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Commissioner of Income-tax Vs. S. Zoraster and Co. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtRajasthan High Court
Decided On
Case NumberD.B. Civil Income-tax Reference No. 46 of 1969
Judge
Reported in[1982]133ITR559(Raj)
ActsIndian Income Tax Act, 1922 - Sections 10(2)
AppellantCommissioner of Income-tax
RespondentS. Zoraster and Co.
Appellant Advocate S.M. Mehta, Adv.
Respondent Advocate V.K. Singhal, Adv.
Cases ReferredAtherton v. British Insulated and Helsby Cables Ltd.
Excerpt:
- - 17,124 in the succeeding assessment year 1958-59 as well. commissioner of income-tax [1966]60itr52(sc) that in a reference under section 66 of the act the high court must accept the findings of fact made by the appellate tribunal, and it is not open to the high court to reopen the findings of fact unless the party concerned has applied for a reference to challenge those findings first by an application under section 66(1) of the act, if he has failed to file an application expressly raising the question about the validity of the findings of fact, he is not entitled to urge before the high court that the findings are vitiated for one reason or another. it may well be so. atherton [1926] ac 205 ;[1925] 10 tc 155 that when an expenditure is made not only once and for all but with a.....dwarka prasad, j.1. this is a reference made by the income-tax appellate tribunal, delhi bench, 'b ', under section 66(2) of the indian i.t. act, 1922 (hereinafter referred to as ' the act '), by which the following question has been referred by the tribunal to this court : ' whether, on the facts and in the circumstances of the case, the tribunal was right in holding that the entire expenditure of rs. 85,620 incurred by the assessed on renovation of its picture house was an expenditure of revenue nature allowable in its assessment for the assessment year 1957-58?'2. the circumstances which have given rise to this reference may be, briefly, stated : 3. m/s. s. zoraster and company, jaipur (hereinafter referred to as ' the assessee '), is carrying on business, inter alia, of running a.....
Judgment:

Dwarka Prasad, J.

1. This is a reference made by the Income-tax Appellate Tribunal, Delhi Bench, 'B ', under Section 66(2) of the Indian I.T. Act, 1922 (hereinafter referred to as ' the Act '), by which the following question has been referred by the Tribunal to this court :

' Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the entire expenditure of Rs. 85,620 incurred by the assessed on renovation of its picture house was an expenditure of revenue nature allowable in its assessment for the assessment year 1957-58?'

2. The circumstances which have given rise to this reference may be, briefly, stated :

3. M/s. S. Zoraster and Company, Jaipur (hereinafter referred to as ' the assessee '), is carrying on business, inter alia, of running a picture house known as 'Prem Prakash Talkies '. In the year of account corresponding to the assessment year 1957-58, the assessee carried out renovation of the picture house and expended a sum of Rs. 85,620 on this account. In its return for the financial year 1957-58, the assessee claimed deduction of the said sum as expenditure laid out on renovation, under Section 10(2) of the Act. The assessee had also claimed, in addition to the aforesaid sum, an expenditure of Rs. 6,796 on account of maintenance and repairs of the cinema building. The ITO disallowed a sum of Rs. 10,000 out of the expenditure of Rs. 85,620 incurred by the assessee in the renovation of the cinema building and capitalized the rest of the amount, on which depreciation was allowed under the head 'buildings', as in his opinion the expenses incurred by the assessee in respect of renovation of the cinema building was of the nature of capital expenditure. The assessee preferredan appeal against the assessment order and claimed 1/5 of the aforesaid amount of Rs. 85,620, as he estimated the life of the renovation to be five years. The assessee thought it proper to claim 1/5 of the amount of expenditure incurred in respect of renovation in that assessment year and 1/5 each in the remaining succeeding four years. The AAC held that the .renovation was carried out for the first time in the assessment year in question and though the expenditure had increased the life of the asset, yet, at the same time, it did not bring into existence a new asset. Considering the life of the renovation carried out as five years, the AAC held that the claim of the appellant was not unreasonable and so he allowed a deduction in respect of a sum of Rs. 17,124, representing 1/5 of the expenditure incurred by the assessee on renovation in the assessment year 1957-58. The AAC also allowed an equivalent sum of Rs. 17,124 in the succeeding assessment year 1958-59 as well. The revenue department filed appeals before the Income-tax Appellate Tribunal in respect of both the assessment years 1957-58 and 1958-59, challenging the correctness of the order passed by the AAC, allowing a sum of Rs. 17,124 in both the aforesaid assessment years. The Appellate Tribunal, while dismissing the appeal of the department for the assessment year 1957-58, held, by its order dated November 30, 1963, that the expenditure was incurred by the assessee on account of repairs carried out for the upkeep of the picture house and that 1/5 of such expenditure was rightly allowed by the AAC, as claimed by the assessee, and since the assessee did not file an appeal in the matter, nothing further could be done. Thus, the finding of the Appellate Tribunal was that the quantum of expenditure of Rs. 85,620 was revenue expenditure relating to the assessment year 1957-58. In this view of the matter, the Appellate Tribunal allowed the appeal preferred by the department in respect of the subsequent assessment year 1958-59 and held that the assessee was not entitled to an allowance of Rs. 17,124 during that assessment year, as no expenditure in this respect was expended by the assessee during the later year 1958-59.

