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Issues involved: Determination of whether the expenditure incurred by the assessee is of a capital nature or a revenue expenditure.
Summary: The High Court of Punjab and Haryana was tasked with deciding whether an expenditure of Rs. 1,06,292 by a private limited company, related to the conversion of looms, constituted revenue or capital expenditure. The Income-tax Officer initially disallowed the amount, considering it of capital nature due to the creation of new assets. However, the Income-tax Appellate Tribunal later allowed the expenditure as revenue, citing it as current repairs and replacements necessary for the business. The department argued that the conversion of looms created a new asset, while the assessee contended that no new asset was brought into existence. The court considered various precedents and emphasized the distinction between expenditure for repairs and for creating new assets. The Tribunal's findings highlighted that the conversion did not improve the asset and was necessary due to unavailability of spare parts from the Japanese manufacturers. The court upheld the Tribunal's decision, stating that the expenditure was for current repairs and replacements essential for the business's operation. Citing relevant case laws, the court concluded that the expenditure was revenue in nature, not capital. Consequently, the question was answered in favor of the assessee, who was awarded costs from the department.
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