SRINIVASAN J. - In 1947, the assessee purchased a cinema house known as the Gnanam Talkies. At that time a lessee was in occupation and under the terms of the sale deed the lease was continued in force. The assessee was in receipt of Rs. 2,700 as annual rent and this income was being assessed in the assessees hands as income from property.
The lease was due to expire in December, 1952. But the lessee did not surrender possession but continued as a tenant holding over on the expiry of the lease. A short while prior to the expiry of the lease, there had been a cyclone which had caused some damage to the cinema theatre. Apparently, the lessee carried out the necessary repairs and continued his business as a film exhibitor. On the failure of the lessee to surrender possession, the assessee took steps to evict him. His petition before the House Rent Controller failed. While the matter was pending appeal in the sub-court, the parties came to a compromise as a result of which the assessee paid a sum of Rs. 17,000 to the lessee and obtained possession of the premises together with certain items of machinery and furniture. Such possession was taken by him on 1st July, 1953.
Thereafter, the assessee carried out extensive repairs to the cinema house. A total sum of Rs. 36,318 was spent by him, After reconditioning the theatre, the assessee started exhibition of films in this cinema house on and from 5th November, 1953.
For the assessment year 1954-55, for which the account year ended on 31st March, 1954, the assessee claimed entitled to deduct a sum of Rs. 24,889 as expenses towards current repairs. This sum forms part of the amount of Rs. 36,318 spent by him. Apparently, his own auditors excluded a sum of Rs. 13,500 as having been spent of items of a capital nature such as the construction of a cabin room, booking offices and compound wall. The sum claimed includes also Rs. 2,229 spent for white-washing the premises. The Income-tax Officer disallowed the claim except for the sum of Rs. 2,229. He took the view that the expenditure was not purely of a revenue nature, that the premises were being repaired from time to time by the lessee, who was carrying on the business in those premises, and that what had been effected by way of repairs by the assessee really constituted an improvement to the buildings. The expenditure claimed other than the sum of Rs. 2,229 was held to be of a non-recurring nature and hence capital in character.
On the dismissal of his claim by the Income-tax Officer, the assessee appealed to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner held that there had been a complete renovation of the theatre resulting in the acquisition of a benefit of an enduring nature. It was not current repairs according to the Appellate Assistant Commissioner and the expenses did not also fall within the scope of section 10(2)(xv) of the Act.
His further appeal to the Tribunal also failed and, on an application to this court, the Tribunal was directed to refer the following question for the determination of this court :
'Whether, on the facts and in the circumstances of the case, the claim of the assessee for deduction of Rs. 24,889 spent upon effecting repairs to the Gnanam Cinema House was allowable under section 10(2)(xv) of the Act ?'
The deduction to which an assessee is entitled under section 10(2)(xv) is :
'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.'
Clause (v) deals with an allowance 'in respect of current repairs to such buildings, machinery, plant or furniture, the amount paid on account thereof'. It is seen from the above provisions that expenses towards current repairs to buildings, machinery, plant or furniture, are deductible as an allowance under clause (v). Clause (xv) excludes the expenditure towards such current repairs, but permits the deduction of any other item of expenditure not being of the nature described, but which expenditure is incurred wholly and exclusively for the purpose of such business. It is the assessees claim that the expenditure which he incurred in respect of this cinema house is of a revenue nature and that no item thereof can be regarded as a capital expenditure. Nor having regard to the wording of clause (xv) can it be his contention that if the expenditure is to be brought within clause (xv) it was also on account of current repairs. But, apparently, the claim was put forward partly on the basis of clause (v) and partly on the basis of clause (xv). Though the question that has been referred for our determination specifically refers to clause (xv), the circumstances of the case clearly call for an examination of the scope of both the clauses in relation to the expenditure in question.
