Cultural Enterprises Corporation v. Commissioner Of Income-Tax.

Ajit K. Sengupta, J.:— In this reference under section 256(1) of the Income-tax Act, 1961, for the assessment year 1977-78, the following question of law has been referred to this court:

“Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the expenditure of Rs. 35,000 on repair of the house property at 7A, Tiljala Road, Calcutta, was a capital expenditure not deductible in computing the income from the said property?”

2. Shortly stated, the facts are that the assessee-firm claimed deduction of Rs. 59,888 as expenditure for repairs of the house property at Tiljala Road, and 39, Dr. Sundari Mohan Avenue, Calcutta, for the assessment year 1977-78. The Income-tax Officer disallowed the claim of the assessee on the ground that the amount was spent by the assessee for renovation of the buildings referred to above. The assessee appealed to the Commissioner of Income-tax (Appeals).

3. The Commissioner of Income-tax (Appeals) after going through the details of the expenses found that in fact a sum of Rs. 35,000 only was incurred for bringing the dilapidated building at Tiljala Road, Calcutta, into use and the rest on repair to the house at Dr. Sundari Mohan Avenue, Calcutta. The assessee contended before the Commissioner of Income-tax (Appeals) that even though the aforesaid amount was a considerable amount, yet it did not represent capital expenditure in the case of the assessee because the assessee was merely a lessee. It was also submitted that without bringing the building to a habitable condition, it was not possible to earn income of Rs. 84,791. It was, therefore, submitted that such essential expenditure was in the nature of revenue expenditure and, therefore, the Income-tax Officer should have allowed the same as an admissible deduction. The Commissioner of Income-tax (Appeals) held that by spending this amount the assessee had not brought any new asset and, therefore, it could not be said to be a capital expenditure.

4. Against the said order of the Commissioner of Income-tax (Appeals), the Department preferred an appeal before the Tribunal. It was contended that the Income-tax Officer had found as a fact that the amount was spent by the assessee for renovation or extensive repairs of a house and could not be said to be revenue expenditure. Learned counsel for the assessee, on the other hand, contended that the amount in question represented repairing charges which consisted of Rs. 14,952 for renovating and repairing of old building walls and floors, Rs. 15,000 being cost of re-casting and grouting of the upper roof and Rs. 5,050 being sanitary fittings and electrification cost. According to him, this was in the nature of current repairs and so an admissible deduction.

5. Both the Revenue and the assessee relied on several decisions in support of their respective contentions.

6. The Tribunal held that it was not in dispute that the amount of Rs. 55,000 was spent by the assessee for renovation of the building and replacement of sanitary fittings, etc. The Tribunal observed that it is well settled that the sum expended for renovation of building cannot be regarded as revenue expenditure. The Tribunal further observed that it is true that the expenditure on current repairs is allowable as revenue expenditure but it is necessary to understand what the expression “current repairs” means. The Tribunal followed the decision of the Calcutta High Court in the case of Humayun Properties Ltd., [1962] 44 ITR 73, wherein it has been held that current repairs connote only such repairs which have a periodicity. The periodicity may be a month, 6 months or a still longer period of intervals. The idea of recurrency is embedded in “current repairs”. Again, current repairs means not luxury repairs or repairs which wait upon the whims or choice of the assessee. The Tribunal held that the expenditure incurred in connection with renovation and replacement could not be said to be revenue expenditure.

7. The Tribunal, therefore, set aside the order of the Commissioner of Income-tax (Appeals) and restored that of the Income-tax Officer.

8. The assessee filed a miscellaneous application which was partly allowed.

9. However, the said miscellaneous petition does not bear on the issue before us; the miscellaneous petition is on points unrelated to the question referred to us for determination.

