R. N. MISHRA, J. :

The Revenue applied to this Court under s. 256 (2) of the IT Act of (hereinafter referred to as the (‘Act’) and by order dt. 17th Sept., 1975, the Tribunal had been called upon to state a case and refer the following question for opinion of the Court :

"Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the expense incurred for purchase of new equipment for oscillating system was Revenue in character "

The Tribunal has accordingly stated the case.

2. Assessee is a private limited company maintaining accounts according to mercantile system. The relevant asset. yr. is 1966-67. Assessee was engaged in the business of exhibiting films and claimed a deduction of Rs. 18,178/- on building account. The ITO found that the amount had been spent to make the exhibition hall taken on rent more suitable for exhibiting films. He was of the view that the assessee was likely to derive benefit of enduring nature and therefore, the expenditure was not Revenue in character but was out and out capital investment. Accordingly he disallowed the deduction.

3. The AAC found that the new equipment for oscillating system was required for curing the defective echo of sound in the exhibition hall. He, however, did not accept the claim and held that the amount spent for acquisition of the equipment for oscillating system was not a deductible expenditure.

4. In second appeal, the Tribunal found that the assessee had introduced the oscillating system for removing the defective echo of sound in the cinema hall. It noticed that there was no finding that this exhibition hall did not have any system to resist vibration of sound. Therefore, the introduction of the oscillating system was more by way of replacement than introduction of a new unit of sophisticated machinery. Accordingly, it came to hold that the claim for deduction was permissible and directed the same to the deducted while computing income.

5. The distinction between capital and Revenue expenditures is well-marked. One of the determining tests is where the expenditure is an investment which would bring enduring return. But it cannot always be said to be a final guide. In the case of Hanuman Motor Service vs. CIT (1967) 66 ITR 88 [LQ/KarHC/1966/112] the question for consideration before the Mysore High Court was whether expenses for substitution of diesel engines in place of worn out petrol engines for stage carriage wehicles would be Revenue expenses or capital expenditure. Hegde, J., (as the learned Judge than was) spoke for the Court holding that it was a Revenue expenditure.

In the case of CIT vs. Coibator Motor Transport Co-operative Society (1968) 70 ITR 165 [LQ/MadHC/1967/444] the question before the Madras High Court was whether expenses incurred for completely renovating the body of a motor vehicle by putting of a new body on an old chassis could be allowed as a business expenditure. The Court found in the facts of the case that it was a permissible deduction.

In the case of CIT vs. Jagat Cinema, Bareilly (1971) 81 ITR 488 [LQ/DelHC/1970/244] a Bench of the Delhi High Court was called upon to decide whether the expenses made by a lessee of an exhibition hall for widening the screen and the stage were Revenue expenditure or capital enxpenditure. Khanna, C. J. (as the learned Judge than was) spoke for the Court upholding the claim of the assessee. The test indicated by the Supreme Court in the case of Assam Bengal Cement Co. Ltd. vs. CIT (1955) 27 ITR 34 [LQ/SC/1954/160] , was used and the following observation in the said decision was quoted with approval :

"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 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."

Applying this test in the said, case, the High Court came to uphold the assessee’s claim.

6. The Tribunal in the instant case has found as a fact that the oscillating system was by way of replacement and not a new machinery. For improving the business is was very much necessary that the cinema hall should be free from resounding. The old equipment was not appropriate for the purpose. Therefore, for the running of the business, the modification became necessary. The investment, as found by the Tribunal, was not with the intention of acquiring a new asset but with the avowed purpose of removing a defect by replacing a better instrument for the one that was already in use. In this view of the matter, our answer to the question referred is :

On the facts and the circumstances of the case, the Tribunal was right in holding that the expenses incurred for purchase of new equipment for oscillating system was Revenue in character.

Parties shall bear their own costs.

das, j. :

I agree.