Business expenditure: Capital or revenue: A.Y. 2003-04: Assessee tenant in premises contributed to reconstruction cost of premises with understanding that it will continue as tenant at the same rent: Expenditure is revenue expenditure.

The assessee was a tenant of 5000 sq.ft. in a building which was declared as unsafe. The assessee contributed Rs.1.5 crore for reconstruction of the building with the understanding that it will continue as a tenant at Rs.11,300 per month. In the A.Y. 2003-04, the assessee claimed the deduction of the said expenditure of Rs.1.5 crore. The Assessing Officer disallowed the claim holding that it is capital expenditure. The CIT(A) and the Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:

“(i) The assessee had not incurred any expenditure of capital nature. The expenditure did not result in the acquisition of a capital asset by the assessee. The assessee continued as before to be a tenant in respect of the premises.

(ii) By contributing an amount of Rs.1.5 crore towards the construction or, as the case may be, renovation of the existing structure, the assessee obtained a commercial advantage of securing tenancy of an equivalent area of premises at the same rent as before. Since there was no acquisition of a capital asset and the occupation of the assessee continued in the character of a tenancy, the expenditure could not be regarded as being of a capital nature.

(iii) The cost of repair/reconstruction of the tenanted premises was of a revenue nature and was allowable as and by way of deduction.”