Capital expenditure on engine replacement and development rebate on diesel machinery, with initial depreciation barred by statute.

Replacement of petrol engines with diesel engines was treated as capital expenditure because the substitution brought an enduring advantage and formed part of the undertaking's assets, so it was not deductible as revenue expenditure. The diesel engines were also regarded as machinery for development rebate purposes, so rebate was allowable on their cost. However, initial depreciation could not be claimed in addition to development rebate where the statute prohibited both benefits being taken together.

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Issues: (i) Whether the expenditure incurred in replacing petrol engines by diesel engines was capital expenditure not allowable as a deduction under section 10(2)(xv). (ii) Whether, on the cost of the diesel engine, the assessee was entitled to development rebate and whether initial depreciation was also admissible.

Issue (i): Whether the expenditure incurred in replacing petrol engines by diesel engines was capital expenditure not allowable as a deduction under section 10(2)(xv).

Analysis: The replacement was treated as bringing into existence an advantage of enduring benefit and as forming part of the assets of the undertaking. The governing test was whether the outlay created an enduring asset or advantage for the trade, and on the facts the substitution of diesel engines for petrol engines satisfied that test.

Conclusion: The expenditure was capital in nature and was not allowable as revenue expenditure under section 10(2)(xv); the finding was against the assessee.

Issue (ii): Whether, on the cost of the diesel engine, the assessee was entitled to development rebate and whether initial depreciation was also admissible.

Analysis: Diesel engines were treated as machinery, and the installation or introduction of such machinery in replacement of the old engines fell within the relevant rebate provision. Since development rebate was admissible, initial depreciation could not also be granted where the statute barred that duplication.

Conclusion: Development rebate was allowable under section 10(2)(vib), while initial depreciation was not available under section 10(2)(vi); the finding was in favour of the assessee on the rebate issue.

Final Conclusion: The reference was answered against the assessee on the capital nature of the replacement expenditure, but in favour of the assessee on entitlement to development rebate, with initial depreciation excluded by the statutory prohibition.

Ratio Decidendi: Expenditure incurred to replace an existing part of a business asset is capital expenditure if it brings an enduring advantage, and a diesel engine installed in replacement of a petrol engine is machinery for the purposes of development rebate, though initial depreciation cannot be simultaneously claimed where the statute prohibits it.

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