4. The assessee then filed an appeal before the Income-tax Appellate Tribunal against the order of the AAC for the assessment year 1957-58 and although the appeal was filed late, yet the Tribunal condoned the delay in submitting the appeal and admitted the appeal. On merits, the Appellate Tribunal took the same view which it had already taken in the appeal preferred by the revenue and, consequently, the appeal was allowed and the entire sum of Rs. 85,620 was deducted as revenue expenditure in the assessment year 1957-58 by the order of the Tribunal dated September 4, 1964. Thereafter, the Commissioner filed an application for making a reference but the same was rejected by the Tribunal. However, this court directed the Appellate Tribunal to draw up the statement of the caseand refer the question of law mentioned above to this court, which arose out of the order of the Appellate Tribunal dated September 4, 1964.

5. Mr. S. M. Mehta, appearing for the revenue, argued that the expenditure incurred by the assessee on renovation of the cinema building could not be allowed as a deduction permissible under Section 10(2)(v) of the Act, because the expenditure was not of the nature of current repairs. Moreover, it was pointed out by the learned counsel that the assessee had separately claimed an amount of Rs. 6,796 on account of maintenance and repairs during the relevant assessment year, which fact also went to show that the amount spent on renovation was not spent on current repairs. On the other hand, Mr. S. K. Keshote, appearing for the assessee, submitted that even if the amount spent on renovation may not be considered as current repairs, so as to come within the purview of Clause (v) of Sub-section (2) of Section 10 of the Act, yet the aforesaid amount was an allowable deduction under Clause (xv) of Sub-section (2) of Section 10 of the Act as it was an expenditure of revenue nature, not being an allowance coming within any of the Clauses (i) to (xiv) and not being of capital nature or of the nature of personal expenses of the assessee, but it was expended exclusively for the purpose of business. It was also argued by Mr. Keshote that the Appellate Tribunal had recorded a finding in its order dated November 13, 1966, which was affirmed by the subsequent order of the Tribunal dated September 4, 1964, that the expenditure in question was incurred on account of repairs carried out for the upkeep of the picture house and that the aforesaid finding is one of fact which could not be challenged by the revenue before this court, .as no question relating to the correctness of the finding has been called for and referred to this court.

6. Before embarking upon a discussion of the question referred to us, it would be proper to read Clauses (v) and (xv) of Sub-section (2) of Section 10 of the Act, which are as under :

'10. Business.--(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 on by him.

(2) Such profits or gains shall be computed after making the following allowances, namely :--...

(v) in respect of current repairs to such buildings, machinery, plant or furniture, the amount paid on account thereof ;......

(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.'

7. As regards the argument of the learned counsel for the assessee that the preliminary facts found by the Tribunal and the factual inferences drawn by it were not open to review by this court, as the question as to whether the expenditure incurred on renovation was spent on repairs or otherwise was essentially a question of fact. We may observe that the question referred to this court for opinion proceeds on the basis that the facts and circumstances of the case, as found by the Tribunal, are not open to question but oniy the legal effect of such facts and circumstances has to be considered by this court. In Aluminium Corporation of India Ltd. v. CIT : [1972]86ITR11(SC) their Lordships of the Supreme Court observed as under (p. 13) :

' When a question refers to the facts and circumstances in the case, it means the facts and circumstances as found by the Tribunal. If any party wants to challenge the correctness of the findings given by the Tribunal either on the ground that the same is not supported by any evidence on record or is based on irrelevant or inadmissible evidence or is unreasonable or perverse, a question raising any one of those grounds must be sought for and obtained. It is needless to say that the jurisdiction of the High Court in a reference under Section 66 is only an advisory jurisdiction. That being so it can only pronounce its opinion on the questions referred to it. It is trite to say that it cannot sit as an appellate court over the decision of the Tribunal.'

8. In Hazarat Pirmahomed Shah Saheb Roza Committee v. CIT : [1967]63ITR490(SC) the question raised was whether the income of the Roza properties was assessable to tax during; the relevant assessment year or were exempted from payment of tax. The Tribunal held that the original purpose of the wakf was confined to the maintenance of the Roza and the mosque and celebration of festive occasions, that all Muslims had unrestricted access to the Roza and the mosque, and that, therefore, the wakf was established for a wholly religious purpose. The Madras High Court on a reference considered that the maintenance of ' Madrasa' and the library by the wakf must be taken to be one of the original purposes of the wakf and rejected the finding of the Appellate Tribunal that the wakf was created wholly for religious purpose. On appeal, their Lordships of the Supreme Court in the aforesaid case held that the question as to what was the object of the wakf was essentially a question of fact and the High Court could not interfere with the finding of fact recorded by the Tribunal that the purpose of the wakf was wholly religious. Their Lord: hips of the Supreme Court observed as under in this context in the Roza Committee's case : [1967]63ITR490(SC)

