1. Though two income-tax references have been registered in this matter, there is only one reference pertaining to the assessment year 1963-64.
2. The reference arises out of the assessment proceedings for the assessment year 1963-64, of M/s. Hotel Diplomat, New Delhi, a firm consisting of four partners, Madan Lamba, Jagdish Lamba, Harish Lamba and Kailash Lamba sharing the profits of the firm equally. The four partners were also the co-owners of a building situate at Sardar Patel Road, New Delhi.
3. By a lease deed dated November 30, 1962, the co-owners purported to lease the above building to the firm. This lease deed was said to record the terms and conditions of the tenancy which had commenced on November 25, 1962, in pursuance of which the firm had been in possession of the premises as a tenant of the co-owners on a monthly rent of Rs. 10,000. Among other things the lease deed permitted the firm to use the aforesaid house leased to it for the purposes of running the business of a hotel which it had already started in the premises on November 25, 1962. The lease does not mention anything about the period of the lease but as a supplemental agreement dated March 30, 1963, added a clause to the lease deed whereby the tenants had to give at least six months' notice to the landlords in the event of their deciding to determine the lease and in case of default on their part in giving such notice, they should reimburse the landlords by payment of the rent for the said period of six months as liquidated damages. Under the lease deed, the Lessers were to maintain the premises in good condition and also to carry out the annual repairs and painting of the premises. The lessee could not make any structural additions or alterations in the tenanted premises without the consent of the Lessers and the municipal authorities and, in case the Lessers agreed to any additions or alterations, they should be carried out at the expense of the lessee and shall be left to become the property of the Lessers on the termination of the lease.
4. By an agreement dated February 19, 1963, the firm entered into an agreement with the American Embassy in Delhi. By this agreement, the firm allotted to the American Embassy for its use 18 double rooms and 4 single rooms including the normal use of other areas such as living, dining, lounge, storage facilities, terrace, lawn and driveway facilities. It was agreed that no less than one bath-room with toilet facilities should be provided with each set of two rooms and that the firm should move with all possible speed to construct whatever number of bath-rooms fell short of this requirement. The agreement was to last for two years in the first instance but could be extended for another period of one year on the giving of the prescribed notice. On January 9, 1964, it was agreed by the parties that the lease agreement was to terminate on September 30, 1964, However, on September 15, 1964, a fresh agreement was entered into for another period of two years from October 1, 1964, with a provision for a further extension by a period of two years on giving proper notice.
5. In pursuance of the terms of the agreement, the assessed-firm carried out certain repairs which were debited under the head 'Repairs and Replacements'. The expenditure of Rs. 12,171 debited in its books for the accounting year which ended on March 31, 1963, represented the expenditure incurred on the construction of bath-rooms and provision of various installations and other facilities. Similarly, for the assessment year 1964.65 (for which the previous year was the year ended on March 31, 1964), the assessed claimed certain expenses under this head. Out of the expenses of Rs. 12,171 claimed in the assessment year 1963-64, the ITO allowed expenses to the extent of Rs. 8,067 and allowed depreciation on expenses to the extent of Rs. 743. He disallowed the bath-room construction expenses to the extent of Rs. 3,361. This last amount, the ITO held, represented capital expenditure. But since the bath-room thus constructed became the property of the Lessers and was not the property of the firm, he held that the assessed could not be allowed depreciation in respect thereof. Similarly, it appears that in the assessment year 1964-65, the ITO had allowed and disallowed certain expenses, the details of which it is unnecessary to refer to here.
6. The assessed preferred an appeal to the AAC which was heard by him along with similar appeals preferred for the assessment years 1964-65 and 1965-66. So far as the assessment year 1963-64 is concerned, the AAC upheld the disallowance of the sum of Rs. 3,361 as well as the refusal to allow depreciation in respect thereof for the same reasons as were given by the ITO. So far as the assessment year 1964-65 was concerned, he gave some relief permitting the assessed depreciation in respect of a sum of Rs. 19,000 spent towards furniture and fittings.
7. The assessed preferred appeals in respect of the assessment years 1963-64 and 1964-65, which were heard and disposed of by the Tribunal by a common order on October 10, 1972. The Tribunal pointed out that the disallowance in the first year, i.e., 1963-64, related to the expenditure on the construction of a bath-room and for the second year it was difficult to identify the items, the disallowance of which the AAC had confirmed. The Tribunal was of opinion that the expenditure claimed in the first year was rightly disallowed as capital expenditure. It pointed out that this was more or less the first year of the assessed's business and the expenditure had been incurred by the assessed not to restore the assets in question to the original working condition in which they were but to improve them so as to make them conform to the requirements of their major customers. The improvements made were of an enduring character and would be available to the assessed even if and when the American Embassy vacated the premises. The mere fact that the lease did not specify the period of lease did not make the advantage limited to a short duration. Apart from the safeguard of the rent laws, the fact that the partners of the firm owned the property, ensured the continuity of the tenure for a reasonable future. The Tribunal, thereforee, held that the expenditure was rightly disallowed as capital in nature. So far as the second year was concerned, the Tribunal found some difficulty in identifying the disallowance made by the ITO and the AAC. They, thereforee, set aside the findings of the AAC on this point and restored the appeal to his file for further disposal in accordance with law and in the light of their observations in so far as they were relevant to the year in question.
