COMMISSIONER OF INCOME TAX Vs. VASANT SCREENS

JUDGEMENT

(1.) MESSRS . Vasant Screens, the assessee, entered into an agreement to take on lease a godown belonging to Richpal Rungta. That agreement was entered into on March 29, 1958. Under the terms of the agreement of lease, Richpal was to hand over possession of premises consisting of parts of Rungta godown and open plots on both the sides of the godown for converting it into a cinema theatre. The agreement of lease provided that the rent from the opening of the cinema theatre for the first period of five years was to be Rs. 1,250 per month and then for the subsequent period of five years was to be Rs. 1,383 -5 -4 per month. The rent was to be paid at the end of each month before the 10th day of the following month. Clause 3 of this agreement, inter alia, provided that Richpal agreed to allow the assessee to spend a sum of Rs. 40,000 to Rs. 50,000 for effecting necessary alterations for converting it into an 'A' class theatre and equipping it with all necessary equipments including electric fittings, fans, water tank and furniture as per the rules under the Cinematograph Act for making the said building fit and useful for cinema show. Under this agreement all materials as well as all alterations effected to the premises except the machinery were to be regarded as a part of the premises and were to belong to Richpal after the expiry of the period of lease. The assessee was not to pay the monthly rent, till half of the amount spent on the alterations made in the building to make it fit for exhibiting cinema shows, to Richpal was adjusted and Richpal was to pass a receipt against the amount of expenditure to the assessee. The remaining amount was to be adjusted for payment in the monthly rent proportionately. The agreement of lease further provided that after the expiry of the period of the lease the assessee would be entitled to extend the lease for a further period of two years and the rent of the leased premises was to be enhanced to 25% of the monthly rent payable during the second five years. There was an express provision that the lease deed embodying the terms and conditions was to be duly executed and get registered by the parties. Pursuant to this agreement of lease, the assessee was put in possession of the property and had carried out alterations thereto and commenced the business of exhibition of motion pictures long before the year under consideration. According to the bookings of account of the assessee in which the relevant expenditure is debited to the account of Richpal, such expenditure amounted to. Rs. 1,16,528 by July 31, 1960, and Rs. 1,18,468 by July 31, 1961. As the expenditure that was incurred was more than that anticipated, the assessee desired to claim a set -off in respect thereof and there were disputes between the assessee and Richpal. The disputes were ultimately and finally amicably settled out of court and on February 19, 1963, an instrument entitled deed of lease was executed which provided that the assessee was entitled to hold the leasehold premises till March 31, 1970. This document provided that the assessee as lessee had spent Rs. 80,000 for making alterations and reconstruction in the original godown building and the assessee was entitled to deduct the same from the rents payable to Richpal each month a provided in this deed Rs. 60,000 were already adjusted from rent which fell due up to December 31, 1962, while the balance of Rs. 20,000 was to be deducted by the assessee at the rate of Rs. 299.89 per month from the monthly rent payable from the month of January, 1963, onwards. The deed further provided that the assessee was entitled on expiry of the lease to continue in possession as lessee for a further period of two years on his paying a monthly rent of 25% more in addition to Rs. 1,500 per month. Under this deed, all existing materials as well as all the alterations effected to the leasehold premises and structures as well as the existing furniture, fan, electric fittings, etc., except machinery in the projection room and auditorium, were to become part of the premises to be handed over to Richpal, the lessor, on determination of the lease and possession thereof was to be delivered to him on the expiry of the lease.

(2.) IN the account maintained in the name of Richpal the assessee had debited to this account sums totaling Rs. 1,18,468 relating to expenditure on alterations, etc. Further, a sum of Rs. 5,000 was deposited with the lessor and thereafter another sum of Rs. 5,541, which was referable to the rent from January 1, 1959, to May 12, 1959, was not adjusted. The total of all these sums came to Rs. 1,29,009 out of which under the terms of the deed of lease a set -off was permitted only in respect of the sum of Rs. 80,000. The balance of Rs. 49,009 was adjusted to the profit and loss account of the assessee in the year ended July 31, 1963, and for the assessment year 1964 -65, he claimed a deduction of this amount on the ground that it was revenue expenditure incurred wholly and exclusively for the purposes of business.

(3.) IN an appeal before the AAC, the genuineness of the quantum of expenditure was not questioned; but he disallowed the deduction of expenditure holding that it was not of a revenue nature as it brought into existence a capital asset, since the benefit from the expenditure would enure to the assessee during the period of lease of 11 years.