' The Tribunal, therefore, held that the original purpose of the wakf was confined to the maintenance of the Roza and the mosque an 1 celebra-tion of festive occasions and, therefore, the wakf was established for a wholly religious purpose. At the hearing of the reference, the High Court has interfered with the finding of the Tribunal on this point. The High Court considered that the maintenance of madrassas and the library must be taken to be one of the original purposes of the wakf and the finding of the Tribunal that the wakf was wholly for a religious purpose must be overruled. It is manifest that the question as to what was the object of the, wakf is essentially a question of fact and the High Court had, therefore, no justification for interfering with the finding of the Tribunal on the point. It was pointed out by this court in India Cements Ltd. v. Commissioner of income-tax : [1966]60ITR52(SC) that in a reference under Section 66 of the Act the High Court must accept the findings of fact made by the Appellate Tribunal, and it is not open to the High Court to reopen the findings of fact unless the party concerned has applied for a reference to challenge those findings first by an application under Section 66(1) of the Act, If he has failed to file an application expressly raising the question about the validity of the findings of fact, he is not entitled to urge before the High Court that the findings are vitiated for one reason or another.'

9. In CIT v. Manna Ramji and Co. : [1972]86ITR29(SC) the question referred to the High Court was whether, on the facts and circumstances of the case, the amount received by the appellant as compensation from the Government for the requisition of a property was taxable as income, and was of the nature of capital receipts in its hands. The Appellate Tribunal found that the business of the assessee had not come to a standstill altogether and that he continued to carry on business, though at a reduced scale, after requisitioning and that if any injury was caused to his business it was to the volume thereof and not to the profit-making apparatus. The High Court of Bombay, on a reference, held that the amount received by the assessee for the requisitioning was in the nature of capital receipt, for damages in the profit-making apparatus. On appeal, the Supreme Court reversed the judgment of the Bombay High Court and held that as the question was framed, the High Court could not go behind the findings of fact recorded by the Tribunal. The observations of their Lordships of the Supreme Court, in this respect, are as under (p. 37) :

' It may also be mentioned that Mr. Hajarnavis has assailed the findings of fact of the Tribunal. In this respect we are of the view that the Tribunal is the final fact-finding authority. It is for the Tribunal to find facts and it is for the High Court and this court to lay down the law applicable to the facts found. Neither the High Court nor this court has jurisdiction to go behind or to question the statement of facts made by the Tribunal. The statement of case is binding on the parties and they are not entitled to go behind the facts of the Tribunal in the statement. Whenthe question referred to the High Court speaks of ' on the facts and circumstances of the case', it means on the facts and circumstances found by the Tribunal and not on the facts and circumstances as may be found by the High Court.' (emphasis* ours)

10. In Karmni Properties Ltd. v. C2T : [1971]82ITR547(SC) their Lordships of the Supreme Court held that the High Court was not entitled to reassess the evidence on record. When it was required to give its opinion ' on the facts and in the circumstances of the case ', it means the facts and circumstances as found by the Tribunal and not the facts and circumstances as may be found by the High Court. In the aforesaid case, their Lordships made the following observations in this regard (p. 553):

' The High Court after reassessing the evidence on record has also taken the view that there was only one source of income and that source was of letting out the premises to the tenants. Mr. Manchanda contended, and the High Court has accepted that contention that the authorities under the Act have not properly construed the lease deeds nor have they properly appreciated the evidence on record. It may well be so. We say nothing about it as it is not within our province to reappreciate the evidence on record. The question as to the correctness of the facts found by the Tribunal was not before the High Court nor is it before us. When the question referred to the High Court speaks of ' on the facts and in the circumstances of the case', it means on the facts and circumstances found by the Tribunal and not about the facts and circumstances that may be found by the High Court. We have earlier referred to the facts found and the circumstances relied on by the Tribunal, the final fact-finding authority.

It is for the Tribunal to find facts and it is for the High Court and this court to lay down the law applicable to the facts found. Neither the High Court nor this court has jurisdiction to go behind or to question the statements of fact made by the Tribunal. The statement of the case is binding on the parties and they are not entitled to go behind the facts found by the Tribunal in the statement.' (emphasis* added).

11. Similarly, in India Cements Ltd. v. CIT : [1966]60ITR52(SC) their Lordships of the Supreme Court pointed out that the High Court must accept the findings of fact recorded by the Appellate Tribunal and it is for the person who applied for a reference to challenge those findings first by an application under Section 66(1) of the Act, It was held that if he fails to file an application under Section 66(1) of the Act, expressly raising the question about the validity of the findings of fact, that party is not entitled to urge before the High Court that the findings are vitiated for one reason or the other. In that case, the High Court had preferred the findings of the ITO to that of the Appellate Tribunal, whilethe question referred was ' whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amount expended by the assessee in obtaining a loan was allowable expenditure'. Their Lordships of the Supreme Court held that the High Court was in error in setting aside the finding of fact recorded by the Tribunal.

