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Issues: Determination of whether the expenditure incurred for laying a new pipeline for water supply to factory premises is a revenue expenditure or capital expenditure.
Summary: The High Court of Bombay was presented with a reference under section 256(1) of the Income-tax Act, 1961, regarding the allowability of a deduction claimed by the assessee for an expenditure of Rs. 27,940 on laying a new pipeline for water supply to the factory premises. The Income-tax Officer initially considered the expenditure to be of a capital nature, but the Commissioner of Income-tax (Appeals) allowed it as a business expenditure. The Income-tax Appellate Tribunal upheld the decision of the Commissioner, stating that the expenditure was a revenue expenditure as it did not provide the assessee with an enduring advantage and merely augmented the existing water supply. The Revenue contended that the expenditure should be considered of a capital nature due to the enduring advantage obtained by the assessee. However, the Court, after considering various tests to distinguish revenue and capital expenditure, emphasized that each case must be evaluated based on its specific facts and circumstances. Referring to the aim and object of the expenditure, the Court highlighted that if the outlay is an integral part of the profit-making process and not for acquiring a permanent asset, it may be treated as revenue expenditure, even if the advantage endures for an indefinite future. Applying these principles to the case at hand, the Court concluded that the expenditure incurred by the assessee was a revenue expenditure, not of a capital nature. Therefore, the Tribunal's decision to allow the deduction to the assessee was deemed justified. Consequently, the question referred was answered in the affirmative and in favor of the assessee, with no order as to costs.
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