1985 PLP 611 (PTD)

JUDGMENT' G. RAMANUJAM, J.‑This assessee is a firm of 9 partners carrying on the business of manufacture and sale of brass‑sheets, circles and stainless steel-sheets and circles under the trade name "Kumbum". It has put up a building in Mount Road, Madras, known as T. N. K. House" in which are built four cinema theatres viz. Devi, Devi Paradise, Devi Kala and Devi Bala. Besides the said four theatres, there are other portions let out to certain offices. The assessee originally filed a return for the assessment year 1971‑72 on 8th October, 1972 claiming a business loss of Rs. 5,01,

998. Subsequently, on 11th March, 1974 it filed a revised return claiming a business loss of Rs: 5,14,

190. In so doing it had deducted Rs. 34,008 being 50% of the expenditure incurred in providing carpets and screens in the two theatres, Devi and Devi Paradise, which were inaugurated on 23rd May, 1970 and 5th July, 1970 respectively, as revenue expenditure. It also claimed depreciation at 15% of Rs. 4,27,231 being the cost of the partition works, and false ceiling in the above‑mentioned buildings. The I.‑T. O. disallowed the claim regarding 50% of the ex penditure incurred for providing carpets and screens on the ground that it cannot be considered as revenue expenditure, but allowed the claim for depreciation in respect of the partition works and false ceiling at 7.5 % treating the building as second class building. Thus by his order dated 29th March, 1974 he computed the net loss at Rs. 3,78,655 as against the loss of Rs. 5,14,190 returned by the assessee for the assessment year.

2. Aggrieved by the said assessment, the assessee‑firm preferred an appeal to the A. A. C. reiterating its claim for deduction of Rs. 34,008 as revenue expenditure and the depreciation in respect of the partition works and false ceiling at 15% as against 7.5% allowed by the I.‑T. O. The A. A. C. confirmed the disallowance of Rs. 34,008 being 50 /a of the expenditure incurred for providing carpets and screens for the theatres holding that such an expenditure was capital in nature. He also upheld the view of the I.‑T. O. that the depreciation could be allowed in respect of partition works and false ceiling at the rate of 7.5% and not at 15% as claimed by the assessee. Thereupon the assessee preferred an appeal to the Income‑tax Appellate Tribunal. The Tribunal held that the carpets and screens not being assets of enduring nature, could be used only for a limited period, and the same cannot be treated as capital expenditure, nor could they be considered as forming part of the theatre building and consequently, the expenditure incurred in respect thereof should be taken as revenue expenditure. As regards the assessee's claim for depreciation in respect of the partition works and false ceiling, the Tribunal ‑held that though the partition works and false ceiling may not come under the expression "furniture", yet they would clearly fall within the expression "fittings" in item 2 of Part I of Appx. I of the I.‑T. Rules, 1962, and therefore, the depreciation has to ire allowed therefore at the rate of 15%. Thus, the assessee has succeeded before the Tribunal in respect of both the claims.

3. Aggrieved by the decision of the Tribunal the Revenue sought for and obtained a reference to this Court under section 256(1) of the I.‑T. Act, 1961 hereinafter referred to as the Act, on the following questions : ‑ (i) Whether, on the facts and in the circumstances of the case, Rs. 34,008, being 50% expenditure incurred by the assessee for providing carpets and screens in the two cinema theatres, is to be allowed as revenue expenditure for the assessment year 1971-72? (2) Whether, on the facts and in the circumstances of the case, the assessee is entitled to depreciation at 15 % of Rs. 4,17,422 being the cost of the partition works and false ceiling for the assessment year 1971‑72?"

4. The first question relates to the expenditure incurred by the assessee for providing carpets and screens for the two cinema theatres which were inaugurated in May and July, 1970. According to the Revenue since the carpets and screens were provided for theatres for the first time before the theatre was inaugurated, it should be treated as capital expenditure, and, therefore, it could not be allowed as a revenue expenditure, though such an expenditure in the subsequent years could be treated as revenue expenditure. The contention of the assessee on the other hand is that providing carpets and screens in the theatre could not be said to be a capital expenditure, that even without providing carpets and screens the theatre could be run, and providing the carpets and screens was only for the purpose of decoration so as to attract more crowd and consequently more income, that the said expenditure had been incurred for the purpose of running the business more profitably and, therefore, it should be treated as revenue expenditure and that the fact that it was provided before the inauguration of the theatres could not make them a part of the building, which was a capital asset.

5. On a due consideration of the matter, we are of the view that the contention of the assessee has to be accepted as tenable. Even the Revenue concedes that if such carpets and screens had been provided by way of replacement in the subsequent years, that can be allowed as a deduction, but not the original provision of carpets and screens. We are not in a position to see any difference between the original provision of the carpets and screens and their replacement. As already pointed out, the theatres can be run even without the carpets and screens, but the same have been provided by the assessee by way of decoration with a view to attract more crowd and consequently to earn more income. Therefore, this is a revenue expenditure. It is not part of the theatre, which is an income earning apparatus at any point of time, and, therefore, it cannot have become a part of the capital asset. It cannot be disputed that the expenditure has been incurred wholly and exclusively for the purpose of the business of running the threatres and it is not for the personal expenses of the assessee. Therefore, the assessee's claim for 50 % of the cost of carpets and screen has rightly been allowed by the Tribunal.

