1979 (2) TMI 69 - HC - Income Tax

Court classifies cinema theatre renovation as capital expenditure, not revenue.

The High Court of Bombay ruled that the expenditure incurred by the assessee on renovating and repairing a cinema theatre should be classified as capital ... Capital Expenditure, Cinema Theatre, Enduring Nature, Expenditure On Repair, Revenue Expenditure Issues:1. Whether the expenditure incurred by the assessee on renovation and repairs of a cinema theatre should be treated as revenue expenditure or capital expenditure.Analysis:The judgment delivered by the High Court of Bombay involved a dispute regarding the nature of expenditure incurred by the assessee on the renovation and repairs of a cinema theatre. The assessee had converted a ginning factory into a cinema theatre and incurred significant expenses on various items such as repairs to walls, repainting, flooring, roofing, doors, windows, and electrical wiring replacement. The Income Tax Officer (ITO) treated the expenditure as capital expenditure, allowing depreciation on it. The Appellate Authority confirmed this decision, stating that the renovation work transformed the old hall into a new cinema theatre. However, the Income-tax Appellate Tribunal disagreed, considering the expenditure as either current repairs or revenue expenditure for business purposes, as it did not result in the creation of a new asset. The Tribunal emphasized that no structural alterations were made, and the work aimed to enhance the efficiency of running the theatre.The primary legal issue revolved around whether the expenditure incurred by the assessee should be classified as revenue or capital expenditure. The revenue contended that the renovation work resulted in an enduring benefit, making it capital expenditure. They cited previous court decisions to support their argument. On the other hand, the assessee argued that the expenditure was solely for repairs and should be treated as revenue expenditure. The court analyzed the nature of the work carried out by the assessee, considering the scale of renovation and the purpose behind the expenses. The court observed that the renovation work involved substantial improvements, including the installation of new machinery, furniture, sanitary fittings, and electrical fittings, transforming the old hall into a well-equipped cinema theatre.The court referred to previous judgments to establish a test for distinguishing between repairs and capital expenditure. It highlighted that if the expenditure aimed at bringing a new asset into existence or obtaining a new advantage, it would be considered capital expenditure. Applying this test to the current case, the court concluded that the extensive renovation work carried out by the assessee aimed at securing an enduring benefit, making it capital expenditure. The court noted that the renovation work went beyond mere repairs and significantly enhanced the theatre's facilities, indicating a capital nature of expenditure. As a result, the court ruled against the assessee, holding that the amount spent on renovation should be treated as capital expenditure, and appropriate adjustments for depreciation were to be made. The court also directed the assessee to bear the costs of the revenue.