COMMISSIONER OF INCOME TAX Vs. MEHTA TRANSPORT COMPANY

JUDGEMENT

(1.) THE assessee is a registered partnership firm and the assessment year under consideration is 1972 73. The assessee firm has a business of road transport for carriage of goods having its head office at Ahmedabad and branch office at Bombay and Surat. The assessee, in the course of the assessment, claimed expenses of Rs. 16,748 spent for construction of loft admeasuring about 300 to 350 sq. feet in their office premises taken on lease at shops Nos. 4, 5, 6 and 7 in Amir Building, in the City of Bombay. The said premises consisted of ground floor admeasuring about 450 sq. feet. It was claimed by the assessee that the loft was required to be put up in order to accommodate 30 members of the administrative staff. The ITO was of the opinion that these expenses were in the nature of capital expenditure and, therefore, could not be properly charged to revenue account. The assessee also claimed a sum of Rs. 3,307 as expenses incurred for supplying tea to the customers. The ITO disallowed this claim also. The assessee, therefore, carried the matter in appeal before the AAC, who confirmed the order of the ITO in respect of the disallowance of Rs. 16,748. The AAC, however, in respect of the entertainment expenses, restricted the disallowance to Rs. 2,000 only. The assessee, therefore, carried the matter in further appeal to the Tribunal. Before the Tribunal, it was urged on behalf of the assessee that after obtaining the office premises in Amir Building, the same were required to be renovated and put on proper shape for which the assessee was required to incur the expenses of Rs. 16,748. On the other hand, the Revenue contended that since a new asset in the nature of addition of a loft, or, in any case, an advantage of enduring benefit came into existence, the impugned expenses are capital in nature and, therefore, the AAC was justified in affirming the order the ITO disallowing the said claim. The Tribunal found, as a matter of fact, that the loft was not in the nature of renovation and was altogether a new construction. The Tribunal, however, observed that if the expenses incurred by the assessee were with a view to make the leased premises more suitable for the business purposes, they could not be treated as capital expenses since on surrender of the lease, the assessee could not have taken the benefit with him and would have to leave the premises together with the improvements made therein. The Tribunal, therefore, ruled that the expenses incurred could not be disallowed as capital expenditure. The Tribunal also deleted the addition of Rs. 2,000 on the ground that it did not involve any wasteful expenditure. The CIT, therefore, prayed for the reference of the following two questions to this Court which was granted by the Tribunal :

(2.) SO far as the second question is concerned, since we are concerned with the asst. year 1972 73, the position is concluded by the decision of this Court in CIT vs. Patel Brothers & Co. (1977) 106 ITR 424 (Guj). We have, therefore, to answer the question in the affirmative, that is, in favour of the assessee and against the Revenue.

