Capital expenditure on fitting out leased premises is not deductible where it forms part of adapting property for trade.

Expenditure incurred by a tenant on alterations, repairs and fitting out of leased premises to make them suitable for trade was treated as capital expenditure rather than deductible revenue expenditure. The true character of the outlay depended on its substance and purpose on general income-tax principles, not on section 137 of the Income Tax Act 1952. Because the works formed part of acquiring and adapting the premises for business use, and were given in substitution for rent concessions over the lease term, the expenditure was held to be capital in nature and not deductible as trading expense. The appeal succeeded for the Revenue.

---

---

Issues: Whether the expenditure incurred by the tenant on works to the leased premises was capital expenditure or revenue expenditure and therefore deductible in computing trading profits.

Analysis: The expenditure was incurred in connection with the acquisition and fitting up of the premises for the tenant's trade, in substitution for rent concessions over the initial years of the lease. The works included alterations and accumulated repairs needed to make the premises suitable for business use. Section 137 of the Income Tax Act, 1952 did not determine the character of the expenditure; the true question was whether, on general income-tax principles, the outlay was capital or revenue. Applying those principles, the expenditure was treated as part of the cost of acquiring and adapting the premises for trade and not as ordinary current repairs.

Conclusion: The expenditure was capital in nature and not deductible as revenue expenditure; the appeal succeeded in favour of the Revenue.

Final Conclusion: The decision establishes that expenditure undertaken by a tenant as part of the acquisition and adaptation of leased premises for business use is to be characterised by its capital nature rather than by the fact that it may replace rent or be spread across the lease term.

Ratio Decidendi: The true character of an outlay for income-tax purposes depends on its substance and purpose, and expenditure incurred to acquire or adapt premises for trading use is capital expenditure even if it is connected with a lease arrangement or rent concession.

---