JUDGMENT
Kantawala, C.J.
1. Messrs. Vasant Screens, the assessee, entered into an agreement to take on lease a godown belonging to Richpal Rungta. That agreement was entered into on March 29, 1958. Under the terms of the agreement of lease, Richpal was to hand over possession of premises consisting of parts of Rungta godown and open plots on both the sides of the godown for converting it into a cinema theatre. The agreement of lease provided that the rent from the opening of the cinema theatre for the first period of five years was to be Rs. 1,250 per month and then for the subsequent period of five years was to be Rs. 1,383-5-4 per month. The rent was to be paid at the end of each month before the 10th day of the following month. Clause 3 of this agreement, inter alia, provided that Richpal agreed to allow the assessee to spend a sum of Rs. 40,000 to Rs. 50,000 for effecting necessary alterations for converting it into an “A” class theatre and equipping it with all necessary equipments including electric fittings, fans, water tank and furniture as per the rules under the Cinematograph Act for making the said building fit and useful for cinema show. Under this agreement all materials as well as all alterations effected to the premises except the machinery were to be regarded as a part of the premises and were to belong to Richpal after the expiry of the period of lease. The assessee was not to pay the monthly rent, till half of the amount spent on the alterations made in the building to make it fit for exhibiting cinema shows, to Richpal was adjusted and Richpal was to pass a receipt against the amount of expenditure to the assessee. The remaining amount was to be adjusted for payment in the monthly rent proportionately. The agreement of lease further provided that after the expiry of the period of the lease the assessee would be entitled to extend the lease for a further period of two years and the rent of the leased premises was to be enhanced to 25% of the monthly rent payable during the second five years. There was an express provision that the lease deed embodying the terms and conditions was to be duly executed and get registered by the parties. Pursuant to this agreement of lease, the assessee was put in possession of the property and had carried out alterations thereto and commenced the business of exhibition of motion pictures long before the year under consideration. According to the bookings of account of the assessee in which the relevant expenditure is debited to the account of Richpal, such expenditure amounted to. Rs. 1,16,528 by July 31, 1960, and Rs. 1,18,468 by July 31, 1961. As the expenditure that was incurred was more than that anticipated, the assessee desired to claim a set-off in respect thereof and there were disputes between the assessee and Richpal. The disputes were ultimately and finally amicably settled out of court and on February 19, 1963, an instrument entitled deed of lease was executed which provided that the assessee was entitled to hold the leasehold premises till March 31, 1970. This document provided that the assessee as lessee had spent Rs. 80,000 for making alterations and reconstruction in the original godown building and the assessee was entitled to deduct the same from the rents payable to Richpal each month a provided in this deed Rs. 60,000 were already adjusted from rent which fell due up to December 31, 1962, while the balance of Rs. 20,000 was to be deducted by the assessee at the rate of Rs. 299.89 per month from the monthly rent payable from the month of January, 1963, onwards. The deed further provided that the assessee was entitled on expiry of the lease to continue in possession as lessee for a further period of two years on his paying a monthly rent of 25% more in addition to Rs. 1,500 per month. Under this deed, all existing materials as well as all the alterations effected to the leasehold premises and structures as well as the existing furniture, fan, electric fittings, etc., except machinery in the projection room and auditorium, were to become part of the premises to be handed over to Richpal, the lessor, on determination of the lease and possession thereof was to be delivered to him on the expiry of the lease.
2. In the account maintained in the name of Richpal the assessee had debited to this account sums totaling Rs. 1,18,468 relating to expenditure on alterations, etc. Further, a sum of Rs. 5,000 was deposited with the lessor and thereafter another sum of Rs. 5,541, which was referable to the rent from January 1, 1959, to May 12, 1959, was not adjusted. The total of all these sums came to Rs. 1,29,009 out of which under the terms of the deed of lease a set-off was permitted only in respect of the sum of Rs. 80,000. The balance of Rs. 49,009 was adjusted to the profit and loss account of the assessee in the year ended July 31, 1963, and for the assessment year 1964-65, he claimed a deduction of this amount on the ground that it was revenue expenditure incurred wholly and exclusively for the purposes of business.
3. The ITO rejected the claim holding that he was not in a position to verify the quantum of expenditure and further the expenditure was in the nature of capital expenditure and not in the nature of “current repairs”.
4. In an appeal before the AAC, the genuineness of the quantum of expenditure was not questioned; but he disallowed the deduction of expenditure holding that it was not of a revenue nature as it brought into existence a capital asset, since the benefit from the expenditure would enure to the assessee during the period of lease of 11 years.
