The nature of the advantage in a commercial sense and the enduring benefit are crucial factors in distinguishing between capital and revenue expenditure.

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 ?"

2. 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.

3. 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.

4. 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. Vs. Commissioner of Income Tax, 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 a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure."

5. 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 not 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. Vs. 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 a 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