10. We find that it is not in dispute that the amount of Rs. 35,000 was spent by the assessee for the renovation of the building and replacement of sanitary fittings, etc., and it was on that basis that the Tribunal came to the ultimate conclusion that the expenditure could not be allowed as repairs. There is some contradiction in the findings of the Tribunal in relation to facts. At the first stage, the Tribunal has held that Rs. 35,000 was spent towards renovation of the buildings and replacement of the sanitary fittings, etc. This finding is immediately followed by the Tribunal's view that it is only current repairs which are allowable as revenue expenditure. It appears that, by renovation, the Tribunal has meant repairs other than current repairs which take place with periodicity. But it is now well accepted that even where a sum of money is spent for repairs in a particular year because of the fact that regular repairs are allowed to fall into arrears and repairs on an extensive scale have to be undertaken to remedy the effect of several years' negligence, the expenses for such arrear repairs are allowable. It may possibly happen that large-scale repairs had to be carried out to restore the property to a habitable or usable state. Such cost of arrear repairs would also be on the revenue account. The repairs may not be allowable as current repairs but still the cost of such repairs would be an admissible revenue expenditure under the residual section, viz., section 37 of the Act. Such view has been taken in a number of cases: Regal Theatre v. CIT, [1966] 59 ITR 449 (Punj), Girdhari Dass and Sons v. CTT, [1976] 105 ITR 339 (All) and Liberty Cinema v. Commissioner Of Income-Tax, Calcutta., [1964] 52 ITR 153 (Cal). The Tribunal has overlooked the fact recorded by the Income-tax Officer in the assessment order. The Income-tax Officer observed “the assessee took lease of premises No. 7A, Tiljala Road, Calcutta, last year and the income from the property is being assessed under the head ‘Other sources’. During this year, the assessee spent a substantial amount of Rs. 59,880 towards complete renovation of the property. On examination it is found that when the assessee took lease of this property last year, it was an old dilapidated one”. Thus it is an accepted fact that the property on which the amount was spent was dilapidated. Therefore, a dilapidated house would necessarily require extensive repairs. This dilapidated condition is also emphasised by the Commissioner of Income-tax (Appeals). The Tribunal, however, came to the conclusion that the amount was spent for renovation or extensive repairs of a house. A renovation merely by way of extensive repairs of a dilapidated house would certainly imply that the property had not been kept in good repairs which were allowed to fall into arrears. If the renovation was incidental to the extensive repairs required by the dilapidated condition of the property, such renovation could not be said to be capital expenditure in so far as it did not result in the creation of any new asset. It is only a case of the existing asset being brought to a habitable state, otherwise uninhabitable. The Tribunal's finding is further marked by an ambivalence in that the Tribunal found as a fact that the expenditure was for renovation or extensive repairs of the house. The nature of the renovation is thus admitted by the Tribunal to be of the nature of extensive repairs not bringing into existence any new asset. Where the renovation is also describable as extensive repairs, the cost of such repairs need to be allowed as general revenue expenditure, even if not as current repairs. The Tribunal on the basis of the facts found could not come to the conclusion that here the renovation was of a nature as could not partake of the nature of revenue.

11. The Tribunal relied in this connection on a decision of this court in Humayun Properties Ltd. v. Commissioner Of Income-Tax, Calcutta., [1962] 44 ITR 73. In that case, the cinema house of the assessee was renovated but the renovation was for the purpose of making the hall more attractive and comfortable and to draw more cinema-goers than before. It is not the case that the assessee in this case while spending the sum of Rs. 35,000 substantially improved upon the pre-existing structure apart from effecting the arrear repairs. There is also another contradiction in the Income-tax Officer's order as also in the order of the Tribunal. The Tribunal, in its order, has admitted that the sum of Rs. 35,000 includes the cost of replacement of sanitary fittings, etc. When the house as such is on all hands admitted to be in a dilapidated condition, the replacement of sanitary fittings would, in the very nature of things, be a necessary step. The Tribunal or the Income-tax Officer had not brought out any fact to show that the existing sanitary fittings were quite usable and that the replacement was a luxury replacement which could be dispensed with. As a matter of fact, it is not also the case of the Revenue that substitute sanitary fittings in place of the worn-out ones were more advantageous than the pre-existing ones. Thus, there are many gaps on the factual plane and the Tribunal apparently hastened to the view that the amount of Rs. 35,000 was not expenditure on repairs simpliciter. No materials have been brought on record to show that the expenses had more effect than restoring the property to its habitable state. Rather, the words “extensive repairs” as used by the Tribunal indicates that there was no substantial improvement to the preexisting property so as to add to its value that pertains to the capital field as happened in the case of Humayun Properties Ltd., [1962] 44 ITR 73 (Cal). On the facts and in the circumstances as were present before the Tribunal or which have been brought on record, it cannot be concluded that the expenditure incurred is capital in nature. In the premises, we are of the view that the expenditure in question is allowable in computing the assessee's income.

12. For the reasons aforesaid, we answer the question in this reference in the negative and in favour of the assessee. There will be no order as to costs.

Bhagabati Prasad Banerjee, J.:— I agree.