of the bank and, therefore, they had resulted in an income from year to year for a long period of time. He, therefore, disallowed them as capital expenditure.
4. The assessee appealed to the AAC. There were two submissions before the latter. The first submission was that since the assessee itself was a tenant of the premises and it was not the owner of the property, no benefit of enduring nature could arise in its favour. It was submitted that if at all there was any such advantage, it arose only to the landlord, namely, Harish Tandon (HUF). It was further submitted before him that the rental income from the bank had been assessed as the assessee's business income and, therefore, the expenses should be treated incidental to the business and of revenue nature. The AAC agreed with these submissions and directed the deletion of the additions.
5. The department is now in appeal before us. The submission of the learned departmental representative, based on a number of decided authorities, was that the expenses clearly were of capital nature, while, on the other hand, the submission of the learned counsel for the assessee was that they were of revenue nature. We have, therefore, to decide between these rival claims. The facts, as stated above, are not in dispute and the question clearly is one of law. We have, therefore, to consider the various cases on the point and then come to a legal conclusion. It will be relevant to mention here that emphasis from the side of the assessee was led on the submission that the assessee had incurred the above expenditure as commercial expediency with a view to improve its business premises, which was its business asset in order to exploit it in a commercial manner and, therefore, such expenses could not be treated as capital expenditure.
6. We will first refer to the decision of the Allahabad High Court in the case of Girdhari Dass & Sons v. CIT  105 ITR 339. In this case, the assessee, who was carrying on a business in a rented building, carried out repairs to the building with the consent of the landlord. The cost of such repairs was claimed as allowable deduction.
The assessee claimed them as deduction from its income as being expenditure incurred on current repairs. The claim was disallowed by the ITO. His appeal to the AAC also failed. Before the Tribunal, a ground was raised that the expenditure should have been allowed under Section 37 of the Income-tax Act, 1961 ('the Act'), as being expenditure wholly and exclusively held laid out for purposes of business. After remand of the case by the Tribunal, the matter again reached for its consideration. The Tribunal held that the expenditure was allowable neither as an expenditure on current repairs nor under Section 37 as it was an expenditure of capital nature. The assessee brought the matter through a reference before the Hon'ble High Court of Allahabad. The Court made the following pertinent observations in the report : The first and the most commonly applied test is to see whether the expenditure brings into existence an asset or advantage of enduring nature. When a person constructs or purchases a building, he acquires an asset and the expenditure on such acquisition or construction would be a capital expenditure. Similarly, when he incurs expenditure on addition or alteration in a building which enhances its value, the expenditure can again be of a capital nature. If the building is used for business purposes, the owner is allowed depreciation on the cost of acquisition or construction as also on the cost of addition and alteration. Depreciation allowance is nothing but allowance of the expenditure as a whole spread over a number of years. But the case of a tenant is different. If he 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. Ordinarily, such an expenditure will be of a revenue nature. To hold otherwise would amount to denying him the benefit of deduction of the expenditure at all because he will not be entitled to any depreciation allowance.
(p.342) The Court further observed at page 343 of the report that there was no finding that the lease in favour of the assessee was a perpetual lease so that the advantage acquired by him by structural changes could be said to be of enduring nature.
7. From the above, it is clear that the Court came to the conclusion that the expenditure was of revenue nature mainly on the ground that a tenant was not entitled to any depreciation allowance on the expenditure incurred by it in construction of a property. The Court was, however, conscious of the fact that even in the case of a tenant, there can be an advantage of enduring nature in case the tenant had obtained a perpetual lease of the property from its own landlord. There is, therefore, no universal principle, as was canvassed before us on behalf of the assessee, that in the case of a tenant there could never be a capital expenditure with reference to the premises taken on rent.
