(vi) Cost of cement, bajri & other expenses 20,393 Total 49,097 The Income-tax Officer rejected the assessee's contention that the above amount was an expenditure of a revenue nature. He treated the same as capital expenditure.

The assessee preferred an appeal to the Appellate Assistant Commissioner. The said Commissioner held that out of this amount an expense to the extent of Rs. 4,555 had been incurred for current repairs and was, therefore, admissible as deduction. The break-up of this amount is as follows :

(i) Cost of oils and paints, etc., for painting the cinema building specially ball 3,955

(ii) Cost of cloth and sewing charges of screen 600 Total Rs. 4,555 Thus, only a sum of Rs. 44,542 was held to be expenditure of capital nature.

3. The assessee was dissatisfied with the order of the Appellate Assistant Commissioner. A further appeal was preferred to the Income-tax Appellate Tribunal. The Tribunal, after going through the various items of expense, found some others as permissible deduction. The Tribunal increased the deduction from Rs. 4,555 to Rs. 6,555. Thus, only the balance of Rs. 42,542 was held as expenditure of a capital nature.

4. The assessee was not satisfied with the order of the Tribunal. An application was made under Section 256(1) of the Income-tax Act, 1961, to refer the following question of law for our opinion :

"Whether, on the facts and in the circumstances of the case, the whole or any portion of the total expenditure of Rs. 49,097 was an expenditure in the nature of repairs and replacement ?"

5. There is no dearth of decided cases wherein the controversy whether certain expenditure is capital or revenue fell for determination. Some of these decisions have tried to lay down certain principles which are merely aids to the determination of such controversy. Yet, it must be recognised that those tests are not the conclusive tests. It is difficult to formulate a test which will always suffice to discriminate between expenditure which is not capital and expenditure which is capital. As a working rule, what has to be seen is whether the expense incurred brings into existence as asset, not necessarily a tangible asset, for the enduring benefit of trade. But "enduring" cannot be termed as "everlasting". It is also risky to decide one case on the analogy of another. The correct rule is to examine closely the facts of a given case and then keeping in view the thin dividing line between capital and revenue. A solution has to be found whether the expense claimed is capital or revenue. The decided cases are only useful for they help one to clear one's mind. It may be that sometimes they also tend to confuse the issue. However, we may refer to a few decisions which, in our opinion, are relevant to solve the present tangle.

Lord Macmillan in Rhodesia Railways Ltd. v. Income-tax Collector, [1933] 1 I.T.R. 227, 233, 234 (P.C.), Bechuanaland Protectorate, approved the following passage in Highland Railway Co. v. Balderston, (2) [1889] 2 T.C. 485;

"'It must be kept in view that this is not a mere relaying of line after the old fashion. It is not taking away rails that are worn out or partially worn out and renewing them in whole or in part along the whole line. That would not alter the character of the line ; it would not affect the nature of the heritable property possessed by the company. But what has been done is to substitute one kind of rail for another--steel rails for iron rails. Now, that is a material alteration, and a very great improvement in the corpus of the heritable estate belonging to the company, and so stated, surely is a charge against capital. All that is done, it will be observed from the details given with reference to this matter, is to charge the price of the rails and chairs, that is to say, the weight in addition to what was the original weight of the rails and chairs. That is the whole charge, and that is a charge made entirely for the improvement of the property--the permanent improvement of the property. Now, how that can be anything but a charge against capital, I am unable to see.'"

6. In the case with which Lord Macmillan was dealing, a part of the railway track was replaced by similar types of rails because the old rails had been worn out and the question arose whether the expense so incurred was of a capital nature or of a revenue nature. In that context the noble Lord observed as follows :

"The contrast between the cost of relaying the lines so as to restore it to its original condition and the cost of relaying the line so as to improve it is well brought out in the passage just quoted, and while the former is recognised as a legitimate charge against income the extra cost incurred in the latter case in the improvement of the line is equally recognised as a proper charge against capital. In the present instance the renewals effected constituted no improvement ; they merely made good the line so as to restore it to its original state."

7. In Assam Bengal Cemewt Co. Ltd. v. Commissioner of Income-tax, [1955] 27 I.T.R. 34, 45; [1955] 1 S.C.R. 972 (S.C.), Bhagwati J. approved the principles laid down in a Full Bench decision of the Lahore High Court in In re Benarsidas Jagannath, (2) [1947] 15 I.T.R. 185 (Lah.) [F.B.].

and summarised the law as under :

"In cases where the expenditure is made for the initial outlay or for extension of a business or a substantial replacement of the equipment, there is no doubt that it is capital expenditure. A capital asset of the business is either acquired or extended or substantially replaced and that outlay, whatever be its source, whether it is drawn from the capital or the income of the concern, is certainly in the nature of capital expenditure. The question however arises for consideration where expenditure is incurred while the business is going on and is not incurred either for extension of the business or for the substantial replacement of its equipment. Such expenditure can be looked at either from the point of view of what is acquired or from the point of view of what is the source from which the expenditure is incurred. If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business, it is properly attributable to capital and is of the nature of capital expenditure. If, on the other hand, it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce tne profits, it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence, it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence. It is only in those cases where tins test is of no avail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital."

