I. T. A. NO. 867/KB OF 1976-77, DECIDED ON 7TH JANUARY, 1979. Versus I. T. A. NO. 867/KB OF 1976-77, DECIDED ON 7TH JANUARY, 1979.

ORDER

1. M. T. SIDDIQUE, PRESIDENT.‑‑ The Appellant, a 'registered firm', agitates against the learned Appellate Assistant Commissioner, Range, decision dated 23‑8‑1975 on Appeal No. 269/75 relating to assessment year 1974‑75. The Assessee is engaged in exhibition of films. The following issues came up for adjudication.

2. Repairs and Maintenance Expenses.‑The Assessee had obtained T. M. Cinema on lease from its owner Mr. F. at a consolidated rent of Rs. 2,500 per month. The lease was to run for a period of 15 years from 1‑9‑1972. On 17‑1‑1973 the picture house got fire resulting in damage and destruction to building, furniture and machinery. It remained closed for repairs from 18‑1‑1973 to 27‑1‑1973. A sum of Rs. 2,06,294 was claimed to have been spent of repairs etc. When the Cinema was re‑started it was given on sub lease to a concern known as Messrs A. Enterprises. The Assessing Officer instituted enquiries to verify this claim and inter alia issued a show‑cause notice to the assessee for explaining them as to why the expenditure should not be treated as of capital nature. The Assessee placed reliance on cases reported as (1967) 17 Taxation 109 ; (1964) 9 Taxation 32 (Trib.) ; (1956) I T R 338 ; (1933)1 T R 227 (P C) and (1955) 28 I T R 14 to take out a case that cost of Repairs could be held to be of capital nature even if it is undertaken to remedy effects of wear and tear or neglect etc. The assessing officer had recorded a statement of the sub‑lessee and in the background of Assesses own admission in their letter dated 3‑10‑1974 that the entire building was burnt with the result that the cinema house, its furniture, equipment and electric fitting had to be replaced, came to the conclusion that the entire expenditure to remedy the effects of damage caused by fire was of capital nature. He, therefore, disallowed the same. On appeal the learned Appellate Assistant Commissioner confirmed this view and upheld the disallowance. It was argued before us that under clause (ii) of subsection (2) of section 10 in those cases wherein the Assessee is a tenant of premises and has under taken to bear the cost of such repairs, the amount paid thereon is to be allowed as deduction against profit. Our attention was drawn to the clause 'II' of the lease Agreement which spelled out that the Lessee shall instal talkie machine, all furniture outside the auditorium, double projectors and all other fittings i. e. screen, drop‑screen, curtains, fans in cabin room, gal:: curtains rectifier, transformer batteries, generators and all fittings connecter' therewith including repairs of the building at their cost. It was thud pleaded that the expenditure incurred by the Assessee was covered by this clause and, hence should have been allowed as a straight deduction. The Depart mental Representative on his turn supported the orders of the two officer?, below that replacement was not the responsibility of the Lessee and hence. replacement and new erections could not be treated as items of revenue expenditure.

3. After hearing arguments of both the Representatives and going through the record we find that it is not denied that the cinema house was destroyed by fire and that it was not the property of the present Assessee. The Assessee had, however, to incure the expenditure so as to bring it into a fit place to run the business of exhibition of films. The rent paid by the Assessee was Rs. 30,000 a year and he managed to lease it out to a sub-lessee for a rent of Rs. 59,900 during the previous year. It, therefore, cannot be disputed that the expenditure was incurred to restore the earning capacity of a premises which the Assessee had obtained on lease and which unfortunately was to a large extent destroyed by fire. The factum of expenditure has not been doubted or altered by the Assessing Officer. The crux of the matter therefore, is as to what is the nature of this expenditure (incurred for the earning of income) in the hands of the Assessee. It is out of question that a capital expenditure be allowed as straight deduction but at the same time it is to be borne in mind that the Assessee was not the owner of the premises and thus he could not get the benefit of Deprecation. Having gone through the bifurcation of the expenditure, as furnished to the learned Appellate Assistant Commissioner, we find that the expenditure was incurred on furniture and fixture (Rs. 72,800 ; on building repairs replacement of parts of cinema projection, white wash colour wash etc. (Rs. 11,14,954), and electric fittings (Rs. 21,900). It is evident from the clause II of the Lease Agreement dated 1‑9‑1972 that furniture, projectors etc. were to be the property of the Assessee. Therefore, the two officers below should have segregated the expenditure on each item so as to allow Depreciation to the Assessee on those which were their property. Moreover, certain items of expenditure appear to be such as could easily be characterised as current repairs, in which case this would undoubtedly be expenses of revenue nature. The third, and last, category would be, deferred revenue expenditure', which is to he written off over a number of years because these do not bring into existence a revenue yielding asset to the Assessee. We, therefore, resolve the matter with the direction that the amount of Rs. 2,06,294 should be split up between three distinct heads e. g. Items of capital nature ; items of current repairs an items of deferred revenue expenditure. While Depreciation should be allowed in the first category, the second should be treated as straight deduction an the third should be spread equally, for purpose of write off, over the unexpired period of tenancy. The order of the learned Appellate Assistant Commis sioner is in consequence VACATED and the assessment SET ASIDE quo ad hoc for the assessing to do the needful in the light of our directions.

4. Depreciation on Machinery.‑--The Assessing Officer disallowed a sum of Rs. 8,934 for the reason that depreciation was not allowed in earlier years. The learned Appellate Assistant Commissioner upheld the treatment. The discussion before us revealed that the Assessee had acquired some machinery on hire‑purchase agreement. The Assessing Officer in the earlier years held that the asset was not owned by the Assessee, and therefore, he was not entitled to Depreciation under section 10(2) (vi) of the Act. Same treatment was ordered in the year under appeal. The learned Authorised Representative for the Assessee drew our attention to the finding of the learned Judge of the Supreme Court of Pakistan in Shewram D as Agarwala's case (PLD1961 SC321) wherein it was held that if the property in the goods continued to vest to the owner there could be no question of the hire‑purchaser having a right to any part of the sale proceeds. It was insisted by the Authorised Representative that in the present case the property in the machinery had passed on to the purchaser hence they become entitled to Depreciation also. Having considered the facts and circumstances of the case, we are of the view that in hire‑purchase agreement the purchaser becomes the owner of the goods and the amount of deferred instalments has the character of outstanding liability (or Debt). Therefore the claim for Depreciation cannot be refused. In this view of the matter we order the Assessing Officer to allow legally admissible Depreciation. The appeal succeeds in consequence. Necessary relief shall be allowed. The Assessing Officer is authorised to make amendment in the assessment of individuals.

5. Appeal allowed.