Each case has to be examined on its own merits. With regard to the allowance of depreciation to a tenant, an amendment has been made to the Income-tax Act. Sub-section (1A) has been introduced in Section 32 of the Act by the Taxation Laws (Amendment) Act, 1970, with effect from 1-4-1971. The new sub-section reads as under : 32.(1A) Where the business or profession is carried on in a building not owned by the assessee but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession after the 31st day of March, 1970, on the construction of any structure or doing of any work in or in relation to and by way of renovation or extension of, or improvement to, the building, then, in respect of depreciation of such structure or work, the following deductions shall, subject to the provisions of Section 34, be allowed.
This sub-section has been made applicable only from 1-4-1971, i.e., from the assessment year 1971-72 onwards. The case of Girdhari Dass & Sons (supra) related to the assessment years 1964-65, 1965-66 and 1966-67, and, therefore, a different decision had to be arrived at.
This makes it clear that so far as the basis of the decision of the Hon'ble High Court that in the case of a tenant, an expenditure has to be treated as revenue in nature, mainly because he is not entitled to any depreciation allowance, no more survives from the assessment year 1971-72 onwards. The assessment years under appeal before us are 1977-78 and 1978-79. The decision of Girdhari Dass & Sons (supra) will, therefore, not be applicable to the years and to the case before us.
8. The other decision, which was also relied on by the learned counsel for the assessee, is also of the Allahabad High Court in Rampur Distillery & Chemical Co. Ltd. v. CIT  140 ITR 725. This decision related to the assessment year 1969-70. The decision of Girdhari Dass & Sons' case (supra) was followed in this case. Since we have already distinguished the decision of Girdhari Dass & Sons'' case (supra), the decision of Rampur Distillery & Chemical Co. Ltd.'s case (supra) also stands distinguished and will not apply to the assessment years before us.
9. Another decision, on which reliance was placed on behalf of the assessee, is of Madras High Court in the case of CIT v. Madras Auto Service Ltd.  13 Taxman 378. The facts of this case are entirely different. In this case, the assessee had taken out a lease of land and building for housing its branch in Bangalore. The building was old or rather old fashioned. The landlord was not in a position to put money of his own to remodel the building or build it anew. But the assessee was prepared to do the demolition and reconstruction, if allowed, at its own cost and expense. The landloard was agreeable to this course, if the assessee were willing to forego the ownership of the new building, even as it was being raised brick by brick [emphasis Supplied].The assessee found it worthwhile accepting these terms, because the landlord was willing to grant the lease on a long-term basis. The assessee incurred certain expenditure in the reconstruction.
The question arose whether it was capital or revenue. It was held that entire expenditure was revenue in nature. The decision went against the department for the asset belonged to the landlord brick by brick from the very beginning. The whole money was lost to the assessee as soon as the expenditure was incurred. In the case before us, we have already quoted above the letter to the landlord which states that only on the expiry of the lease, the property as stood on that date shall become the property of the lessor without any charge or claim from the assessee. The above decision of Madras High Court, is also, therefore, distinguishable on its own facts.
10. We will now refer to some of the direct decisions on the point and which are in favour of the department. One of these decisions is CIT v.Menora Hosiery Works (P.) Ltd.  109 ITR 714 (Bom.). In this case, the assessee had obtained for its business purposes, on leave and licence basis, certain property for a period of five years.
Subsequently, the licensor entered into an agreement with the assessee, whereunder the assessee could at its own cost, construct second floor of the building and on the expiry of the licence, the additional structure put up by the assessee was to belong to the licensor and the assessee, at the end of the period of the licence, was bound to hand over the additional structure to the licensor without claiming any compensation for the construction. The extra road taxes and water charges, etc., were to be borne and paid by the assessee. The assessee constructed the second floor and claimed the expenditure as a deduction. The claim was disallowed by the ITO on the ground that the expenditure was of a capital nature inasmuch as the assessee had acquired an enduring benefit by the construction of the second floor and that the amount spent by it over the construction did not amount to payment of advance rent. It was held that by incurring the expenditure, the assessee had brought into existence an asset or advantage in the form of right to occupy the additional floor for the purpose of its business, which was going to enure to the assessee for a period of at least seven years. It was also observed that it was capital expenditure inasmuch as its aim and object was to bring into existence an enduring advantage, though not everlasting. The benefit was to last as long as the leave and licence of the assessee lasted in regard to the premises.