Even without reference to any authority, it seems to us that the expression 'current repairs' indicates an expenditure that is incurred by an assessee in relation to the building, machinery, etc., giving rise to the income under assessment which expenditure was necessitated during the time the business was conducted and by reason of the business itself such as on account of wear and tear and the like. It does not appear reasonable to hold that there could be any expenditure incurred on account of current repairs either before the business was started or after the business had ceased. In Commissioner of Income-tax v. Darbhanga Sugar Co. Ltd., the Patna High Court had considered the meaning of the expression 'current repairs'. Though the facts of that case are not quite on all fours with the facts of the present case, the decision is nevertheless instructive in explaining what 'current repairs' should mean. That was a case where the magnitude of the expenditure incurred was somewhat large. The learned judges pointed out that 'current' cannot be equated to mean 'petty' and that even if a substantial sum is expended, if it is for the restoration or the replacement of subsidiary parts of old machinery, it would amount only to a repair. If, on the other hand, the entire machinery or substantially the whole of it should be replaced,it would cease to be a repair. The learned judges also though that the expression 'current repairs' must be interpreted to mean repairs in the current accounting year.
The Bombay High Court held in New Shorrock Spinning and . v. Commissioner of Income-tax, that the expression 'current repairs' means expenditure on buildings, machinery, plant or furniture, which is only for the purpose of preserving or maintaining an already existing asset, which does not bring in a new asset into existence or does not give to the assessee a new or different advantage and that there must be repairs which are attended to as and when the need for them arises. The learned judges also took the view that the necessity for effecting repairs mist be left to the businessmen to decide and, solely for the reason that such repairs have fallen into arrears or have been accumulated over a period of time, it would not render expenditure upon such repairs any the less current repairs.
Besides relying upon the observations contained in the two decisions cited above, the learned counsel for the assessee referred also the Commissioner of Income-tax v. Sheikhupura Transport Co. Ltd. That was a case where a transport company spent a sum in fitting new bodies in the place of worn out ones of five lorries which were being run by it and claimed the amount as deductible as spent on current repairs. The learned judges thought that the expenditure incurred in renewing the bodies was comparatively small and must be held to fall within the definition of current repairs. They refer to a decision of this court in Commissioner of Income-tax v. Sri Rama Sugar Mills Ltd. where replacement of a boiler by a new one was held to be within section 10(2)(v). The reason adopted by the learned judges of the Punjab High Court was that compared to the value of the lorries themselves, the expenditure incurred on the construction of new bodies therein was negligible and that, having regard to the circumstances of the case, it could not be said that the company was acquiring a new asset or adding to the number of its vehicles. If the replacement of a tyre or a wheel or such minor parts as the carburettor could be deemed to be current repairs, the learned judges had no reason to hold otherwise with regard to the replacement or a worn out body.
It seems to us that while these cases no doubt furnish some guidance with regard to the interpretation of clause (v) of section 10(2), they are hardly applicable to the facts and the circumstances of the present case. Though the question has been framed in a general manner, it is important for us to note that the various items of expenditure which go to make up this total of Rs. 24,889 have not been analysed either by the department or the Tribunal so that it is not possible for us to give and answer which will finally dispose of the question in dispute. The assessee himself did not claim as deductible either under section 10(2)(v) or section 10(2)(xv) the sum of Rs. 13,500 as admittedly the items on which this sum was expended were all of a capital nature. But in so far as the amount claimed is concerned, beyond a broad statement that it was spent for the renovation of the theatre, there is no indication in the orders of any of the officers below to show for what particular reasons such expenditure was held to be of a capital nature. We are only referring to this aspect of the case to indicate that the matter may require a fresh investigation at the hands of the department in the light of the answer that we propose to give.
