Capital versus revenue classification: site-specific, temporary tunnel works equipment treated as revenue expenditure, not enduring plant.

The article addresses classification of expenditure on rollers, scrap rails, conveyor belts and ventilation ducting used in tunnel subcontract works executed with a TBM, applying the commercial-benefit test to determine capital versus revenue treatment. It reasons these items were procured and used pro tempore on third-party sites, were site-specific, frequently renewed or damaged, and did not confer an enduring advantage or form part of permanent plant and machinery. Consequently the expenditure is characterised as revenue (temporary/site-specific/consumable) rather than capital, with disallowance of such costs set aside and appeals allowed in favour of the assessee.

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Issues: Whether the expenditure incurred on rollers and structures, scrap rails (railway track), conveyor belt and ventilation ducting in the course of execution of tunnel sub-contract works is capital expenditure (plant and machinery) giving enduring benefit or revenue expenditure (temporary/site-specific/consumable) and therefore allowable as revenue deduction.

Analysis: The Tribunal examined the nature and use of the items (rail tracks, conveyor belt, ventilation ducting, rollers and related structures) in the context of the tunnel EPC turnkey contract executed using a Tunnel Boring Machine (TBM). The Tribunal considered whether the outlay brought into existence an asset or advantage of an enduring nature for the assessee's business or whether the items were temporary, site-specific tools used exclusively for executing a single contract and part of the profit-earning process. The Tribunal reviewed the facts that the items were acquired and deployed pro tempore within a site belonging to others, continually extended as the tunnel progressed, frequently damaged (in the case of conveyor belts and rollers), and did not form part of the assessee's permanent business infrastructure. The Tribunal applied the commercial-benefit tests and precedents (including principles articulated in Madras Auto Service and related authorities) to conclude that the expenditure did not create a capital asset for the assessee and produced no enduring capital advantage beyond the life of the contract.

Conclusion: Issue decided in favour of the assessee; the expenditure on rollers and structures, scrap rails, conveyor belt and ventilation ducting is revenue in nature (temporary/site-specific) and not capital expenditure, and the additions disallowing such expenditure are set aside; appeals allowed.

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