11. Another case on the point is of Hotel Diplomat v. CIT  125 ITR 781 of the Delhi High Court. In this case also, a firm had taken a building on lease for an indefinite term. Under the lease any structural alterations or additions were to become the property of the owners. The assessee-firm, in turn, agreed with an Embassy to let certain rooms in the building. Pursuant to the agreement with the Embassy, the assessee-firm incurred expenditure, which included expenses for construction of additional bath rooms. It was held that the expenditure was of capital nature.
12. A similar question came up for the consideration of Andhra Pradesh High Court in an earlier decision in Sri Rama Talkies v. CIT  59 ITR 63. In this case also, the assessee, who had constructed and was running a cinema theatre on a land taken on lease, had incurred certain expenditure on extensive renovations to the theatre. It was held that the expenditure had been incurred 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 must be deemed to be in the nature of a capital expenditure.
13. Similar view was taken by the Madras High Court in the case of Southern Agencies Ltd. v. CIT  45 ITR 602. In this case, the assessee had taken certain buildings on lease and expended moneys to improve them and make them fit for use as guest houses to accommodate its guests and claimed the moneys so spent as deductions in computing its profits. The Tribunal held that the expenditure was capital in nature. This view was accepted by the High Court.
14. Apart from the above, even Section 32(1 A) clearly suggests that there can be an expenditure in the case of a tenant, otherwise the sub-section itself would become superfluous, which cannot be the intention of the Legislature.
15. It was next contended before us that the expenditure had been incurred as a commercial expediency, with a view to running the assessee's business of letting out the premises efficiently and, therefore, it was allowable as revenue expenditure. In this connection, the counsel for the assessee relied on Clause 3 of the partnership deed, which we have already quoted above to point out that one of the businesses of the assessee was in real estate, procuring properties on lease and letting them out. In our opinion, there is no merit in this contention also. It is no doubt correct that Clause 3 of the partnership deed stated that the assessee, besides several other businesses, was also to run the business of procuring properties on lease and letting them out. The present is not, however, the case of that type. We have already mentioned above that 34, Mahatma Gandhi Marg, Allahabad, was earlier utilised by the assessee for carrying on its own business. Somehow or the other, it thought fit to let it out to Punjab and Sind Bank with a view to earn some rent. That, in our opinion, does not amount to procuring of properties and letting them out. In any case, even in such a situation if an expenditure incurred is capital in nature, it has to be disallowed under Section 37.
16. The next question, which was raised before us, was that the expenditure otherwise was also not capital in nature. In our opinion, there is no merit in this contention either. The ITO has clearly mentioned that the assessee had constructed a new mazzanine floor to the building and had carried out other structural changes in the premises, with a view to make it fit for use by a bank for its purposes. Such an expenditure, in our opinion, must be treated as capital expenditure. In this connection, we will also refer, besides the cases already stated above, the decision of the Calcutta High Court in Humayun Properties Ltd. v. CIT  44 ITR 73. In this case, the assessee-company, which carried on business as cinema exhibitors, was the owner of the two cinema houses. The assessee incurred certain expenses, which it termed renovation expenses. On enquiry it was found that the primary purpose of renovation was to make the halls more attractive and comfortable to the public and, therefore, designed to increase their value and running capacity. It was held that the expenditure was of capital nature. The principle laid down in this case and in various other cases stated above squarely applies to the case of the assessee.
17. Our finding, therefore, is that the expenses of Rs. 52,650 in the assessment year 1977-78 and Rs. 9,267 in the assessment year 1978-79, were capital expenditure and could not, therefore, be allowed as a revenue expenditure or as commercial expediency under Section 37 in the computation of the assessee's income of the respective years. We, therefore, set aside the orders of the AAC on this point and restore those of the ITO.