Replacement of machinery as revenue expenditure depends on commercial reality, not book treatment, where no independent asset is acquired.

Replacement expenditure on machinery was held to be revenue in nature where the replaced equipment formed part of a composite industrial unit and no new independent asset was acquired. The court applied the real nature of the asset and the commercial character of the replacement as the decisive test, and treated the assessee's accounting treatment in the books as irrelevant. Since the machinery was only an integral part of the ongoing manufacturing apparatus, the outlay was allowable as revenue expenditure and the Revenue's challenge failed.

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Issues: Whether the expenditure incurred on replacement of machinery was allowable as revenue expenditure or was capital in nature.

Analysis: The claim had to be decided under the Income-tax law and not by the manner in which the assessee treated the item in its books of account or balance sheet. The replacement of machinery formed part of the ongoing manufacturing apparatus, and the machinery replaced was not to be treated as an independent complete unit. On the settled view that the plant and machinery of the mill constituted a composite whole, replacement of individual machines did not result in acquisition of a new independent asset or a marketable intermediate product.

Conclusion: The expenditure on replacement of machinery was revenue expenditure and was allowable to the assessee.

Final Conclusion: The substantial questions of law were answered in favour of the assessee, and the Revenue's appeal failed.

Ratio Decidendi: In determining whether replacement expenditure is capital or revenue, the decisive test is the real nature of the asset and the commercial character of the replacement, and not the accounting treatment in the books; where the replaced machinery is part of a composite industrial unit and no separate independent asset is acquired, the expenditure is revenue in nature.

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