8. The assessed thereupon moved a reference application in which it made a reference to both the assessment years and it is in these circumstances that two reference numbers have been registered by this court. But the question referred to us is only the following question:
'Whether, on the facts and in the circumstances of the case, the amount of Rs. 3,361 was admissible as revenue expenditure while determining the assessed's profit for the year 1963-64 ?'
9. Thus, we are concerned only with the sum of Rs. 3,361 disallowed in the assessment year 1963-64, and not with the other amounts disallowed in this year or with the disallowances made in the assessment year 1964-65, though a reference to the latter assessment year is also found in the cause title to the statement of the case. We would also like to add that the question sought for the assessed had also sought to raise the question regarding the disallowance of depreciation in respect of the above sum of Rs. 3,361. But the Tribunal refused to make a reference on that aspect since the question regarding allowance of depreciation had not been raised before the Tribunal or the taxing authorities. In the result, we are here concerned only with the question whether the amount of Rs. 3,361 was expenditure of revenue nature or whether in the nature of capital expenditure.
10. We have no doubt in our minds that the Tribunal was right in the conclusion arrived at by it that above amount represented expenditure of capital nature. The Tribunal has given good reasons for coming to this conclusion. As already mentioned, this was the amount incurred by the assessed for putting up an additional bath-room in the premises. In other words, this was an expenditure incurred with the object of bringing into existence an asset of an enduring advantage to the assessed. Mr. Anoop Sharma, learned counsel for the assessed, vehemently contended that the expenditure in question had been wholly and exclusively laid out for the purposes of the business and that the putting up of the additional bath-rooms was rendered obligatory by the terms of the lease deed with the American Embassy. This is correct. But to say that the expenditure is wholly and exclusively laid out for the purposes of the business does not also mean that the expenditure is of revenue nature. On that aspect, Mr. Sharma contended that the expenditure could not be said to be capital in nature because the construction put up did not belong to the assessed but only belonged to the original owners of the premises on the terms and conditions of the lease deed. In support of his contention that the expenditure in question could be allowed as revenue expenditure, Mr. Sharma relied upon certain recent decisions of various courts.
11. In our opinion, the contentions urged on behalf of the assessed are not tenable. In regard to the expenses of the type presently in question the test that can be usefully applied is that laid down by the Supreme Court in Assam Bengal Cement Co. Ltd. v. CIT v. CIT : 27ITR34(SC) and that is whether the expenditure has been made not only once and for all but with a view to bring into existence an asset or advantage for the enduring benefit of the trade. In applying this test, it is not necessary that the asset referred to should be something material the asset or advantage derived by the assessed as a result of the expenditure may be of an impalpable or incalculable nature. Similarly, the expression 'enduring advantage' merely indicates that the asset or right acquired as a result of the expenditure must have enough durability to justify it being treated as a capital asset. It does not mean a perpetual or everlasting advantage (see Coal Shipments' case : 82ITR902(SC) . It the decisions on this aspect are examined, it would be seen that the degree of durability or permanence that should exist to come to a conclusion that the expenditure has brought in an enduring advantage depend entirely upon the facts and circumstances of each case. We entirely agree with the Tribunal that in the present case the expenditure brought in, if not an asset, certainly an enduring advantage to he assessed's trade. As the Tribunal had rightly pointed out, the assessed was just starting on its business. The lease deed which had entered into with the owners of the buildings was not for any particular period of time. The supplemental agreement only contemplated a termination of the agreement by a notice given by the tenants. The land-lord could perhaps terminate the agreement under the Transfer of Property Act. But then their rights of termination would be subject to the provisions of the Rent Control Act. That apart, the very fact that the partners of the firm were the co-owners, shows that the possibility of the tenants being vacated without their consent is very remote. The agreement with the American Embassy was for a period of nearly six years and also contained possibilities of renewal as already happened once. Even after the American Embassy left the premises, the construction put up would continue to be enjoyed by the assessed so long as it remained the tenant of the premises and this, as we have mentioned before, was a very indefinite period. Having regard to all these circumstances, it is difficult to agree with the counsel for the assessed that the firm derived no enduring advantage as a result of this expenditure.