6. In C. I. T. v. Century Spinning, Weaving and Mfg. Co. Ltd. (1947) 15 I T R 105 : (A I R 1947 Bom. 445)) the question arose as to whether the expenditure incurred in connec tion with the first reg1stration under the Trade Marks Act, 1940, of the trade marks of the assessee, which has been continuously in use since then was to be treated as revenue or as capital. The Bombay High Court held that though the first reg1stration of their trade marks had taken place before the business of manufacture and sale of textile goods actually commenced, the expenditure was attributable to revenue inas much as it was recurring and did not bring into ex1stence an asset or ad vantage for the enduring benefit of the trade. In Assam Bengal Cement Co. Ltd. v. C. I. T. ((2) (1955) 27 I T R 34:(AIR 1955 S C 89)), the d1stinction between capital expenditure and revenue expenditure has been pointed out by the Supreme Court. The Supreme Court, having pointed out that it was not easy to define the term "capital expenditure" in the abstract or to lay down any general or satisfactory test to discriminate between a capital and a revenue expenditure, observed that it was possible to cull out the following broad principles from the decided cases (1) Outlay is deemed, to be capital when it is made for the initia tion of a business, for extension of a business, or for a substantial replacement of equipment. (2) expenditure may be treated as property attributable to capital when it is made not only once and for all, but with a view to bringing into ex1stence an asset or an advantage for the enduring benefit of a trade. (3) whether for the purpose of the expenditure, any capital was with drawn, or, in , other words, whether the object of incurring the expenditure was to employ what was taken as capital of the business and whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital.

7. If the above principles are applied, the expenditure incurred in this case for providing carpets and screens cannot be treated as capital expenditure as it is not an expenditure incurred once and for all and it is not intended to be for the enduring benefit of the assessee and the expenditure is only of a recurring nature.

8. In Ashoka Hotels Limited v. C. I. T. (1969) 72 I T R 306) a somewhat similar question arose before the Delhi High Court. In that case, the assessee which owned a luxury hotel started functioning in October, 1956. It purchased linen and blankets for use in the rooms of the hotel and the uniforms for its employees for the first time at or before the commencement of the hotel business. During the first accounting year an expenditure of Its 1,79,904 incurred on the initial issue of linen and blankets and Rs. 1,96,931 on the initial issue of uniforms were claimed as permissible deduction under section 10 (2) (xv) of the Income‑tax Act, 1922. The Court held that the expenditure incurred by the assessee on line and blankets and for uniforms for its employees as a part of the initial equipment of the hotel was of a capital nature and as such not a permissible deduction under section 10 (2) (xv) This decision has been strongly relied on by the learned counsel for the Revenue. But, in that case, it has been found that the expenditure was incurred by the assessee on linen and blankets and for uniforms for its employees as a part of the initial equipment of the hotel and that a five‑star modern hotel cannot be said to be fully equipped without linen, blankets and uniforms which form an integral part of the income earning apparatus. But that is not the position here. Here, even without the carpets and screens the theatre can be run and they cannot be said to be an integral part of the apparatus, that is, the theatre. In Empire Jute Co. Ltd. v. CIT(1980) 124 I T R 1 : (1980 T L R 1092). the Supreme Court has laid down that it was not every advantage of enduring nature, acquired by an assessee, that would be treated as capital expenditure, that what was material to consider was the nature of the advantage in a commercial sense and that it was only where the advantage was in the capital filed that the expenditure was disallowable on the ground that it was capital but if the advantage cons1sted merely in facilitating the assessee's trading operations or enabling the manage ment and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. Having regard to the fact that we have already held that the providing of carpets and screens was only to facilitate the assessee in running the theatres more profitably, the expenditure incurred in connection with that should be taken to be only C on revenue account. We have to, therefore, agree with the view taken by the Tribunal on this issue. The first question is, therefore, answered in the affirmative and against the Revenue.

9. Coming to the second question, we have seen that as per item 1 of Part 1 of Appeal of the Income‑tax Rules, 1962, depreciation to be allowed in respect of buildings is7.5% and as per item 2 of Part I of Appx. I of the same Rules in respect of furniture and fittings the depreciation to be allowed is at 15%. The authorities have proceeded on the basis that the partition works and false ceiling were an integral part of the building and, therefore, depreciation should be allowed only at 7 % . The Tribunal has taken the view that the partition works and false ceding cannot be taken to be part of the building but they will fall under the expression "fittings" though not under the expression "furniture". We agree with the Tribunal that the partition works and false ceiling come under the expression` "fitting" coming under item 2 Part I of Appx. I of the Income‑tax Rules, 1962, in which case the rate of allowance can be only 15%, and not 7.5%, which is applicable only to buildings. Therefore, this question also has to be answered in the affirmative and against the Revenue. The assessee will have its costs from the Revenue Counsel's fee Rs.,

500. M. B, A. Question answered in affirmative