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of <h1>Replacement of damaged moulds treated as revenue expenditure, deductible as business outlay, not capital investment for machinery upkeep</h1> HC held that expenditure incurred by the assessee on replacement of damaged moulds, runners and end rings used in its manufacturing process constitutes ... Nature of expenditure incurred on replacement of damaged moulds - expenditure incurred on replacement of runners and end rings - revenue expenditure Or capital - HELD THAT:- The assessee requires moulds to complete its manufacturing process in its factory ; these undergo damage frequently to such an extent that they have to be replaced so that the assessee could carry on its business effectively. Since moulds by themselves, taken as independent units, are capable of being installed as capital machineries, the Revenue contends that the expenditure incurred by the assessee in this regard is capital in nature. While establishing a factory, the initial investment of all kinds of machineries and parts will be in the nature of capital expenditure. However, replacement of parts of machineries in the course of working them will be a revenue expenditure ; similarly, effecting repairs to machineries is part of revenue expenditure. Further, the fact that the benefit accruing by the expenditure being of an enduring nature by itself is not a conclusive test to hold it as a capital expenditure. The replacement of moulds is in the nature of maintenance of the machineries installed in the factory ; it may loosely be termed as rebuilding of the machineries as a whole, used in the productive process of the assessee. It is unnecessary to discuss the several citations explaining the nature of capital and revenue expenditure. The difficult of answering such question has been emphasised by the Supreme Court in several decisions and it is now clear that there is no rigid formula applicable to all fact situations. Issues involved:The judgment addresses the questions of whether the expenditure incurred on replacement of damaged moulds and runners/end rings should be treated as revenue expenditure or capital expenditure under the Income-tax Act, 1961.Issue 1 - Replacement of damaged moulds:The court deliberated on whether the expenditure of Rs. 33,427 and Rs. 39,668 for the assessment years 1980-81 and 1981-82, respectively, on replacement of damaged moulds should be considered revenue or capital expenditure. The Revenue argued that since moulds can be installed as capital machineries, the expenditure is capital in nature. However, the court emphasized that replacement of parts of machineries during operations constitutes revenue expenditure. Citing the case of Empire Jute Co. Ltd. v. CIT, the court highlighted that expenditure integral to the profit-earning process and not for acquiring a permanent asset is revenue expenditure. The Appellate Tribunal's findings supported that the replacement of moulds was maintenance rather than creation of new assets, thus qualifying as revenue expenditure.Issue 2 - Replacement of runners and end rings:The court examined whether the expenditure of Rs. 32,533 for the assessment year 1981-82 on replacement of runners and end rings should be treated as revenue expenditure. The court reiterated that expenditure related to maintenance and repair of machinery is typically revenue expenditure. The Appellate Tribunal's observation that no new enduring asset was created through this expenditure, and that it was necessary for the ongoing operations of the business, further supported the classification of this expense as revenue in nature.The judgment underscores the distinction between capital and revenue expenditure based on the business context and necessity. It emphasizes that the enduring benefit test is not conclusive and must be applied considering the specific circumstances of each case. Ultimately, the court concurred with the Appellate Tribunal's findings, ruling in favor of treating the replacement expenditures as revenue expenditure rather than capital, thereby deciding against the Revenue's contentions.
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