12. In the present case also, no question has been referred to us on the ground that the finding recorded by the Tribunal is not supported by any evidence or is inadmissible or unreasonable or perverse and in the absence of any such question being referred to this court, the finding of fact recorded by the Tribunal, that the expenditure was incurred by the assessee on account of repairs carried out for the upkeep of the picture house, cannot be allowed to be assailed by the revenue in the present reference.

13. Now, we will proceed to consider the question of law which has been referred to this court on the basis of the facts found by the Tribunal. The first question which arises in this respect is as to what is meant by the expression ' current repairs ', which occurs in Clause (v) of Sub-section (2) of Section 10 of the Act, whether it means current petty repairs or repairs carried out for the maintenance and preservation of the property or it may even amount to reconstruction or substantial replacement.

14. It may also be pointed out here that in the English Act only the word ' repair' has been used and it has been interpreted as restoration by renewal or replacement of subsidiary parts of a whole. Buckley L.J. in Lurcott .v. Wakely & Wheeler [1911] 1 KB 905 held that 'repair ' and ' renewal ' are not words expressive of a clear contrast. Repair always involves renewal of a part, while renewal is reconstruction of the entirety.

15. In Ramkishan Sunderlal v. CIT : [1951]19ITR324(All) the Allahabad High Court took an extreme view and held that the words ' current repairs ' employed in Section 10(2)(v) of the Act restricted the meaning of the word ' repairs ' to ' petty repairs ', usually carried out periodically and does not include repairs or renewal costing a large sum of money, which has to be spent after the machine had run for a number of years.

16. However, we find that the view taken by the Allahabad High Court in the aforesaid case has not been accepted by any other court. In New Shorrock Spg. & Mfg. Co. Ltd. v. CIT : [1956]30ITR338(Bom) a Division Bench of the Bombay High Court consisting of Chagla C.J., and Tendolkar J. considered the expression 'current repairs' used in Section 10(2)(v) of the Act and it was held that 'current repairs' means an expenditure on buildings, machinery, plant or furniture, which is not for the purpose of renewal or restoration but which is spent only for the purpose of preserving or maintaining an already existing asset, and which does not bring a new asset into existence nor does it give to the assessee an advantage of enduring nature. The Bombay High Court did not acceptthe test laid down by the Allahabad High Court that if the expenditure is petty then it may be claimable as an allowable deduction under Section 10(2)(v) of the Act and if the expenditure was substantial then the deduction cannot be so claimed. On the other hand, it was held that the fair test would be to see as to whether the expenditure was incurred in order to preserve and maintain an existing asset. When the need for repairs arose their Lordships of the Bombay High Court agreed with the decision of the Patna High Court in CIT v. Darbhanga Sugar Co. Ltd. : [1956]29ITR21(Patna) and of the Madras High Court in CIT v. Sri Rama Sugar Mills Ltd. : [1952]21ITR191(Mad) and it was pointed out that in the definition given by Buckley L.J., he only considered the expression ' repair ' while in the Indian Act the expression used is 'current repairs ', so that the pastor arrear repairs are not included in the allowable deduction under Section 10(2)(v) of the Act.

17. In Humayun Properties Ltd. v. CIT : [1962]44ITR73(Cal) a Bench of the Calcutta High Court considered the question as to whether the amount spent by an assessee, who was a cinema exhibitor, on renovation should be allowed as permissible deduction under Section 10(2)(v) of the Act. Their Lordships of the Calcutta High Court agreed with the view taken by Chagla C.J. in New Shorrock Mills' case : [1956]30ITR338(Bom) and held that the expression ' current repairs ' means necessary repairs which are needed for the maintenance of the building, machinery, plant or furniture. It was also pointed out that a reasonable view should be taken of what a man of ordinary common sense, a businessman, should do and a cut and dry formula cannot be laid down as to what extent the building, machinery, plant or furniture could be repaired. But 'current repairs' should not mean 'luxurious repairs ', upon the whim or choice of the assessee. In Liberty Cinema v. CIT : [1964]52ITR153(Cal) P. B. Mukherji J., speaking on behalf of a Bench of the Calcutta High Court, accepted the broad test laid down by Lord Cave in British Insulated and Helsby Cables Ltd. v. Atherton [1926] AC 205 ; [1925] 10 TC 155 that when an expenditure is made not only once and for all but with a view to bring into existence a new asset or an advantage of enduring nature then there was very good reason, in the absence of special circumstances leading to an opposite conclusion, for treating such expenditure as properly attributable not to revenue but to capital. The dictum of Cave L. C. in the aforesaid case appears to have been universally accepted and followed by the decisions on the question as to whether a particular expenditure incurred by the assessee is, revenue or capital expenditure.

