D.K. Kapur, J.
1. The assessed, in the present case, is a Hindu undivided family represented by its karta. It earns income from house property, money-lending and also from cinema exhibition business at Agra. Besides this, there was income in the assessment year 1964-65 from film distribution business. The reference to this court is in connection with expenditure amounting to Rs. 91,250 which the assessed claimed in respect of the New Taj Talkies at Agra.
2. The cinema in question is on a monthly rent of Rs. 1,750 with the assessed. The District Magistrate, Agra, had pointed out certain defects in the building which had to be removed in order to get a renewal of the cinema license.
3. In the accounting period ending March 31, 1964, an amount Rs. 91,250 was spent on repairs to sanitary fittings amounting to Rs. 6,767, repairs to auditorium Rs. 25,132, labour for repairs Rs. 7,597 and renovation account Rs. 51,754. The expenses were for providing automatic flush type latrines, shifting of the ladies latrines, replacement of staircase, reconstruction of the floor of the auditorium, provision of a ceiling to the auditorium and reconstruction of the balcony, replacement of junglas and shifting of the ladies waiting room to some other place.
4. The entire expenditure was disallowed by the Income-tax Officer as capital expenditure. The assessed claimed that the entire amount was an admissible deduction as it was something done under the directions of the District Magistrate. The Appellate Assistant Commissioner upheld the Income-tax Officer's view following the judgment of the Calcutta High Court in Liberty Cinema v. CIT : 52ITR153(Cal) . On further appeal to the Tribunal, it was held that part of the amount should be allowed as revenue expenditure amounting to Rs. 10,000, but the capital. expenditure had to be disallowed.
5. The following question has been referred to us for our opinion :
'Whether, on the facts and in the circumstances of the case, the assessed is entitled to allowance of the following items of expenditure or any of them under section 37(1) of Income-tax Act, 1961 :
Rs.(i) Repairs to sanitary fittings 6,767(ii) Repairs to auditorium ceilings 25,132(iii) Labour for repairs 7,587(iv) Renovation charges 51,754 The facts stated earlier seem to show that the expenditure is on capital account. However, the assessed is only a monthly tenant with no long-term lease, so the question is, can this be treated as a, capital expenditure in the case of the assessed ?'
6. A number of cases have been cited at the Bar. In Lakshmiji Sugar Mills Co. P. Ltd. v. CIT : 82ITR376(SC) , certain contributions were made to the Cane Development Council for the purpose of construction and development of roads between the sugarcane producing centres and sugar factories. There was a statutory obligation for developing these roads which remained the property of the Government even after the improvement was made. No enduring benefit came to the assessed. So, the Supreme Court held that this expenditure was not of a capital nature. It was expenditure incurred for running the business with a profit motive. The contention of learned counsel for the assessed is that the entire expenditure in this case was necessary, otherwise the license would have been cancelled. It is, thereforee, a business expenditure not leading to any enduring benefit. In the course of the judgment, the Supreme Court examined the judgment of the Calcutta High Court in CIT, v. Hindustan Motors Ltd. : 68ITR301(Cal) , wherein the High Court had held that the money was spent not so much to bring about any asset or advantage of enduring benefit but for the efficient and convenient running of the business and, thereforee, it was revenue expense. In another judgment relied upon by the Supreme Court, i.e., CIT v. Royal Calcutta Turf Club : 41ITR414(SC) , the expense of running a school for training jockeys was treated as a revenue expense because from a commercial point, it was necessary that the club should have races run efficiently.
7. In Humayun Properties Ltd. v. CIT : 44ITR73(Cal) it was held that the renovation of a cinema owned by the assessed was not a current repair. As already discussed above, this expense could not be allowed as a repair as far as the present assessed is concerned because there is no obligation to repair. None the less, the question that we have to decide is whether the expense was not necessary with a view to running the business, as otherwise, the license would not have been renewed.
8. The letter from the District Magistrate, Agra, dated March 6, 1974, states that the specified defects and deficiencies existing in the cinema should be removed within a period of three weeks so that the renewal of the cinema license for the ensuing year may be considered. The assessed would not have incurred any of this expense but for these directions.
9. In Uttar Bharat Exchange Ltd. v. CIT , there was a lease of a hotel building for two years with an option to renew. There was some expense of putting up partitions and other temporary structures in the existing building. It was held that the expenditure was of a capital nature which did not alter because the lease was for a period of two years. In Taj Mahal Hotel v. CIT : 66ITR303(AP) , there was a hotel business in which new rooms were put up. It was held that capital improvement resulted which was of an enduring nature and hence it could not be treated as a revenue expense.
10. On the other hand, in CIT v. Bharat Cinema , it was held that certain repairs were necessary in the cinema because of defects in the building. This involved replacing the ceiling. It was held it was a revenue expenditure. In a case before the Supreme Court, CIT v. Kalyanji Mavji & Co. : 122ITR49(SC) , certain renovations were necessary for a colliery which had been requisitioned by the military in 1942, but was released in 1955. It was held that the renovation was one which did not bring any new asset into existence, but was necessitated on account of the damage to the building and the consequent necessity to recondition the machinery and to clear debris, etc., which was treated as a revenue expenditure.