That the assessee did not commence the cinema business in so far as this theatre is concerned till November 5, 1953, is not disputed. The question, broadly stated, would be whether any expenditure that was incurred before that particular date could at all the be canvassed as an expenditure falling under section 10(2)(v) or section 10(2)(xv). Had it been a case of the assessee taking over the cinema theatre as a going concern, for instance, by purchasing the leasehold right during the currency of the lease and had he obtained a transfer of the various licences required for the running of the cinema, whether any expenditure incurred by him would then be an expenditure in the course of running the business, would come in for an examination. But in the present case, the lessee stopped his business on July 1, 1953. What the assessee took over was merely the empty premises. The assessee did not commence any business in that premises till November 5, 1953, and before commencing such business, he spent some amount, part of which at least is admitted to have been of the nature of a capital expenditure. On the wording of section 10(2)(v) or section 10(2)(xv), it seems clear to us that where an assessee expends moneys upon buildings or machinery in advance of the commencement of the business, such expenditure must necessarily be of a capital nature. Both the two relevant clauses of section 10(2) relate to expenditure incurred by an assessee, the one by way of current repairs clearly indicating that the expenditure is required in the running of the business and has been necessitated by the running of the business, and the other expenditure laid out or expended wholly and exclusively for the purpose of such business, obviously a business which was already in existence and not one that is to come into existence in the future. No direct authority dealing with the point had been cited before us. But certain illustrations would serve to show that where repairs are effected to buildings, such repairs, being found necessary at the time of the purchase for the purpose of commencing a business therein, those expenses cannot but be regarded as expenditure on capital account. If, for instance, the assessee purchases certain dilapidated buildings and puts them into serviceable condition for the purpose of commencing his business, it can hardly be claimed that such expenditure can be brought in either under section 10(2)(v) or section 10(2)(xv). As we have pointed out, the position might perhaps be different if the assessee had taken over the business as a going concern and in relation to that business found it necessary to carry out the repairs to the buildings. But what was only an item of property up to November 5, 1953, became an asset of the business only on and after that date; the expenditure incurred up to them only served to bring into existence a new business asset.
It has been argued that since these items of expenditure were incurred during the account year, during part of which the assessees business was in existence, the expenditure cannot to taken out of the category of allowable items of expenditure. To put it more clearly, the assessees business commenced on November 5, 1953, and was carried on during the rest of the accounting year till March 31, 1954. It is claimed that it is not necessary in order to entitle the assessee to claim these allowances that the business should have been in existence throughout the year. We are in entire agreement with this proposition. But it does not follow therefrom that an expenditure incurred prior to the commencement of the business would still be available for consideration as an item which would be allowable under section 10(2)(v) or section 10(2)(xv). Commissioner of Income-tax v. National Syndicate Ltd. has been referred to. That was a case where the business was conducted during part of the accounting year. Thereafter, it was closed and sold. The books of account were also closed during the year indicating losses in the sale of some of the assets of the business and writing them off. In the assessment, deduction was claimed under section 10(2)(vii) of the Act. The Appellate Tribunal rejected the claim on the ground that any loss incurred but the sale of the assets of the business after the business had closed was not liable to be deducted. But their Lordships of the Supreme court pointed out that all the conditions requisite for the application of section 10(2)(vii) were available and that it was not necessary that the business should have been carried on throughout the year. Reliance has been placed upon this decision in support of the claim that though the expenditure was partly incurred before November 5, 1953, since the assessees business was carried on during the rest of the year, the allowance under section 10(2)(v) and section 10(2)(xv) cannot be denied. We are not satisfied that the decision cited above gives any support to this contention. This is a clear case where there was no business till November 5, 1953, and whatever amounts were spent by the assessee up to that date were only for the purpose of bringing a serviceable asset into existence. That the repairs to those buildings arose out of neglect of the prior lessee is of no consequence. Up to that date, the property was not an asset of any business which the assessee was carrying on. It was only property, the income wherefrom was being assessed under the head 'income from property'. It is only expenditure incurred on and after the commencement of the business that can possibly qualify for allowance either by way of current repairs under section 10(2)(v) or as other expenditure falling within the scope of section 10(2)(xv).
As we have said, there is no indication as to the nature of the various items of expenditure incurred and also as to those items which were incurred before and after November 5, 1953. We accordingly answer the question in this manner. Expenditure incurred prior to the commencement of the business will not fall for deduction under any of the clauses of section 10(2). The expenditure incurred after that date would have to be independently examined for the purpose of granting relief under either of the two clauses.
The assessee will pay the costs of the department. Counsels fee Rs. 250.
Reference answered accordingly.