SETHURAMAN J. - The Income-tax Appellate Tribunal, Madras Bench, has under section 256(1) of the Income-tax Act, 1961, referred the following question of law for the opinion of this court.
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the expenditure of Rs. 37,390 was not not capital nature but it was an expenditure incurred by the assessee wholly for the purposes of its business and allowable as a deduction under section 37 of the Income-tax Act, 1961 ?'
The assessee is a firm carrying on the business of running a hotel. That hotel business was previously run by one Seetharama Rao and subsequently it was converted into a partnership. We are concerned in this reference with the assessment year 1965-66, the relevant previous year ending on 31st March, 1965. The expenditure which is now in dispute has been described as follows :
Putting decorated mirrors with pictures of religious personages in the pink hall of the hotel used as dining cum-lecture hall.
Putting up plaster-moulded roof decoration in the above hall with a view to beautify the premises.
Fixing plywood panels in restaurant halls and in some living rooms.
Fixing carpet in the reception hall.
Replacement of old and worn-out hinges, etc.
Putting frosted glass in the pink hall.
The Income-tax Officer considered that the expenditure given above could not be said to be on account of current repairs to the building and that the expenditure incurred had brought into existence an asset of enduring nature. He, accordingly, treated this expenditure as of capital nature and disallowed the said sum of Rs. 37,390 in computing the total income of the firm. The assessee field an appeal to the Appellate Assistant Commissioner who observed that the expenditure was incurred so as to improve the earning scope of the business and that the expenditure was more of initial nature rather than a regular business expenditure. He held that the expenditure in question had resulted in a benefit of enduring nature to the assessee-firm. He, therefore, confirmed the disallowance.
On further, appeal, the Tribunal held that, having regard to the circumstances of the present case, the expenditure incurred by the assessee-firm was not of capital nature and that the expenditure was incurred wholly for the purpose of its business and was, therefore, allowable as deduction under section 37 of the Act. Aggrieved by this order of the Tribunal, the revenue has come up with this reference raising the question mentioned above.
Section 37 of the Income-tax Act, 1961, provides for the deduction, of any expenditure not being in the nature of capital expenditure laid our or expended wholly and exclusively for the purposes of the business or profession. The only question, therefore, is whether this expenditure is of capital nature or whether it is laid out wholly and exclusively for the purposes of the assessees business. As far as the latter aspect is concerned, viz., as to whether it is an expenditure laid out wholly and exclusively for the purposes of the business, there is absolutely no dispute that it has been incurred, in the present case, only for the purposes of the assessees business. We have thus to consider only one point, viz., as whether the expenditure has brought into existence any asset of enduring nature so as to be classified as capital expenditure. In the figures that we have already mentioned, there are items like replacement of old and worn-out hinges and putting of frosted glass in the pink hall. These items are in the nature of petty replacement of items which already existed and, therefore, these could not be taken as capital expenditure at all. One other item of expenditure like putting of decorated mirrors with pictures of religious personages or putting of plaster-moulded roof decoration in the dining-cum-lecture hall was incurred with a view to beautify the premises. Fixing of plywood panels in the halls and in some living rooms would, having regard to the nature of the business carried on by the assessee, be liable to be classified as revenue expenditure. The expenditure incurred has obviously been incurred only with a view to keep the place fit for the purpose for which persons assemble in the hall, viz, for taking food and other edibles in the dining hall. Without a proper atmosphere in the hall, it would not be possible to attract the necessary customers for running the hotel which the assessee has been carrying on as it business. The items that have been described in the details of expenditure given are also such that they cannot be said to be of enduring nature, because those items like putting of plaster-moulded roof decoration and fixing of plywood panels would absolutely be of no use with reference to any other place. They are just fixed in the walls so that they would present an inviting appearance for the customers assembled there. They cannot be removed and used. Having regard to the nature of the business carried on by the assessee and the nature of the expenditure described above, we are satisfied that the Tribunal came to the correct conclusion in holding those items as revenue expenditure allowable as deduction under section 37 of the Act. We therefore, answer the question in the affirmative and in favour of the assessee. The assessee will have its costs. Counsels fee Rs. 500.