8. Reference may also be made to the observations in Henriksen (Inspector of Taxes) v. Grafion Hotel Ltd., [1943] 11 I.T.R. (Suppl.) 10, 18 (C.A.).

wherein du Parcq, Lord Justice, referred to the following test laid down by Lord President Clyde :

"'Are the sums in question part of the trader's working expenses, are they expenditure laid out as part of the process of profit-earning : or, on the other hand, are they capital outlays, are they expenditure necessary for the acquisition of property or rights of a permanent character the possession of which is a condition of carrying on the trade at all ?"

and observed :

"It is true that the period for which the right was acquired in this case was three years and no more, and a doubt may be raised whether such a right is of 'endurirg benefit' or 'of permanent character'. These phrases, in my opinion, were introduced only for the purpose of making it clear that the 'asset' or 'right' acquired must have enough durability to justify its being treated as a capital asset. This is borne out, so far as Lord Clyde's judgments are concerned, by the fact that in Adam's case, [ 1928] 14 T.C. 34 the duration of the right acquired was eight years, and that his Lordship there spoke of its 'relatively permanent character'. 'Permanent' is indeed a relative term, and is not synonymous with 'everlasting'. In my opinion the right to trade for three years as a licensed victualler must he regarded as attaining to the dignity of a capital asset, whereas the payment made for an excise licence is no doubt properly regarded as part of the working expenses for the year."

9. In the present case, it must be examined as to what is the assessee's case with regard to the expenditure in question. Before the Appellate Assistant Commissioner, the assessee's case was that "the assessee had replaced its old wooden chairs with new iron cushioned chairs and the sum of Rs, 16,849 was spent towards the cost of these chairs. The assessee had, during the previous year, constructed one verandah, one office, side room and three bath rooms in terms of the arrangement arrived at between the lessor and the lessee. Before the Appellate Tribunal, it seems that there was no dispute as to the amount spent on the verandah, side room and bath rooms, but the dispute seams to have centred round the new chairs. We say so because there is no discussion in the order of the Tribunal about the aforesaid items excepting the chairs. With regard to the chairs, the Appellate Tribunal observed ;

"In the instant case, the old and worn out chairs were taken out from the cinema hall and brand new chairs were put in."

and thereafter held as follows :

"Repirs and replacements are only those which restore the asset to its original condition or near about that. If the entire asset is replaced by new one, it cannot be a case of replacement or repair."

10. The only relief that the Tribunal gave to the assessee was in the enhancement of permissible deduction, that is, from Rs. 4,555 to Rs. 6,555.

11. We may further observe that in basing its decision on In re L.H. Sugar Factories and Oil Mills Ltd., [1952] 21 I.T.R. 325 (All.) the Tribunal went off the mark. We have already observed that cases like the present cannot be decided on the analogy of other decided cases. However, in spite of this, the Tribunal came to a correct decision. It cannot be denied that the amount spent for the construction of the verandah, office room, side room and bath rooms brought into existence an asset of an enduring nature. It is no one's case that only the existing verandah, office, side room or bath rooms were repaired. What appears is that these constructions were brought into being for the purpose of modernising the cinema hall. Therefore, the amount spent for the construction of the same can in no sense be treated as revenue expenditure. The asset that was brought into being was an asset of an enduring nature in the true sense of the word.

12. However, the main controversy centered round the replacement of chairs. In this connection one has to keep in mind that a businessman for the purposes of his business incurs two types of outlays, i.e., capital and revenue. Whatever he spends for the purpose of forming a basis of his profit-earning machinery would, in our opinion, partake of the nature of capital expenditure. In the case of a lessee, it may not be everlasting. But that is not the test. Capital expense with regard to a short-term venture, such as a lease for a period, has to be viewed in the context of that lease, namely, its purpose coupled with its duration. The object of the assessee in replacing the old wooden chairs by steel chairs was to attract larger and better custom. This was in fact an outlay for the purpose of earning profits or, in other words for the purpose of better business. It was not an expense which was of a recurring nature, and therefore, it can be safely said that the lessee brought into being an asset of an enduring nature. Undoubtedly, it was an improvement. The wooden chairs were replaced. No evidence has been led that the wooden chairs had become useless and could not be used for seating the cinema-goers. On the other hand, the stand taken is that the whole object was to modernise the cinema house to bring it in line with the modern show-business. Therefore, whatever was done, so far as certain permanent fixtures were concerned, was done with that object in view. The replacement was an improvement of an enduring nature and not mere replacement.

