Expenditure for constructing second floor deemed capital, not deductible in business profits computation.

The High Court determined that the expenditure of Rs. 27,284 for constructing the second floor was of a capital nature, not revenue, as it provided an enduring benefit. Consequently, the expenditure was not allowable as a deduction in the computation of business profits. The court ruled against the assessee, ordering them to pay the costs of the reference.

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Issues Involved:
1. Whether the expenditure incurred by the assessee for constructing the second floor was of a capital nature or revenue nature.
2. Whether the expenditure of Rs. 27,284 or 1/5th of it was allowable as a deduction in the computation of business profits.

Summary:

Issue 1: Nature of Expenditure (Capital vs. Revenue)
The primary issue was whether the expenditure of Rs. 27,284 incurred by the assessee for constructing the second floor on a leased property was of a capital nature or revenue nature. The Tribunal had concluded that the expenditure was revenue in nature, treating it as advance rent. However, the High Court disagreed, emphasizing that the expenditure was for acquiring an enduring benefit, thus making it capital expenditure. The Court referenced the principles laid out in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax [1955] 27 ITR 34 (SC), which state that if the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business, it is capital expenditure. The Court noted that the assessee acquired the right to occupy the additional structure for seven years, which constituted an enduring benefit.

Issue 2: Allowability of Deduction
The Tribunal had allowed 1/5th of the expenditure as a deduction for the relevant accounting year, treating it as revenue expenditure. However, the High Court held that since the expenditure was capital in nature, it could not be allowed as a deduction in the computation of business profits. The Court cited the decision in Taj Mahal Hotel v. Commissioner of Income-tax [1967] 66 ITR 303 (AP), which supported the view that such expenditure, intended to bring an enduring advantage, should be treated as capital expenditure.

Conclusion:
The High Court answered the referred question in the negative and against the assessee, holding that the expenditure incurred was capital expenditure and not allowable as a deduction in the computation of business profits. The assessee was directed to pay the costs of the reference.

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