Capital expenditure on leased premises is not deductible as rent or revenue outlay when it creates enduring business advantage.

Expenditure voluntarily incurred by a lessee to construct additional rooms on leased hotel premises was held to be capital in nature because it created an enduring business advantage during the lease period, with the structures ultimately vesting in the lessor on termination. The source or mode of payment was immaterial; the controlling test was the purpose and advantage obtained from the outlay. As the payment was neither contractual rent nor premium, it was not deductible as rent under section 10(2)(i) or as revenue expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922.

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Issues: Whether the sum spent by the assessee for constructing additional rooms on leased hotel premises was deductible as rent under section 10(2)(i) of the Indian Income-tax Act, 1922, or as revenue expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Analysis: The expenditure was incurred voluntarily under the lease to make extensions and additional accommodation for the hotel business. It was not a contractual payment due to the lessor as rent, nor did it bear the character of premium. The object and effect of the outlay were to bring into existence an advantage of enduring benefit for the business, namely additional rooms available during the lease period, with the structures becoming part of the premises and vesting in the lessor on termination. Applying the settled distinction between capital and revenue expenditure, the source or mode of payment was immaterial; what mattered was the purpose and advantage obtained.

Conclusion: The expenditure was capital in nature and was not deductible either as rent under section 10(2)(i) or as revenue expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922.

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