13. Mr. Bhagirath Dass strongly relied on Regal Theatre v. Commissioner of Income-tax, [1966] 59 I.T.R. 449 (Punj.). This case is distinguishable from the facts of the present case as would appear from the observations that I made in that judgment at pages 455-56 :

"We are also constrained to observe that the observation of the Tribunal that the wooden panels were put by the assessee to avoid reconstruction of the walls is also unjustified. The assessee could not reconstruct the walls in view of the terms of the lease. The reconstruction of a part of the building was within the powers of the landlord, as was also the case in the matter of repairs. The assessee had to carry on his business--the business being show business--and in order to attract customers, the cinema house had to be kept in certain presentable condition, particularly in keeping with its locality and the clientele. It was essential to keep the building in a tip-top condition. To achieve this object, which is certainly a business object vis-a-vis the assessee, he had to incur the expense in connection with the wooden panels and this expense, in the very nature of things, cannot be said to be an expense of a capital nature, particularly when the assessee's lease was for a short duration and the life of the panels was not such as could be treated as an asset of an enduring nature, for at the end of the lease, the assessee could remove the same, and, on the admitted facts, the wooden panels on removal will not be of much value. It was not disputed before us that if the assessee had white-washed the building, it would be a 'revenue expenditure' and so also, if he had re-plastered the walls and applied plastic emulsion to the walls. How does the nature of the expense change when to achieve the same object and also for the same purpose, the wooden panels are fixed. We can see no distinction in putting the wooden panels in a different category than painting the wall with a cheap material or an expensive one."

14. This was the nearest case on which the learned counsel placed his reliance for his contention that the expense in question is revenue and not capital expenditure. Mr. Bhagirath Dass then relied upon Commissioner of Income-tax v. S.B. Ranjit Singh, [1955] 28 I.T.R. 14 (Punj.), Commissioner of Income-tax v. Sheikhupura Transport Co. Ltd., [1961] 41 I.T.R. 336 (Punj.), Hanuman Motor Service v. Commissioner, of Income-tax, [1967] 66 I.T.R. 88 (Mya.), Commissioner of Income-tax- v, Coimbatore Motor Transport Co-operative Society for Ex~servicemen, [1968] 70 I.T.R. 165 (Mad.) and Greaves Cotton & Crompton Parkinson Ltd. v. Commissioner of Income-tax, [1968] 70 I.T.R. 181 (Bom.). It is not necessary to individually deal with these cases for they have all proceeded on their own peculiar facts.

15. Aftergiving our careful consideration to this vexed question, we have come to the conclusion that the expenditure incurred by the assessee to the tune of Rs. 42,542 is an expenditure of a capital nature and it brought into being an advantage of an enduring nature and, thus, it has been rightly treated as such by the Tribunal.

16. Before parting with this judgment, we may mention that at one stage there was a controversy before us whether the assessee was entitled (o a deduction only under Section 10(2)(ii), 10(2)(v) and not under Section 10(2)(xv), However, the learned counsel for the department made it clear that the case before the department all through was on these heads and not only on the first, two heads. We have not been unmindful of the provisions of Section 10(2)(xv). We have kept the same in view and have come to the con elusion that the expenditure in question is of a capital nature. We may also mention that for the reasons best known to the assessee, the lease-deed way not produced right up to the stage of the Tribunal. It has also not been made a part of the statement of this case. At the stage of arguments before us, an attempt was made to persuade us to bring it on the record but in view of the clear pronouncement of the Supreme Court in Keshav Mills Co. Ltd. v. Commissioner of Income-tax, [1965] 56 I.T.R. 365, [1965] 2 S.C.R. 908 (S.C.) and Commissioner of Income-tax v. Indian Molasses Co. (P.) Ltd., [1970] 78 I.T.R. 474 (S.C.) we are unable to do so. No additional evidence can be let in at the stage of reference. Therefore, we have declined the contention of the assessee's counsel that we should ask the Tribunal to scud a supplementary statement of the case after taking on record the lease-deed.

17. For the reasons recorded above, we answer the question, referred to us, in the negative, that is, in favour of the department and against the assessee, except to the extent of the amount found by the Tribunal being on account of repairs. There will be no order as to costs.