12. A brief reference may be made to the several cases cited at the bar. In Laxmiji Sugar Mills Co. P. Ltd. v. CIT : 82ITR376(SC) , the Supreme Court was concerned with a contribution made by a sugar mill for improving the approach roads to a factory. While holding that the expenditure was not in the nature of capital expenditure, the Supreme Court laid emphasis on the fact that no new roads had been put up for the first time as a result of the expenditure. The position was similar in CIT v. Hindustan Motors Ltd. : 68ITR301(Cal) . The case in CIT v. Belgachi Tea Co. Ltd. : 99ITR99(Cal) related to expenditure for putting up fences to protect the tea garden of the assessed and stands on a clearly different footing. So also in CIT v. Kanodia Cold Storage : 100ITR155(All) , the Allahabad High Court was concerned with the renewal of worn out parts of the cold storage and held that the expenditure was revenue in nature. So also in Addl. CIT v. Desai Bros. : 108ITR14(Guj) , the Gujarat High Court was concerned with the question, whether the expenditure on replacement of a petrol engine by a diesel engine would be capital or revenue - a question again which depended upon whether the expenditure was only for the protection of an existing asset by the replacement of a part or was the replacement of a whole machinery. The recent decision of the Supreme Court in CIT v. Kalyanji Mavji & Co. : 122ITR49(SC) does not help the assessed. It actually reiterates the principle laid down in Assam Bengal Cement Co. Ltd.'s case : 27ITR34(SC) . It was only a decision on the peculiar facts of the case and the Supreme Court held that the expenditure was only for restoring the assets belonging to the assessed which had been requisitioned by the military authorities back to their original state and rendering them fit for being used in the business in which they were being used prior to the requisition, which user had been interrupted for a short while by the requisition.
13. Three cases come somewhat close to the fact of the present case but, in our opinion, they are also clearly distinguishable. In CIT v. J. N. Bhowmick  111 ITR 747, the Orissa High Court was concerned with the expenditure incurred in putting up certain buildings and held it to be expenditure of revenue nature. But the interesting point about this case is that the putting up of the buildings was obligatory on the lessee under the terms and conditions of the lease deed and if the assessed had not put up those buildings the lease itself would have stood forfeited. In other words by putting up the buildings the assessed actually staved off the forfeiture of the lease, though it was no doubt true that he also obtained the advantage of using these buildings for the purposes of his business. In other words, the positive and negative aspects of the expenditure really balanced each other. It was in these circumstances that the Orissa High Court held that though in a way it would be said that the benefit obtained by the new construction was an enduring asset to last as long as the lease subsisted that alone was not sufficient guideline for deciding the case and that when an overall picture was taken of the facts of the case it was appropriate to hold that the expenditure incurred was for the purposes of keeping up the business and was, thereforee, revenue expenditure. That is not the position in the present case. The construction has been put up on the volition of the assessed and not under the condition imposed by the terms of the lease. It was intended wholly to redound to the advantage of the assessed and by putting up these constructions the assessed did get the benefit of the buildings for an indefinite period. It thereforee, resulted in an enduring advantage to the assessed, for the reasons already stated.
14. The second decision which is also of relevance is that of the Madras High Court in CIT v. T. V. Sundaram Iyengar & Sons (P.) Ltd. : 95ITR428(Mad) . In this case, the assessed-company purchased land in the name of the District Collector for the purposes of constructing houses for the company's workers by the Government under the subsidised industrial housing scheme sponsored by the State Government. The Tribunal upheld the assessed's claim that the purchase price paid for the land in question was allowable as a revenue expenditure and this conclusion was upheld by the High Court. But it will be seen from the above facts that in that case the assessed did not acquire any asset or advantage. Though the expenditure was incurred for purchasing a piece of land, the land was purchased in the name of the Government and it was to be utilised for the purposes of putting up quarters for the employees. In other words, in substance, the expenditure incurred was nothing more than a mere contribution by the assessed to a scheme of the Government which had been drawn up for the benefit of employees. If was in these circumstances that it was held that the expenditure could not be treated as capital in nature.
15. We may also refer to the decision of the Bombay High Court in CIT v. Associated Cement Companies Ltd. : 96ITR650(Bom) . In this case, the assessed, a cement factory, was situated outside the municipal limits of a town. The Government decided to include the area within the municipal limits. Negotiations ensued between the Government and the assessed. The assessed agreed to provided certain amenities to the town including provision of water supply and the Government on its part undertook not to include the properties within the municipal limits for a period of 15 years so that the assessed would not have to pay municipal taxes for that period. The assessed incurred huge amounts on installing pipelines, etc., which afterwards became the property of the municipal committee. The court held that the expenditure was allowable as a deduction because by incurring the expenditure the assessed had obtained avoidance of certain disadvantages for a limited period, namely, 15 years. The expenditure was made for the convenience and economic running of a business for a period of the agreement. This case, it appears to us, is somewhat analogous to the Orissa case which was referred to earlier. In both the cases, the object of the expenditure was not to acquire any asset and the apparent advantage which accrued as a result of the expenditure was really no advantage at all. On the contrary the expenditure had been incurred only to avoid the disadvantage to the business that was being faced.
16. We are, thereforee, of opinion that the decision cited by the learned counsel for the assessed are distinguishable and that on the facts of the present case the Tribunal came to the correct conclusion that the expenditure in question constituted capital expenditure which could not be allowed as a deduction. We, thereforee, answer the question referred to us in the negative and against the assessed. As the assessed has failed, it will pay the costs of this reference of the Commissioner of Income-tax. Counsel's fee Rs. 300.