1991-VIL-610-KAR-DT

Equivalent Citation: [1992] 194 ITR 159, 97 CTR 117, 60 TAXMANN 170

KARNATAKA HIGH COURT

Date: 10.04.1991

COMMISSIONER OF INCOME-TAX

Vs

MYSORE SPUN CONCRETE PIPE PVT. LIMITED

BENCH

Judge(s)  : K. SHIVASHANKAR BHAT., R. RAMAKRISHNA 

JUDGMENT

The judgment of the court was delivered by

K. SHIVASHANKAR BHAT J. -Under the provisions of the Income -tax Act, 1961, the following questions are referred for our consideration :

"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in allowing the assessee's appeal directing the Income-tax Officer to allow expenditure of Rs. 33,427 and Rs. 39,668 for the assessment years 1980-81 and 1981-82, respectively, being the expenditure incurred on replacement of damaged moulds as revenue expenditure ?

2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in allowing the expenditure of Rs. 32,533 incurred on replacement of runners and end rings as revenue expenditure for the assessment year 1981-82 ?"

The references are argued mainly with reference to the moulds with an understanding that the second question has to be answered in the affirmative and against the Revenue.

The facts are simple ; 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.

Whether an expenditure is capital or revenue in nature has to be decided in the context of the business. 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. In Empire jute Co. Ltd. v. CIT [1980] 124 ITR 1, 13 ; AIR 1980 SC 1946, the Supreme Court pointed out at page 1953 :

"The question must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on or the conduct of the business that it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character, the possession of which is condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure."

Earlier at page 1951 (at p. 10 of 124 ITR), the court has cautioned against applying the test of enduring benefit to hold it as a capital expenditure, by observing :

"The decided cases have, from time to time, evolved various tests for distinguishing between capital and revenue expenditure but no test is paramount or conclusive. There is no all embracing formula which can provide a ready solution to the problem ; no touchstone has been devised. Every case has to be decided on its own facts, keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred. But a few tests formulated by the courts may be referred to as they might help to arrive at a correct decision of the controversy between the parties. One celebrated test is that laid down by Lord Cave L. C. in British Insulated and Helsby Cables Ltd. v. Atherton [1925] 10 T C 155, 192 (HL), where the learned Law Lord stated:

'When an expenditure is made, not only once and for all, but with view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.'

This test, as the parenthetical clause shows, must yield where there are special circumstances leading to a contrary conclusion and, as pointed out by Lord Radcliffe in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 (PC), it would be misleading to suppose that in all cases, securing a benefit for the business would be, prima facie, capital expenditure 'so long as the benefit is not so transitory as to have no endurance at all.' There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case."

It is a matter of common knowledge that moulds do not last long. The assessee's business requires moulds which, by constant use, need replacement ; the replacement of moulds is not in the nature of replacement of capital machinery, but in the nature of replacing a part of a machinery, especially in the context of the entire set up being treated as one unit. The following findings of the Appellate Tribunal are very relevant here :

"As contended on behalf of the assessee, no new asset of an enduring nature had come into existence as a result of this expenditure as the same was incurred only for replacement or conversion of damaged moulds. No extra capacity had been added in the process. We have also taken note of the fact that the initial expenditure incurred on the installation of the moulds had already been capitalised by the assessee itself, and, therefore, the subsequent expenditure incurred on replacement or conversion of the damaged moulds could only be of a revenue nature."

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.

Consequently, we agree with the Appellate Tribunal and the questions referred are answered in the affirmative and against the Revenue.

 

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