5. In second appeal before the Tribunal, the only contention that was urged before the Tribunal was whether the expenditure was of a capital nature. The Tribunal pointed out that the matter has to be considered from the of point view of a businessman and in the light of exigencies of commercial expediency. The Tribunal found that the lease had been acquired by the assessee much earlier to the expenditure in question and indeed the expenditure was incurred only after the acquisition of the lease and receiving possession of the property. Further, the amount had not been paid to the lessor and can hardly be considered to be an amount spent to acquire the right of the lease. Therefore it cannot be held to be in the nature of capital expenditure on the ground that it is an expenditure incurred for the purpose of acquiring the lease. According to the Tribunal, the liability to bear Rs. 49,009 was settled by virtue of the agreement dated February 19, 1963, which was entered into in the accounting year under consideration. This was, therefore, a loss incidental to the business or an expenditure incurred for the business in the year under consideration. As, according to the Tribunal, the expenditure was of a revenue nature, it permitted the deduction of Rs. 49,009 for the assessment year 1964-65. From this order of the Tribunal, the following question has been referred to us for our determination :
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 49,009 was admissible as a deduction as a loss incidental to the business or as expenditure in the nature of revenue expenditure ?”
Mr. Joshi on behalf of the revenue contended that the question whether a particular expenditure incurred is of a revenue nature or of a capital nature will depend upon the facts of each case. His submission was that the entire expenditure of Rs. 49,009, which ultimately was agreed to be borne by the assessee, was incurred with a view to bring into existence a set-off or advantage of enduring benefit. He submitted that this amount was really spent with a view to convert a godown into an “A” class cinema theatre and even under the agreement to lease, the lease was for a duration of 10 years with a right to the lessee to extend it for a further period of two years. He submitted that since during the subsistence of the lease the assessee was to have the advantage of this benefit, it was of an enduring nature. On the other hand, Mr. Dewani on behalf of the assessee contended that, as found by the Tribunal, the business of the assessee to conduct cinema theatre and to exhibit the films had already commenced. This expenditure had to be incurred pursuant to the terms of the agreement between the assessee and Richpal with a view to continue the business and not with a view to acquire a new and enduring benefit. He, therefore submitted that but for the assessee agreeing to bear this expenditure he would not have been in a position to continue his business of exhibiting the films which had already started. He, therefore, submitted that the Tribunal was right in taking the view that the expenditure incurred was of a revenue nature.
6. At the outset, it may be stated that it is common ground between the parties that deduction in respect of the sum of Rs. 49,009 had not been claimed by way of repairs under the provisions of S. 30 of the I.T. Act, 1961, but it is claimed as a permissible deduction falling under S. 37(1) of the Act. That section provides that any expenditure (not being expenditure of the nature described in Ss. 30 and 36 and S. 80VV and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”. It is not controverted before us by Mr. Joshi that the sum of Rs. 49,009, in respect of which deduction is claimed, was expended wholly or exclusively for the purposes of the business of the assessee. However, his submission is that such expenditure, being in the nature of capital expenditure, deduction in respect thereof cannot be claimed under S. 37(1) of the Act.
7. As contemplated by the agreement of lease, to convert the godown into an “A” class theatre an expenditure of Rs. 40,000 to Rs. 50,000 was anticipated to be incurred by the assessee and he was entitled to reimburse the same in the manner provided by the agreement of lease. It, however, appears on facts and it is not disputed before us that the actual expenditure that had been incurred was much more than Rs. 40,000 to 50,000 and there was a litigation which was ultimately settled. Under the settlement, which ultimately resulted in a deed of lease, a sum of Rs. 80,000 out of this expenditure was to be borne by the lessor, Richpal, and the balance of Rs. 49,009 was to be borne by the assessee. This expenditure came to be borne by the assessee. Though it is claimed as a deduction in the accounting year relevant to the assessment year 1964-65, it was incurred by him in the accounting years 1958-59 and 1959-60 because the debit entries were made to Richpal in those years. Since, under the terms of settlement in the year 1963, it came to be borne by the assessee, a deduction was claimed for the assessment year 1964-65. The broad tests for distinguishing capital expenditure from revenue expenditure are laid down by the Full Bench of the Lahore High Court in the case of Benarsidas Jagannath [1947] 15 ITR 185. Mr. Justice Mahajan, who delivered the judgment for the Full Bench, observed (pp. 198, 199) :
“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……
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…..
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 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.”
