Capital expenditure for plant relocation and refitting creates an enduring advantage; depreciation only if a tangible asset is acquired or improved.

Expenditure incurred in dismantling, shifting and refitting plant to a better site constitutes capital expenditure where it is made once and for all to secure an enduring advantage for the trade; such costs are attributable to capital and not to revenue. As a corollary, depreciation is allowable only when a tangible capital asset has been acquired or materially improved so that it can be said to have depreciated; relocation and refitting costs that create an enduring advantage without producing a depreciable tangible asset do not attract depreciation under the facts considered.

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Issues: (i) Whether the expenditure of Rs. 3,19,766 incurred in dismantling and shifting the factory and refitting machinery was capital expenditure and not revenue expenditure within the meaning of section 10(2)(xv) of the Income-tax Act, 1961; (ii) Whether the assessee was entitled to claim depreciation on the said expenditure under section 10(2)(vi) of the Income-tax Act, 1961.

Issue (i): Whether the expenditure of Rs. 3,19,766 incurred in dismantling and shifting the factory and refitting machinery was capital expenditure and not revenue expenditure within the meaning of section 10(2)(xv) of the Income-tax Act, 1961.

Analysis: The Court applied the established test that expenditure made once and for all to bring into existence an asset or an advantage for the enduring benefit of the trade is properly attributable to capital. Authorities including Atherton v. British Insulated and Helsby Cables Ltd., Granite Supply Association Ltd. v. Kitton and Bean v. Doncaster Amalgamated Collieries Ltd. were applied to show that expenses incurred in transferring and refitting plant to a better site produce an enduring advantage analogous to a capital asset even if no separate material asset or chose in action is acquired. The Court rejected the contention that only acquisition of a material asset or legal right can render an expense capital, holding that expenses which effect a permanent improvement in the profit-making machinery or secure an enduring advantage for the trade are capital in nature.

Conclusion: The expenditure of Rs. 3,19,766 was held to be capital expenditure and not revenue expenditure; the High Court's answer to Question (i) is affirmed, adverse to the assessee.

Issue (ii): Whether the assessee was entitled to claim depreciation on the said expenditure under section 10(2)(vi) of the Income-tax Act, 1961.

Analysis: The Court examined the entitlement to depreciation and the relevant form and rules. It held that depreciation is allowable only where there is a tangible improvement or addition to capital assets which can be said to have depreciated. The expense in the present case, though capital in nature as securing an enduring advantage, did not result in acquisition of a tangible asset whose value had increased and which could be depreciated. The question whether depreciation would be allowable on specific improvements to capital assets was not referred and thus was not decided.

Conclusion: The assessee was not entitled to claim depreciation on the expenditure of Rs. 3,19,766; the High Court's answer to Question (ii) is affirmed, adverse to the assessee.

Final Conclusion: The appeal is dismissed; the expenses are capital in nature and no depreciation is allowable on the claimed amount under the facts referred.

Ratio Decidendi: Expenditure made once and for all to secure an enduring advantage for the trade, including costs of transferring and refitting plant to a better site, is capital expenditure and not revenue expenditure, and depreciation is allowable only where a tangible capital asset has been acquired or improved such that it can be said to have depreciated.

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