11. It is not necessary to multiply the cases. A number of other cases cited before us, on one side or the other, merely illustrate the difficulty in dealing with cases of this type.
12. We, thereforee, have to ask first whether the directions of the District Magistrate resulted in any new asset being created. In our view, the changes in the cinema were necessitated by the order of the District Magistrate. These changes did not structurally alter the cinema, which remained a cinema. There was no additional benefit to the assessed. This is demonstrated from the fact that the latrines and urinals were replaced, the ladies' latrine was shifted to another place, the staircase was replaced and the floor was reconstructed and a ceiling was also replaced. It is interesting to see why the District Magistrate has passed this order and for this purpose, we merely reproduce the 17 points that are contained in his order :
'1. The rod of the lightning conductor is not placed at its place as the same is reported to be stolen. The rod should immediately be provided.
2. The latrines and urinals are in an awful condition. Crust of phosphates are deposited in all urinating pots. In view of the requirements laid down under rule 13(11) of the above rules, it is directed that the latrines and urinals should be made of automatic flush type.
3. The ladies urinals facing the classes spread foul smell within the classes. These should be removed to a suitable site.
4. The whitewashing of the walls and paintings of the iron and wood work of the cinema was not done yet. It should be taken up immediately.
5. Proper records of the maintenance of the fire appliances should be kept in register meant for the purpose.
6. Maintenance cards should be placed on fire extinguishers.
7. The roof of the ceiling of the auditorium is in a rotten condition. The entire tin shed needs replacement.
8. The entire floor of the auditorium has got pits and has become unlevelled by long usage. The present floor should be scratched and re-constructed.
9. The balcony class has got pits having large holes, making ground floor visible through them and has thus become very unsafe for the public. The entire balcony class needs demolition and then reconstruction in the interest of public safety.
10. The entire passage leading from the main gate right up to the end of the back-most wall of the cinema and extending towards the urinals and latrines situated at the back has got huge pits and public fall on the ground due to the unlevelled ground. The entire brick passage should be replaced by cemented passage having plain and smooth surface.
11. Similarly, the floors of the verand has in front of the lower and upper classes are in awful condition. The floors also need complete cementing.
12. The jungla railing in front of the balcony class, running from the upper edge of the front staircase to the upper portion and the second staircase of the balcony class is badly shaking and there is every danger of the public falling down by even slight touch with it. This should be either thoroughly repaired or made safe or replaced by cement railing.
Similarly, the jungla in front of the projection room is shaking and needs replacement.
13. The jungla over the main gate is in a broken condition and since it supports heavy publicity banners, it needs replacement to avoid any risk to life of the passer-by on the road and the public visiting the cinema.
14. The location of the ladies waiting room by the side of the booking office causes inconvenience to the public in purchasing tickets and is also not congenial to the purdhanashin ladies. It should be shifted to a suitable place, preferably on the first floor by making a new construction beyond the staircase of the balcony class after removing the tinshed placed over the passage of the booking of the second class. This would also provide a permanent sun and water-proof cover over the heads of the public purchasing the tickets for the second class.
15. The long passage leading from the main gate to the booking offices and the entrances to the classes are open to the sky causing inconvenience to the public from the sun and the rains. The passage from the main gate to the main booking office should also be covered.
16. Certain exit doors do not have curtains behind them causing entry of light inside the hall in the show hours. The missing curtains should be provided.
17. The side walls and pillars of the stage are cracked. Any portion of them may fall down any day causing injury to the public sitting in the front most class. These should either be repaired or the damaged portions better pulled down and reconstructed.'
13. It will be seen that there were really some objectionable features of the cinema as it existed. For instance, the staircase was of an inflammable material. The roof of the ceiling of the auditorium was in a rotten condition. The floor had got pits. The balcony had large pits leading to lack of safety. The location of certain rooms caused inconvenience, such as the waiting room of the ladies and the ladies urinals. The existing urinals were in an awful condition.
14. thereforee, the entire expenditure is a kind of repair under a statutory direction. As a result of these repairs, the cinema stands renovated, but it is still the same cinema with the same seating capacity. No benefit of an enduring nature other than the existing cinema has resulted. When we consider that the assessed is not the owner and is only a monthly tenant, the principle applied by the Supreme Court in the case of CIT v. Kalyanji Mavji & Co. : 122ITR49(SC) , seems to be the appropriate rule to apply.
15. Furthermore, the repairs and renovations were absolutely necessary, otherwise the cinema license would not have been renewed. The only doubt that one can have is about the replacement of urinals. But, even those would belong to the landlord. So, we are of the view that these expenses cannot be treated as capital expenses, but have to be treated as revenue expenses.
16. We would accordingly answer the question referred to us in the affirmative on the footing that these allowances have to be allowed under section 37(1) of the Income-tax Act, 1961. We would leave the parties to bear their own costs.