18. In Liberty Cinema case : [1964]52ITR153(Cal) it was held by the Calcutta High Court that though some of the moneys spent on repairs in a particular year can be allowed even though it is undertaken to remedy thedefects which might have been caused on account of negligence for a number of years and even though such repairs may not be necessary again for several years to come after the said repairs had been effected, yet amounts spent on repairs can be allowed only if they are not expenditure of capital nature.

19. In Sri Rama Talkies v. CIT : [1966]59ITR63(AP) again a question of expenses incurred by an exhibitor of cinema films in the renovation of the theatre was considered by a Bench of the Andhra Pradesh High Court and the test applied by that court was whether the act actually done is one which in substance is by way of replacement of defective parts or a replacement of the entirety or of the substantial part of the subject-matter. The Andhra Pradesh High Court agreed with the tests laid down by the Calcutta High Court in Humayun Properties Ltd. v. CIT : [1962]44ITR73(Cal) in relation to the expression 'current repairs'. The Andhra Pradesh High Court came to the conclusion that the expenditure incurred by the assessee was not made on necessary repairs which were required for the maintenance of the theatre but were luxury repairs of great magnitude and were carried out for the purposes of giving an enduring advantage to the assessee. Again the famous dictum of Cave L.J. was applied and it was held that the expenditure incurred in obtaining an enduring benefit for the business of the assessee was expenditure of capital nature.

20. In R. B. Shreeram & Co. (P.) Ltd. v. CIT : [1968]67ITR428(AP) a Bench of the Andhra Pradesh High Court held that the expenditure incurred in replacing the petrol engine of a truck by a diesel engine was expenditure of a capital nature, inasmuch as it was incurred for recreation and for obtaining an advantage of enduring nature.

21. In Regal Theatre v. CIT it was held by a Bench of the Punjab High Court that the expenditure incurred by the assessee in putting up wooden panels in the staircase and in the restaurant of a cinema theatre was a permissible deduction under Section 10(2)(v) of the Act, as it was an expenditure of revenue nature. In that case, it was observed (at p. 455) that the nature of the business had to be taken into consideration and as the business of the assessee was show business ' in order to attract customers, the 'cinema house had to be kept in certain presentable condition, particularly in keeping with its locality and the clientele. It was essential to keep the building in a tip-top condition. To achieve this object, which is certainly a business object vis-a-vis the assessee, he had to incur the expense in connection with the wooden panels and this expense, in the very nature of things, cannot be said to be an expense of a capital nature, particularly when the assessee's lease was for a short duration and the life of the panels was not such as could be treated as an asset of an enduring nature, for at the end of the lease, the assessee could remove thesame, and on the admitted facts, the wooden panels on removal will not be of much value. It was not disputed before us that if the assessee had white washed the building, it would be a ' revenue expenditure ' and so also, if he had replastered the walls and applied plastic emulsion to the walls. How does the nature of the expense change when to achieve the same object and also for the same purpose, the wooden panels are fixed We can see no distinction in putting the wooden panels in a different category than painting the walls with a cheap material or an expensive one. '

22. In Silver Screen Enterprises v. CIT the question raised was as to whether the repairs made in renovation and modernisation of a cinema house could be considered as business expenditure or capital expenditure. It was held by a Bench of the Punjab and Haryana High Court that the construction of the verandah, office room and bathrooms brought into existence, an advantage of enduring nature and the amount spent for such construction should not be treated as revenue expenditure. Similarly, the replacing of the wooden chairs by steel chairs was also not considered as an expenditure of revenue nature, as it was thought that the replacement was an improvement of enduring nature. However, expenses incurred by the assessee in painting the cinema building was allowed as revenue expenditure. It was held in the aforesaid case that whatever was spent by the assessee for the purposes of forming a basis for his private earning machinery would partake of the nature of capital expenditure.

23. In view of the aforesaid decisions, it is difficult to hold that expenditure incurred on the renovation of the picture house, which has been held by the Tribunal to have been spent on carrying out repairs for the upkeep of the picture house, can be considered as ' current repairs ' within the meaning of Clause (v) of Sub-section (2) of Section 10 of the Act. We, therefore, hold that the assessee is not entitled to claim deduction of the expenditure incurred by him under the head of ' current repairs '. But the amount spent by the assessee could be allowed as revenue expenditure as it does not come within any of the Clauses (i) to (xiv) of Section 10(2} of the Act, but appears to be allowable under Clause (xv) of the aforesaid section. It is not in dispute that the expenditure was incurred by the assessee wholly and exclusively for the purpose of business, but what is disputed is that it was of the nature of a capital expenditure and could not, therefore, be allowed under Clause (xv) of Section 10(2) of the Act. . It has often been said that the line of demarcation between capital expenditure and revenue expenditure is very thin and no general rule can be laid down with sufficient accuracy in this respect, but the broad test laid down by Viscount Cave L.C. in Atherton's case [1926] AC 205; 10 TC 155 may be considered as sufficientlyexhaustive to cover a great number of cases. The learned judge, Lord Cave, observed as under :