Out of the three tests laid down by the Full Bench of the Lahore High Court, we are really concerned with the first two tests laid down therein. Before referring to the cases cited by either side, it will be relevant to quote the observations of Hidayatullah J. in Abdul Kayoom v. CIT as follows (p. 703) :
“…… none of the tests (laid down in various authorities) is either exhaustive or universal. Each case depends 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 the colour of one case against the colour of another.”
These observations of Hidayatullah J. were later on approved by Sikri J. in the case of Gotan Lime Syndicate v. CIT . These guidelines should, therefore, be borne in mind while referring to the cases that have been cited.
8. Reliance was placed by Mr. Joshi upon the decision of Sri Rama Talkies v. CIT [1966] 59 ITR 63 (AP). The facts of the case show that the assessee, who had constructed and was running a cinema theatre on a land taken on lease, appealed against a decree passed against him for eviction from the land, and, as a condition for the stay of execution of the decree pending the appeal, deposited in court, as per the order of the court, a sum of Rs. 6,991 as mesne profits for seven years from the termination of the term of the lease up to the date of the stay order. The assessee claimed deduction of this amount of Rs. 6,991 as rent paid in the assessment year and he also claimed a further allowance of Rs. 15,275 spent on extensive renovations to the theatre. We are not concerned in the present case with the first item of deduction claimed. So far as the second item of deduction was concerned, the Andhra Pradesh High Court held that the amount of Rs. 15,275 was not allowable as expenditure for current repairs or revenue expenditure under S. 10(2)(v) or S. 10(2)(xv) of the Act. The expenditure could not be allowed under S. 10(2)(v) as the amount was not spent in current repairs to the theatre but on improvements of great magnitude carried out for giving an enduring advantage to the assessee to keep pace with or outstrip in the competition with a new theatre which had recently sprung up, and the expenditure did not fall within the scope of S. 10(2)(v) of the Act. It was not allowable under S. 10(2)(xv) as substantial improvements were made to the building and the land appurtenant thereto, with the sole object of getting an enduring benefit for the business and the expenditure must be deemed to be in the nature of a capital expenditure.
9. In the present case, it should not be overlooked that the assessee agreed to take on lease from Richpal was merely a godown together with the lands on both the sides. He has agreed to convert this property into an ‘A’ class cinema theatre for exhibiting films and under the agreement he was to incur an expenditure of Rs. 40,000 to Rs. 50,000 with a right to reimburse the same from rent as provided under the terms of the agreement. However, it is the case of the assessee, which is not disputed before us, that the expenditure incurred was much more than Rs. 50,000 and dispute arose between the assessee and Richpal. The said dispute was amicably settled and Richpal merely agreed to allow reimbursement of Rs. 80,000 and the balance of Rs. 49,009 came to be borne by the assessee. This expenditure has been incurred by the assessee with a view to convert the godown into a cinema theatre and even though the assessee was to be a lessee initially for a period of 10 years with a right to extend the duration of lease for a period of two years more subject to the terms of payment of rent as stipulated between the parties, for the duration of the lease he was to get the advantage and to that extent he was having an enduring advantage during the period of the lease. Unless such expenditure was incurred by the assessee, it was not possible for him to commence the business of exhibiting films. This part of the expenditure, therefore, came to be borne by the assessee for converting a godown into a cinema theatre and is, therefore, an expenditure of a capital nature as thereby the assessee is bringing into existence an advantage of enduring benefit. Such expenditure, in our opinion, is of a capital nature and cannot be permitted to be allowed by way of deduction under S. 37(1) of the I.T. Act, 1961.
