2004 (12) TMI 50 - HC - Income Tax

Renovation expenses on theatre deemed revenue expenditure by Gujarat High Court for AY 1976-77

The High Court of Gujarat ruled in favor of the assessee, allowing the expenditure on renovation of a theatre as revenue expenditure for the assessment ... Expenditure on renovation of the theatre, stamp duty, interest payment, etc. - 'Whether the assessee is entitled to allowance of an amount of Rs. 2,49,508 on account of renovation of the theatre, stamp duty, interest payment, etc., as an admissible deduction as revenue expenditure?' - it is apparent that the assessee had merely incurred the expenditure in rented premises to facilitate its trading operations in a more efficient manner leaving the fixed capital untouched. The result of the expenditure incurred was that it would enable the assessee to generate more revenue by inviting greater flow of customers to the cinema hall without bringing into existence any new asset or an advantage of enduring nature considering the status of the assessee as a lessee. – Thus question isanswered in the affirmative, i.e., in favour of the assessee Issues:1. Allowance of expenditure on renovation of theatre as revenue expenditure.Analysis:The High Court of Gujarat addressed the issue of whether an amount spent on renovation of a theatre, stamp duty, interest payment, etc., by an assessee should be allowed as a deduction under revenue expenditure for the assessment year 1976-77. The Income-tax Appellate Tribunal initially held that the expenditure was capital in nature as it provided an enduring advantage. However, the Commissioner (Appeals) allowed the claim based on precedents like the Empire Jute Co. Ltd. case and the India Cements Ltd. case. The Tribunal further outlined key principles: expenditure for profit earning is revenue in character, renovation expenses can be revenue deductions if they don't create capital assets, and repairs for business upkeep are allowable. The Tribunal concluded that the expenditure in this case did not result in any new asset or enduring benefit, thus qualifying as revenue expenditure.The Revenue contended that since the premises belonged to a lessor, the lessee had no obligation for repairs, and any expenditure resulting in enduring benefit should be disallowed. The Revenue relied on the CIT v. Shri Digvijay Cement Company Ltd. case to support its argument. However, the High Court emphasized that the aim of the expenditure determines its nature, and if it facilitates business operations without creating a capital asset, it qualifies as revenue expenditure. The court referred to the test of enduring benefit, stating that not every enduring advantage leads to capital expenditure.The Tribunal examined the details of the expenditure and found that it was solely for repairs and renovation without creating new assets. The expenditure aimed at improving existing facilities and attracting more customers without generating enduring benefits. The court upheld the Tribunal's decision, emphasizing that the expenditure was for efficient business operations and revenue generation without creating enduring assets. Consequently, the court ruled in favor of the assessee, disposing of the reference without costs.