'But there remains the question, which I have found more difficult, whether apart from the express prohibitions, the sum in question is a proper debit item to be charged against incomings of the trade when computing the profits of it; or, in other words, whether it is in substance a revenue or a capital expenditure. This appears to me to be a question of fact which is proper to be decided by the Commissioners upon the evidence brought before them in each case ; but where, as in the present case, there is no express finding by the Commissioners upon the point, it must be determined by the courts upon the materials which are available and with due regard to the principles which have been laid down in the authorities. Now, in Vallambrosa Rubber Co. v. Farmer [1910] 5 TC 529 Lord Dunedin, as Lord President of the Court of Session, expressed the opinion that ' in a rough way ' it was ' not a bad criterion of what is capital expenditure as against what is income expenditure to say that capital expenditure is a thing that is going to be spent once and for all and income expenditure is a thing which is going to recur every year ' ; and no doubt this is often a material consideration. But the criterion suggested is not, and was obviously not intended by Lord Dunedin to be, a decisive one in every case ; for it is easy to imagine many cases in which a payment, though made ' once and for all', would be properly chargeable against the receipts for the year......But when an expenditure is made, notonly once and for all, but with a mew to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital. ' (emphasis* added)

24. The aforesaid test laid down by Lord Cave was approved by their Lordships of the Supreme Court in Assam Bengal Cement Co. Ltd. v. CIT : [1955]27ITR34(SC) where Bhagwati J., speaking for the Supreme Court, exhaustively considered the several decisions on the question and approved the following observations made by Mahajan J. in a Full Bench decision of the Lahore High Court in Benarsidas Jagannath, In re

' It is not easy to define the term ' capital expenditure ' in the abstract or to lay down any general and satisfactory test to discriminate between a capital and a revenue expenditure. Nor is it easy to reconcile all the decisions that were cited before us, for, each case has been decided on its peculiar facts. Some broad principles can, however, be deduced from what the learned judges have laid down from time to time. They are as follows :

(1) Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment, vide Lord Sands in Commissioners of Inland Revenue v. Granite City Steamship Company [1927] 13 tC 1. In City of London Contract Corporation v. Styles [1887] 2 TC 239 Bowen L.J. observed as to the capital expenditure as follows :

' You do not use it ' for the purpose of ' your concern, which means, for the purpose of carrying on your concern, but you use it to acquire the concern.'

(2) Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade : vide Viscount Cave L.C. in Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155. If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether. Thus, if labour saving machinery was acquired, the cost of such acquisition cannot be deducted out of the profits by claiming that it relieves the annual labour bill, the business has acquired a new asset, that is, machinery.

The expressions ' enduring benefit ' or ' of a permanent character ' were introduced to make it clear that the asset or the right acquired must have enough durability to justify its being treated as a capital asset.

(3) Whether for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business. Again, it is to be seen whether the expenditure incurred was part of the fixed capital of the business or as part of its circulating capital. Fixed capital is what the owner turns to profit by keeping it in his own possession. Circulating or floating capital is what he makes profit of by parting with it or letting it change masters. Circulating capital is capital which is turned over and in the process of being turned over yields profit or loss. Fixed capital, on the other hand, is not involved directly in that process and remains unaffected by it.'

25. It was observed by Bhagwati J. in Assam Bengal Cement Co.'s case : [1955]27ITR34(SC) that if the expenditure is made for acquiring or bringing into existence an asset or advantage of enduring benefit to the business of the assessee it is properly attributable to capital and is an expenditure of capital nature. If, on the other hand, the expenditure is incurred for running the business or working it with a view to produce profits, then it would be revenue expenditure. His Lordship observed thatthe aim and object of the expenditure would determine the character thereof. If a new business is acquired or extended or substantially replaced then the outlay made thereon will be in the nature of capital expenditure, but if the expenditure is incurred while the business is going on, not for the purposes of extension of the business or for the substantial replacement of the equipment, but for earning profits, then it is certainly revenue expenditure.

