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Issues involved:
The judgment involves the disallowance of the claim of the assessee regarding the replacement cost of machineries and whether it should be treated as capital or revenue expenditure for the assessment year 1995-96. Issue 1: Disallowance of claim of the assessee The Assessing Officer disallowed the claim of the assessee in respect of replacement cost of machineries and treated it as capital expenditure. The Commissioner of Income-tax (Appeals) held in favor of the assessee. The Appellate Tribunal also ruled in favor of the assessee. The Revenue appealed, questioning whether the Tribunal was right in allowing a deduction of the amounts spent on replacement of machinery as revenue expenditure. Mrs. Pushya Sitaraman, Senior Standing Counsel for the appellant, acknowledged that the issue is covered against the Revenue based on a previous court decision. The Court emphasized that the treatment of expenditure on replacement of machinery as capital or revenue should be determined by the provisions of the Act, not by the accounting practice of the assessee. Issue 2: Treatment of replacement of machinery as revenue expenditure The Appellate Tribunal found that the replacement of machinery should be considered as revenue expenditure, and therefore, the claim of the assessee cannot be disallowed. The Court referred to a previous case where it was held that all plant and machinery together form a complete spinning mill capable of manufacturing yarn. As a result, each replaced machine cannot be viewed as independent, and no intermediate marketable product was produced. This interpretation was also supported by another decision of the Court. Based on these precedents, the Court ruled in favor of the assessee and dismissed the appeal by the Revenue.
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