2010 (6) TMI 503 - AT - Income Tax

Renovation costs for cinema theatre deemed revenue expenditure by Tribunal, citing business necessity.

The Tribunal concluded that the expenditure incurred for renovating the leased cinema theatre should be treated as revenue expenditure. It held that the ... Depreciation - Capital or revenue expenditure - Expenditure incurred on leased premises - the expenditure incurred by the assessee is only for carrying on the business of exhibiting feature films - it is not in dispute that the expenditure was incurred for earth filling, repair of chairs, replacement of damaged chairs, repair of underground slump, drainage and cable work, wall paper fixing, dust opening repair, carpentry and plumbing, repair of false ceiling, etc - The Apex Court after referring to earlier decision in the case of Assam Bengal Cement Co. Ltd. vs. CIT (1954 -TMI - 49686 - SUPREME Court) found that the expenditure incurred by the assessee was in the process of profit earning - Accordingly expenditure are treated as a revenue expenditure - Decided in the favour of the assessee Issues Involved:1. Classification of expenditure incurred on renovation of leased cinema theatre as capital or revenue expenditure.2. Applicability of Section 32 Explanation 1 of the Income Tax Act, 1961.3. Entitlement to depreciation under Section 32 of the Income Tax Act, 1961.4. Legislative history and interpretation of Section 30(a)(i) and Section 30(a)(ii) of the Income Tax Act, 1961.5. Judicial precedents and their applicability to the present case.Detailed Analysis:1. Classification of Expenditure:The primary issue is whether the expenditure incurred by the assessee for renovating a leased cinema theatre should be treated as capital expenditure or revenue expenditure. The Revenue argued that the expenditure led to an enduring benefit and thus should be classified as capital expenditure. The assessee contended that the expenditure was necessary for carrying on its business effectively and did not result in any new asset or advantage of enduring nature.2. Applicability of Section 32 Explanation 1:The Revenue relied on Section 32 Explanation 1, which allows depreciation on capital expenditure incurred on leased premises. The assessing officer granted depreciation at 10% but disallowed the claim as revenue expenditure. The Tribunal examined the legislative intent behind the introduction of Explanation 1 to Section 32, which was to grant depreciation on capital expenditure incurred by tenants for renovation, extension, or improvement of leased premises.3. Entitlement to Depreciation:The Tribunal noted that before the introduction of Section 32(1A) in 1971, tenants were not entitled to any depreciation on capital expenditure. The provision was later replaced by Explanation 1 to Section 32 in 1988. The Tribunal emphasized that these provisions apply only to capital expenditure and do not affect the treatment of revenue expenditure.4. Legislative History and Interpretation of Section 30(a)(i) and Section 30(a)(ii):The Tribunal referred to Section 30(a)(i) of the Income Tax Act, which allows deductions for repairs to premises taken on lease. It clarified that expenditure on repairs, if not of a capital nature, should be allowed as revenue expenditure under Section 30(a)(i). The Tribunal also referred to CBDT circulars and the legislative history to support this interpretation.5. Judicial Precedents:The Tribunal cited several judicial precedents to support its decision. It referred to the Supreme Court's judgment in CIT vs. Madras Auto Service (P) Ltd., which held that expenditure on construction of a building on leased premises is revenue expenditure. The Tribunal also cited the Delhi High Court's decision in CIT vs. Hi Line Pens (P) Ltd., which distinguished between 'repairs' and 'current repairs' and allowed deductions under Section 30(a)(i). Other relevant cases included CIT vs. Rex Talkies, CIT vs. Kalyanji Mavji & Co., and CIT vs. Laxmi Talkies, all of which supported the treatment of similar expenditures as revenue in nature.Conclusion:The Tribunal concluded that the expenditure incurred by the assessee for renovating the leased cinema theatre should be treated as revenue expenditure. It held that the expenditure was necessary for carrying on the business effectively and did not result in any new asset or enduring benefit. The Tribunal dismissed the Revenue's appeals and confirmed the CIT(A)'s order allowing the expenditure as revenue expenditure. The Tribunal's decision was based on a thorough analysis of legislative provisions, judicial precedents, and the specific facts of the case.