26. The matter again came up for consideration before their Lordships of the Supreme Court in Pingle Industries Ltd. v. CIT : [1960]40ITR67(SC) and their Lordships agreed with the law laid down by Bhagwati J. inAssam Bengal Cement Co.'s case : [1955]27ITR34(SC) and it was observedthat the test given by Mahajan J. in Benarsidas' case has to be applied to the facts of each case. It was held by theirLordships of the Supreme Court in the aforesaid case that the amountexpended for acquiring the right to extract stones, even if a periodicalpayment, which was neither rent nor royalty, but a lump sum payment ininstalments for acquiring capital asset for an enduring benefit to his tradewas capital expenditure. '

27. In Bombay Steam Navigation Co. (1953) P. Ltd. v. CIT : [1965]56ITR52(SC) it was held that the expenditure made under a transaction which is so closely related to the business that it could be viewed as an integral part of the conduct of the business may be regarded as revenue expenditure laid out ' wholly and exclusively for the purpose of the business'. Tjheif Lordships of the Supreme Court observed in that case that it was not ordinarily easy to evolve a test for ascertaining whether the expenditure incurred was capital or revenue, because the determination of such a question depends upon the facts and circumstances of each case. It was also observed that the court has to consider the nature of the expenditure in the ordinary course of business and the objects for which the expenditure was incurred. The following observations of their Lordships of the Supreme Court in the aforesaid case may be usefully reproduced (p. 59) :

' Whether a particular expenditure is revenue expenditure incurred for the purpose of business must be determined on a consideration of all the facts and circumstances, and by the application of principles of commercial trading. The question must be viewed in the larger context of business necessity or expediency, if the outgoing or expenditure is so related to the carrying on or conduct of the business, that it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure.'

28. Again in Golan Lime Syndicate v. CIT : [1966]59ITR718(SC) their Lordships agreed with the following observations made by Hidayatullah J. (as he then was) in K. T. M. T. M. Abdul Kayoom v. CIT : [1962]44ITR689(SC)

' None of the tests (laid down in various authorities) is either exhaustive or universal. Each case must depend on its own facts, and a close similarity between one case and another is not enough, because even a single significant detail may alter the entire aspect. In deciding such cases, one should avoid the temptation to decide cases......by matching thecolour of one case against the colour of another.'

29. It was also held in the aforesaid case by their Lordships that it is not the law that, in every case, if an enduring advantage is obtained, the expenditure for securing it must be treated as capital expenditure and that is why by Viscount Cave while laying down his dictum inserted the word ' in the absence of special circumstances leading to an opposite conclusion ' which acknowledge that there can be exceptions to the general rule and in certain cases expenditure made in obtaining an enduring advantage may not be capital expenditure. In Gotan Lime Syndicates case : [1966]59ITR718(SC) it was held that royalty payment, made in connection with a mining lease, was not a direct payment for securing an enduring advantage as it had relation to the raw material to be obtained and as such the payment of royalty was considered to be revenue expenditure.

30. In Laxmlji Sugar Mills Co. P. Ltd. v. CIT : [1971]82ITR376(SC) the question which arose was as to whether the expenditure incurred by an asses-see, a private company, carrying on the business of manufacturing and sale of sugar, by way of contribution for the construction and development of roads, and paid to a development council, was capital expenditure or revenue expenditure. It was observed by their Lordships of the Supreme' Court that in the diverse nature of business operations it was difficult to lay down a test which may apply to all situations and the criteria has to be applied from the business point of view and on a fair appreciation of the whole situation. Their Lordships held that the apparent object and purpose was to facilitate the running of its motor vehicles or other means employed for transportation of sugarcane to the factory and on that ground it was held that the expenditure was incurred for running the business or working the same with a view' to produce profits, without the assessee getting any advantage of an enduring benefit to itself, and that the expenditure was incurred for reasons of commercial expediency. Their Lordships also observed that the development of roads was necessarily meant for facilitating the carrying on of the assessee's business and as the Tribunal did not give any finding that the roads were to be altogether newly, made and the assessee would get an enduring benefit fromthe construction of the roads, the expenditure in question should, therefore, be allowed as an admissible deduction.

31. In CIT v. Ashok Leyland Ltd. : [1972]86ITR549(SC) it was observed by their Lordships of the Supreme Court that there was no difficulty in enumerating the tests laid down in various cases, but the difficulty arises when the courts are called upon to apply those tests to a given set of facts. It was then observed (p. 553) :

' A long line of decisions have laid down that when an expenditure is made with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, there is good reason (in the absence of special circumstances leading to the opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital...... Hence commercial expediency required the company toterminate the services of the managing agents and the managing agents could be got rid of only by paying reasonable compensation. The Tribunal found that the company terminated the services of the managing agents on business considerations. It accepted the plea of the company that, in view of the change in its business activity, the continuance of the managing agents became superfluous. These are findings of fact which are not open to question before this court. '

32. In the aforesaid case, the compensation paid for the termination of the services of the managing agents was held to be revenue expenditure, as it was a payment made with a view to save business expenditure in the relevant accounting year as well as in the succeeding years and was not made for acquiring an enduring asset or income yielding asset.

