Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment years 1980-81 and 1981-82 - Assessee-company required moulds to complete its manufacturing process in its factory - Those moulds got damaged frequently and had to be replaced so that it could carry on its business effectively - Assessee incurred certain expenditure on replacement/repairs of damaged moulds - ITO disallowed claim for deduction of said expenditure as revenue expenditure -Whether Tribunal was right in allowing expenditure incurred on replacement/repairs as revenue expenditure - Held, yes FACTS The assessee-company required moulds to complete its manufacturing process in its factory. These moulds got damaged frequently and had to be replaced so that it carried on its business effectively. In view of this, for the assessment years 1980-81 and 1981-82, the assessee claimed certain expenditure as revenue expenditure being expenditure incurred on the replacement of damaged moulds. However, the ITO held that the moulds by themselves, taken as independent units, were capable of being installed as machineries and, therefore, the expenditure incurred by the assessee in this regard was capital in nature. On appeal, the Tribunal allowed the assessee's claim. On reference: HELD Whether an expenditure is capital or revenue in nature, has to be decided in the context of business. While establishing a factory, the initial investment in all kinds of machineries and the parts will be in the nature of capital expenditure. However, replacement of parts of machineries, or repairs in the course of working them will be revenue expenditure. Further, the fact of the benefit accruing by the expenditure being of enduring nature by itself is not a conclusive test to hold it as capital expenditure. In the instant case, it was a matter of common knowledge that moulds did not last long. The assessee's business required moulds, which by constant use needed replacements. This replacement was not in the nature of replacing a part of machinery, but in the context of entire set up being treated as one unit. The replacements of moulds was in the nature of maintenance of the machineries…

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