Machinery part replacements are ordinarily revenue repairs, unless they substantially improve the asset or extend its life.

Replacement of worn-out machinery parts with new parts is ordinarily treated as repairs, so the expenditure is revenue in nature and may qualify as allowable working expenses. The character of the outlay depends on the facts: if repeated replacements substantially change the identity of the machine, amount to a substantial improvement, or materially extend its useful life, the expenditure may instead be capital in nature. The issue is one of fact and degree, to be determined from the circumstances of each case.

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Issues: Whether the cost of replacing old and worn out parts of machinery with new parts is capital expenditure or revenue expenditure, and whether such expenditure is allowable as working expenses under section 10(2)(ix).

Analysis: Substitution of new parts for worn out parts in machinery is ordinarily in the nature of repairs and therefore revenue expenditure. The character of the expenditure depends on the circumstances, and if successive replacements substantially change the identity of the machine, amount to a substantial improvement, or materially extend its serviceable life, the expenditure may become capital in nature. Even so, the question remains one of fact and degree, to be decided on the circumstances of each case.

Conclusion: The replacement expenditure is ordinarily revenue expenditure and may be treated as allowable working expenses under section 10(2)(ix), in favour of the assessee.

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