33. In Sassoon J. David and Co. P. Ltd. v. CIT : [1979]118ITR261(SC) Venkataramiah J., speaking for the Supreme court, observed as under (p. 273) :

' In order to claim deduction under'section 10(2)(xv) of the Act, an assessee has to show that the expenditure in question, (i) was not an allowance of the nature described in any of the Clauses (i) to (xiv) of Section 10(2), (ii) was not in the nature of a capital expenditure or personal expenses of the assessee, and (iii) had been laid out or expended wholly and exclusively for the purposes of his business, profession or vocation. Even assuming that the motive behind the payment of retrenchment compensation was that the terms of the agreement of the sale of shares should be satisfied, as long as the amount had been laid out or expended wholly and exclusively for the purpose of the business of the assessee, there appears to be no good reason for denying the benefit of Section 10(2)(xv) of the Act to the company if there is no other impediment to do so.'

34. It was further observed by his Lordship in the aforesaid case as under (p. 275) :

' It has to be observed here that the expression ' wholly and exclusively ' used in Section 10(2)(xv) of the Act does not mean ' necessarily '. Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under Section 10(2)(xv) of the Act even though there was no compelling necessity to incur such expenditure. It is relevant to refer at this stage to the legislative history of Section 37 of the Income-tax Act, 1961, which corresponds to Section 10(2)(xv) of the Act. An attempt was made in the Income-tax Bill of 1961 to lay down the ' necessity ' of the expenditure as a condition for claiming deduction under Section 37. Section 37(1) in the Bill read ' any expenditure...laid out or expended wholly, necessarily and exclusively for the purposes of the business or profession shall be allowed......' The introduction of the word 'necessarily' in the abovesection resulted in public protest. Consequently, when Section 37 was finally enacted into law, the word ' necessarily ' came to be dropped. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under Section 10(2)(xv) of the Act if it satisfies otherwise the tests laid down by law. '

35. Thus, a review of the several decisions on the subject leads us to the conclusion that the broad test laid down by Lord Cave that, ordinarily, an expenditure incurred for obtaining a new asset or for getting an advantage of enduring nature, should be considered as capital expenditure and the broad test laid down by Lord Cave has stood the test of time. The observations made by Mahajan J. in Benarsi Das' case truly enunciates the principles which emerge from the authorities. In cases where the expenditure is made for the initial outlay or for the extension of a business or a substantial replacement of the equipment, there is no doubt that it is capital expenditure. If 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 a capital expenditure. The question, however, arises for consideration, where an expenditure is incurred while the business is going on and is not incurred either for the extension of the business or for the substantial replacement of its equipment. Such an 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. If 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 thenature 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, it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business was 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 it 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 be 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 the particular case. It may be observed that in the great diversity of human affairs and the complicated nature of business operations, it is difficult to lay down a test which would apply to all situations. One has, therefore, to apply the aforesaid criteria one after the other, from the business point of view and come to the conclusion whether on a fair appreciation of the whole situation the expenditure incurred in a particular case is of the nature of capital expenditure or revenue expenditure, in which latter event only it would be a deductible allowance under Section 10(2)(xv) of the Act. The question is essentially a question of fact to be determined by the I.T. authorities, on an application of the broad principles laid down above and the courts of law would not ordinarily interfere with such findings of fact, if they have been arrived at on a proper application of those principles, to the facts of each case, to find out as to whether the expenditure incurred is revenue expenditure or capital expenditure. The question has mainly to be viewed in the light of the nature of the business and also from the view-point of an ordinary businessman. If the expenditure is incurred on account of commercial expediency or on the basis of the principles of ordinary commercial trading, then such expenditure should be considered as revenue expenditure.

36. In the present case, the finding of the Tribunal is that the amount of Rs. 85,624 was expended in carrying out repairs for the upkeep of the picture house. The business of the assessee is the showing of cinematograph films and it cannot be denied that the cinema building has to bekept in a presentable condition appropriate for the show business. The amount is said to have been spent on painting, wood panelling and marble flooring. It has not been found by the Tribunal that the marble flooring was being done for the first time. The Tribunal, after examining the details of the expenditure incurred, arrived at a finding that the expenditure was incurred on account of repairs carried out for the upkeep of the picture house and it is not possible for this court to go behind the aforesaid finding of fact recorded by the Tribunal. We are, therefore, of the opinion that the expenditure which has been incurred by the assessee in making the repairs in question was motivated by commercial expediency and it cannot be held that the assessee either obtained any new asset or he got any advantage or benefit of enduring nature. Even wood panelling has a life of a few years and it cannot be said to be an enduring advantage. Even if we consider it as an advantage which may last fora few years, yet it is difficult to hold that it was not made in the course of ordinary commercial trading activity. We may also point out that merely because the amount spent by the assessee was labelled as ' renovation', it could not lead to any conclusion, because ' renovation ' may mean repairs or substantial alterations or constructions depending upon the circumstances of each case. According to the finding of fact arrived at by the Tribunal, the so-called renovation carried out by the assessee in the present case has to be considered as repairs made for the upkeep of the cinema building. As such, the amount spent by the assessee on the so-called renovation was of the nature of revenue expenditure falling within Section 10(2)(xv) of the Act and is, therefore, an allowable deduction.

37. In this view of the matter, we answer the question referred to us in the affirmative.


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