10. It was, however, urged by Mr. Dewani that the lease had already commenced prior to the year 1963, when the assessee agreed to bear this expenditure on his own and his submission was that it was with a view to continue his business and to preserve his rights therein that he agreed to bear this expenditure and such expenditure was not incurred by him with a view to acquire a new and enduring benefit. Reliance was placed by him upon a decision of the Orissa High Court in the case of CIT v. J. N. Bhowmick [1978] 111 ITR 747 (Orissa). The assessee in that case took on lease some hotel premises for business purposes. Under the covenant of lease the assessee obliged himself to errect within 18 months masonry structures on the two sides of the vacant plot in front of the existing building as per the plan approved by the lessor at considerable cost. This masonry structure undertaken to be built by the assessee was to vest in the lessor on the expiry of the term of the lease (i.e., 12 years 11 month) and it was further expressly stipulated that failure to raise the construction within the time indicated would entail forfeiture of the lease. During the year, the assessee claimed deduction of a sum of Rs. 38,397 to have been spent on the aforesaid head and the same was pressed to be accepted as revenue expenditure. The ITO treated the expenditure to be of capital nature and rejected the claim for deduction. In appeal, the AAC was of the view that the fact that the expenditure was required to be incurred by the assessee under the covenant of lease did not alter the true nature of the expenditure. On analysis, he came to the conclusion that part of the payment could be taken as rent paid in advance and accordingly came to hold that the expenditure was of capital nature. He declined to accept the claim of depreciation in view of the fact that the asset was not owned by the assessee. The Tribunal in further appeal held that since the lease had to enure for twelve years, the assessee was entitled to have depreciation admissible in a sum calculated at 1/11th of the expenditure reckoned with the year of construction as deferred revenue expenditure. In a reference to the Orissa High Court, it was held that though the Tribunal was not justified in allowing depreciation at 1/11th of the expenditure reckoned with the year of construction as deferred revenue expenditure, the expenditure was of revenue nature. According to the Orissa High Court, if the expenditure in question has not been made with a view to satisfying the terms of clause of the covenant of lease, the lease itself would have stood forfeited thereby depriving the assessee of the source of income. In order to keep up the business, the expenditure became necessary. It is true, in a way the benefit obtained by the assessee by the new construction was an enduring asset to last as long as the lease subsisted. But that cannot be the sole guideline for all types of cases. When an overall picture of the matter is taken, on the facts in the case, it would be appropriate to hold that the expenditure was incurred for keeping up the business and, therefore, was a revenue expenditure. The deduction, however, is admissible only in the year in question and there can be no spread-over of it.
11. Strong reliance is placed by Mr. Dewani upon this decision of the Orissa High Court and he submitted that as in the present case the assessee took possession and started exhibiting the films, with a view to continue or preserve his business, he agreed to bear this part of the expenditure incurred for the conversion of a godown into an ‘A’ class cinema theatre. He submitted that even though to a certain extent the benefit of an enduring nature was limited to the duration of the lease, since it was agreed to be born by the assessee with a view to continue or preserve his business, it should be allowed as revenue expenditure as was done by the Orissa High Court. It is not possible for us to accept this contention. The very terms of the agreement was such that the assessee had to be put into possession pursuant to the terms thereof. Under the terms of the agreement, Richpal was to hand over the godown and open plots on both the sides to the assessee for being converted into an ‘A’ class cinema theatre. The cost of conversion was to be incurred to the extent of Rs. 40,000 to Rs. 50,000 and the assessee was to reimburse himself in respect of this cost from the rent. However, a much larger expenditure came to be incurred and disputes arose between the assessee and Richpal as regards reimbursement and the same were settled. Richpal agreed instead of bearing the expenditure of Rs. 50,000 to bear an expenditure of Rs. 80,000 and the rest of the expenditure of Rs. 49,009 had to be borne by the assessee himself. Such expenditure is not incurred or borne by him with a view to continue his business or to preserve the same. In fact, it was the generosity on the part of Richpal to agree to bear an expenditure of Rs. 80,000 because under the terms of the agreement of lease the reimbursement was to be allowed to the assessee only to a maximum amount of Rs. 50,000. The sum of Rs. 49,009 which ultimately came to be borne by the assessee under the terms of the agreement entered into in the year 1963, was expended by the assessee with a view to convert the godown into an ‘A’ class cinema theatre. Any expenditure of that nature is of a capital nature because but for such an expenditure the business of exhibiting films in a cinema theatre cannot be carried on by the assessee. As the expenditure incurred was for converting a godown into a cinema theatre, it cannot be treated as a revenue expenditure simply because the agreement between the parties, in view of the disputes, ultimately came to be arrived at in the year 1963. The very nature of the expenditure itself is such that during the period of the lease it brings into existence an enduring benefit or advantage to the assessee and, therefore, such expenditure is rightly classified by the taxing authorities as a capital expenditure. The Tribunal, in our opinion, was in error when it took the view that such expenditure was incurred after the acquisition of the lease and receiving possession of the property and that it was not incurred with a view to acquire a right of the lessee. Actually, possession had to be given in view of the terms of the agreement to lease because a godown had to be converted into a cinema theatre. But for this agreement Richpal would not have even executed the deed of lease which he did later on in the year 1963. Thus, the conclusion that has been arrived at by the Tribunal is unjustified having regard to the facts and circumstances of the case and the Tribunal was in error in taking the view that the amount which came to be borne by the assessee was in the nature of a revenue expenditure.
12. Accordingly, our answer to the question referred is in the negative and the assessee is not entitled to a deduction of the sum of Rs. 49,009 under S. 37(1) of the I.T. Act, 1961, as his expenditure is of a capital nature.
13. The assessee shall pay the costs of the revenue.