(3.) WHAT is the money wholly and exclusively laid out for the purposes of business is a question which must be determined upon the principles of ordinary commercial trading. In the ultimate analysis, the moot question is as to whether it is the expenditure laid out as a part of the process of profit earning (see Tata Hydro Electric Agencies Ltd. vs. CIT (1957) 5 ITR 202 (PC)). If the expenses are entailed for initiation of business, or for extension of business, or for substantial replacement of equipment, they would be capital in nature. However, in the case of a running business, where they are not entailed for extension of business, or for substantial replacement of equipment, they may be treated as properly attributable to capital when they are made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade/business. If they are not entailed for extension of business or for advantage of the enduring benefit to the business, but made for the purposes of running the business or working it with a view to produce profits, they would be chargeable to revenue account. The aim and object of the expenditure would determine the character of the expenses. It is only in those cases where these tests also fail that the Court may consider as to whether the expenditure incurred was a part of the fixed capital of the business, or part of its circulating business (see Assam Bengal Cement Co. Ltd. vs. CIT (1955) 27 ITR 34 (SC)). The words used for qualifying the advantage "as being of permanent or enduring nature" are not to be understood in the sense that the advantage which would be obtained would last for ever. In certain circumstances, this test of bringing into existence an advantage of enduring nature may not serve the purpose. There may be cases where expenses, even if resulting in the advantage of an enduring benefit, may be properly chargeable to Revenue account if the advantage consists merely in facilitating the assessee's trading operations, or enabling him to manage and conduct his business more efficiently or more profitably while leaving the fixed capital untouched (see Empire Jute Co. Ltd. vs. CIT (1980) 17 CTR (SC) 113 : (1980) 124 ITR 1 (SC)). If the outgoing or expenditure is so related to the carrying on or conduct of the business that it may be regarded as an integral part of the profit earning process, and not for acquisition of an asset, or a right of a permanent character, the possession of which is a condition of carrying on of the business, the expenditure may by regarded as revenue expenditure (see Bombay Steam Navigation Co. (1953)P. Ltd. vs. CIT (1965) 56 ITR 52 (SC)). One of the relevant questions which the Court has to ask is that: is the disbursement made for acquisition of a source of profit or income, or is it for facilitating the trading operation, or carrying it on in a more efficient manner ? (see Empire Jute Co. Ltd.'s case (supra): In view of the above settled legal position, we are of the opinion that the Tribunal was justified in treating these expenses as a proper charge on the Revenue account for the reasons stated hereinafter, over and above those which weighed with the Tribunal. On behalf of the Revenue, the learned standing counsel attempted to persuade us that the Tribunal committed an error of law in treating this amount as a proper charge on the Revenue account since it overlooked two important facts which have been clearly established before the IT authorities. In the first place, a permanent new loft admeasuring about 300 to 350 sq. feet was brought into existence. It was neither repair nor renovation but altogether a new asset, or, in any case, an advantage or facility which would endure as long as the lease subsisted. Secondly, the original premises admeasured only about 450 sq. feet. The learned counsel invited our attention to the fact, as found by the Tribunal, that this was a new construction though the assessee was claiming before the ITO, and has produced some evidence in the nature of particulars before him that there was an old loft measuring about 10' X 6' which was reinforced and enlarged so as to provide additional floor space. In the submission of the learned counsel for the Revenue, the view of the Tribunal that since these expenses have been entailed in leased premises, they are qualified to be treated as revenue expenses, is an over simplification of the problem. The expenses entailed on improvement in the leased premises may, in certain circumstances, amount to those of a capital nature. We do see some force in this contention urged on behalf of the Revenue. However, in our opinion, having regard to the aim and purpose of the expense, we are not inclined to agree with the learned counsel for the Revenue that these expenses should be treated as of capital nature since a loft of a substantial floor space has been constructed and, therefore, an advantage of an enduring nature has come into being. In our opinion, this test of an advantage of enduring nature coming into existence would not be sufficient for answering the present question for the simple reason that the advantage which has been brought into existence may be so integrated with the apparatus of profit making and not as a source of acquiring more profit or income that it can be treated as of capital nature. After everything said and done, what was the assessee seeking to achieve by construction of a loft. Was he seeking to obtain some additional source of profit or income, or was he trying to improve the efficiency by streamlining the working conditions in the office premises ? In our opinion, the assessee was, by construction of a loft, trying to put the available office space to its optimum use. It is possible to say that the assessee could have, by the arrangement in the original premises, made the seating arrangement of the employees in a cramped way. It cannot be gainsaid that the assessee might have viewed that putting of loft as better arrangement resulting in efficient working of the members of the staff and in his opinion and we think rightly for accommodating such a large staff of 30 persons, he has tried to put the available space to its optimum use which would result in greater efficiency by improvement of the working conditions. One of the positive tests indicated by the Division Bench of this Court in CIT vs. Navsari Cotton and Silk Mills Ltd. (1982) 135 ITR 546 (Guj), for determining the true character of a given item of expenditure is to find out whether the same has been entailed for increasing efficiency or for removing the inefficiency in the working. We have no doubt, in our mind, that the aim and purpose of this item of expenses entailed in the construction of a loft is to attain greater efficiency and avoid inefficiency that may result by making the administrative staff work in a cramped space. By no stretch of imagination and without violence to the language, can it be urged that the assessee, by constructing the loft, was seeking to bring into existence an asset of a permanent nature because on the surrender of the lease, the option of the lessor of the premises in which the same improvements are made is either to pay compensation and take over the improvement or to permit the lessee to take away and remove the improvement. We do not think, having regard to the nature of the tenure of the lessee in the premises and the internal structural changes made therein, and particularly the sole aim and purpose of such changes, that it can be successfully claimed, what is sought to be claimed by the Revenue, that the expenses are of capital nature. A number of decisions of different High Courts has been cited by both sides before us where the Courts have taken the view that if the improvements are made in leased premises, the expenses entailed for effecting the improvements would be properly chargeable to Revenue account. We need not cite these decisions in extenso. In the ultimate analysis, it is always a question of fact and a degree, and it does not serve any useful purpose to compare the different cases (see Abdul Kayoom vs. CIT (1962) 44 ITR 689 (SC))). One of the decisions which may be profitably referred in this connection is of the Karnataka High Court in CIT vs. Rex Talkies (1984) 42 CTR (Ker) 97 : (1984) 148 ITR 560 (Ker), where the assessee, which was a tenant of a cinema theatre and carrying on business of exhibition of films therein, claimed deduction of the expenditure incurred on repair to the ceiling, flooring and plaster of paris for ceiling and walls and polishing of furniture, fittings, etc., of the theatre. The ITO disallowed the claim on the ground that it was of a capital nature, which was affirmed in appeal. However, the Tribunal allowed the appeal of the assessee on the ground that the expenditure was in the nature of current repairs. In that context, the Karnataka High Court found that the test of obtaining advantage of enduring benefit would not clinch the issue, and the aim and purpose of the expenses must be examined, and if the advantage obtained by entailing the expenditure consisted in facilitating the assessee's trading operations, or enabling him to manage and conduct his business more efficiently or more profitably, the expenses should be considered as a proper charge on Revenue account.