Expenses of a capital nature incurred before the commencement of the business and legal expenses incurred for the purpose of completing the title of the assessee are not allowable as expenses under s. 10(2) of the Indian IT Act.

1. This is a reference under s. 66(1) of the Indian IT Act. The reference seeks the answer of this Court to the following question: "Whether, on the facts and in the circumstances of the case, the sum of Rs. 24,498-12-6 incurred for repairs and renovation of the cinema hall and the sum of Rs. 9,890 incurred for legal expense could be allowed as expenses under any of the provisions of s. 10(2) of the Indian IT Act ?"

2. The assessee is the lessee of a cinema house belonging to one Jagannath Prosad Roy. Jagannath gave a lease on the 18th Feb., 1946, of the house along with machinery, furniture and other fixtures to one Mahendra Narayan Roy for a period of five years with an option to renew the lease for another five years. The interest of Mahendra Narayan Roy in the said property was sold on the 12th May, 1950, in auction sale on account of income-tax demands to the partners of the assessee-firm along with two other gentlemen, M/s Agarwalla and Advani. The sale was held under the Public Demands Recovery Act. A sale certificate was granted on the 21st June, 1951. Thereafter, on the 26th July, 1951, and the 30th Sept., 1951, the assessee purchased the interests of M/s Agarwalla and Advani.

The assessee's accounting year for the asst. yr. 1953-54 commences from the 28th Oct., 1951. The facts found are that the expense for the acquisition of the lease upto that date was for Rs. 68,673. In the year of account it was claimed that there was an additional expense of Rs. 34,388 on account of the leasehold buildings and rights and the total expense under the head was, in all, for Rs. 1,03,062. What the assessee did was to write off one-fifth of this amount on the ground that the lease was for five years and the amount written off was one-fifth of Rs. 1,03,062, i.e., Rs. 20,612.

3. IN the statement of the case it is clearly laid down as a fact that the assessee's claim in all the years under appeal was that the amount of Rs. 20,612 should be allowed as an expense written off against acquisition of the lease. The assessee's contention was that so far as the amount of Rs. 34,388 spent in the first year of account was concerned, the entire amount should be allowed as an expense on the ground that the expense was incurred, firstly, for the renovation and repairs and, secondly, for the legal expense for completing its title for the acquisition of the lease. This fact is found and stated in the statement of facts in this reference. It must be emphasised that the claim was, firstly, in respect of renovation and repairs and, secondly, for legal expenses for completing the assessee's title for the acquisition of the lease. The reason for emphasising these two facts will be apparent when we proceed to discuss and decide the question referred to us.

4. The only other fact that should be set out here is that the cinema hall was closed for about seven months and the assessee had to renovate the building and furniture in order to properly start the business. In the statement of case the argument was that the business was carried on from the first day of the accounting year and the expense incurred for such renovation was also made during the time when the exhibition of the pictures was made. The assessee claimed that the sum of Rs. 34,388 should be allowed as repairs under s. 10(2)(v) or as an expense under s. 10(2) (xv) of the IT Act. The said expense included Rs. 9,890 incurred after the commencement of the business for legal expenses in connection with the proceedings for setting aside the certificate sale and Rs. 24,498-12-6 and Rs. 9,890 are the subject-matter of the question referred to us.

The assessee lost before the ITO, the AAC and also before the Tribunal. But the claim of the assessee at these different stages changed from time to time. It will be necessary, therefore, to refer to the orders of these three authorities. The ITO finds as a fact that from the 1st July, 1951 to the 27th Oct., 1951, there was no business as the cinema hall