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Judgment
Ramanujam, J.—The 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 theaters viz., Devi, Devi Paradise, Devi Kala and Devi Bala. Besides the said four theaters, there other portions let out to certain
offices. The assessee originally filed a return for the assessment year 1971-72 on October 8, 1972, claiming a business loss of Rs. 5,01,998.
Subsequently, on March 11, 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 theaters, Devi and Devi Paradise, which were inaugurated on May 23,
1970, and July 5, 1970, respectively, as revenue expenditure. It also claimed depreciation at 15% on Rs. 4,27,231, being the cost of the partition
works and false ceiling in the above-mentioned buildings. The ITO disallowed the claim regarding 50% of the expenditure incurred for providing
carpets and screens on the ground that it cannot be considered as a 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 March 29, 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.
Aggrieved by the said assessment, the assessee-firm preferred an appeal to the AAC 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 ITO. The
AAC confirmed the disallowance of Rs. 34,008 being 50% of the expenditure incurred for providing carpets and screens for the theaters holding
that such an expenditure was capital in nature. He also upheld the view of the ITO 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 theater 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 may not come under the expression ""furniture"", yet they would clearly fall within the expression ""fittings"" in item 2
of Pt. I of Appx. I of the I.T. Rules, 1962, and, therefore, the depreciation has to be allowed therefore at the rate of 15%. Thus, the assessee has
succeeded before the Tribunal in respect of both the claims.
Aggrieved by the decision of the Tribunal the Revenue sought for and obtained a reference to this court under s. 256(1) of the I.T. Act, 1961,
hereinafter referred to as the Act, on the following questions :
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 theaters, is to be allowed as revenue expenditure for the assessment year 1971-72 ?
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 ceilings for the assessment year 1971-72 ?
The first question relates to the expenditure incurred by the assessee for providing carpets and screens for the two cinema theaters which were
inaugurated in May and July, 1970. According to the Revenue since the carpets and screens were provided for the theaters for the first time before
the theater 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 not treated as revenue expenditure. The contention of the assessee on the other hand is than
providing carpets and screens in the theater could not be said to be a capital expenditure, that even without providing carpets and screens the
theater 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 theaters could not make them a part of the
building, which was a capital asset.
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 theaters 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 theater, which is an income-earning apparatus at any point of time, and, therefore, it cannot have become
a part of the theater, it cannot have become incurred wholly and exclusively for the purpose of the business of running the theaters and it is not for
the personal expenses of the assessee. Therefore, the assessee''s claim for 50% of the cost of carpets and screens has rightly been allowed by the
Tribunal.
In CIT v. Century Spinning Weaving & Mfg. Co. Ltd. [1974] 15 ITR 105, the question arose as to whether the expenditure incurred in
connection with the first registration 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 registration 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 inasmuch as it
was recurring and did not bring into existence an asset or advantage for the enduring benefit of the trade. In Assam Bengal Cement Co. Ltd. Vs.
The Commissioner of Income Tax, West Bengal, , the distinction 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 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, (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 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.
If the above principles are supplied, 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.
In Ashoka Htoels Ltd., New Delhi Vs. The Commissioner of Income Tax, New Delhi, 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 Rs. 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 s. 10(2)(xv) of the Indian I.T. Act, 1922. The court held that the expenditure incurred by the
assessee on linen and blanket 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 s.10(2) (xv). This decision has been strongly relied on by the learned counsel for the Revenue. But, in that case,
it had 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 theater can be run
and they cannot be said to be an integral part of the apparatus, that is, the theater. In Empire Jute Co. Ltd. Vs. Commissioner of Income Tax, , the
Supreme Court has laid down that it was not every advantage of enduring nature, acquired 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 field that the expenditure was disallowable on the ground that it was capital but if the advantage consisted merely in
facilitating the assessee''s trading operations or enabling the management 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 theaters more profitably, the expenditure incurred in connection with that should be taken to be only 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.
Coming to the second question, it is seen that as per item 1 of Pt. I of Appx. I of the I.T. Rules, 1962, depreciation to be allowed in respect of
buildings is 7 1/2% and as per item 2 of Pt. 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 1/2%. The Tribunal has taken the view that the partition works and false ceiling 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 ""fittings"" coming under item 2 of Pt. I of Appx. I of the I.T. Rules, 1962, in which case
the rate of allowance can be only 15% and not 7 1/2%, 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.