1994 (4) TMI 389 - HC - Income Tax

Summary

Issues:
1. Whether the expenditure incurred for repairs and replacement of plant and machinery is revenue or capital in nature?
2. Whether the change in the method of stock valuation from 'since realisable value' to 'estimated cost' is valid?

Analysis:

Issue 1:
The first two questions in the reference pertain to the expenditure of Rs. 1,77,708 incurred by the assessee for the replacement of parts in a machine used for business purposes. The Assessing Officer initially treated the expenditure as capital in nature. However, the Commissioner (Appeals) and the Tribunal held that the expenditure was revenue in nature based on relevant evidence and past precedents. The Tribunal compared this case to a previous judgment involving the replacement of a truck engine, where it was held that such replacement expenses are revenue in nature as they maintain existing assets without creating new benefits. The Court agreed with this reasoning, emphasizing that the expenditure was solely for the replacement of existing parts for business purposes, leading to the conclusion that it was revenue expenditure.

Issue 2:
The last two questions revolve around the change in the method of stock valuation by the assessee from 'since realisable value' to 'estimated cost'. The Assessing Officer disapproved of this change, alleging that it was intended to reduce taxable profits. However, the Commissioner (Appeals) and the Tribunal supported the assessee's decision, noting that the new method of valuation was consistent with recognized practices and had been followed consistently. The Court acknowledged that stock valuation can be done using different methods and found no malice in the assessee's change to the 'estimated cost' basis. As long as the new method is consistently applied, the change is deemed valid. Therefore, the Court upheld the Tribunal's decision, concluding that the change in the method of stock valuation was not arbitrary or perverse, and ruled in favor of the assessee on this issue.

In conclusion, the High Court of Calcutta upheld the Tribunal's decisions on both issues, affirming that the expenditure for repairs and replacement of plant and machinery was revenue in nature and that the change in the method of stock valuation was valid.