Revenue / capital
This query is : Resolved
07 August 2012
Hi,
I am having a difference of opinion with my internal auditor on the below matter.
I would request an advice on the accounting treatment on below
Server Purchased for Rs. 2,00,000/- 3 yrs back;
The Vendor given a composite Invoice for all the parts of the server.
Its mother board become faulty now;
The replacement cost is Rs. 50,000/-
Can we capitalise the mother board replaced? But we don't have the breakup of the motherboard cost of the server when purchased.
Capitalising the replacement would inflate the cost.
The ideal scenerio would be to remove the mothercost from the originally purchased asset with Accum Dep and then add up the new cost. But since this could not be possible shouldn't we charged off to P&L.
Please advice
Warm Regards
Ramesh
I am having a difference of opinion with my internal auditor on the below matter.
I would request an advice on the accounting treatment on below
Server Purchased for Rs. 2,00,000/- 3 yrs back;
The Vendor given a composite Invoice for all the parts of the server.
Its mother board become faulty now;
The replacement cost is Rs. 50,000/-
Can we capitalise the mother board replaced? But we don't have the breakup of the motherboard cost of the server when purchased.
Capitalising the replacement would inflate the cost.
The ideal scenerio would be to remove the mothercost from the originally purchased asset with Accum Dep and then add up the new cost. But since this could not be possible shouldn't we charged off to P&L.
Please advice
Warm Regards
Ramesh
07 August 2012
As per my View,because motherboard is a essential part of your asset i.e. Server. Now if the replacement of motherboard increases the efficiency of asset then it would be capitalised otherwise it will be charged to P&L.
Wait for other Expert's Opinion too
Wait for other Expert's Opinion too
08 August 2012
In your case, your machine becomes faulty, and you repair & bring it in the previous condition, it doesn't mean that you have added something to the machinery which improve its life etc.
So, I think it is a revenue expenditure and should be taken debited to P&L A/c.
So, I think it is a revenue expenditure and should be taken debited to P&L A/c.
08 August 2012
CIT V. Ramaraju Surgical Cotton Mills 2007 -TMI - 2064 - SUPREME COURT OF INDIA
Point: Whether the expenditure on replacement of an asset is capital expenditure or revenue expenditure?
Ramaraju Surgical Cotton Mills, the assessee is a manufacturing company. It replaced some of its assets during the relevant assessment year so as to increase its production capacity. The replacement was not for the reason that the old assets were worn out but for increasing the production capacity. However even on replacement of the assets, the production capacity of the company remained constant. Hence the expenditure on replacement was claimed as revenue expenditure under Sec. 37 of the Income Tax Act, 1961 by the assessee company in its Income tax return for that year.
The court held that any expenditure to fall in the purview of capital expenditure definition, it should provide long term benefit. However in the given case, replacement of an asset does not contribute to any benefit, long term or short term and hence it is revenue expenditure.
Link=
https://www.taxmanagementindia.com/visitor/Detail_Case_Laws.asp?ID=2064
CIT V. Ramaraju Surgical Cotton Mills 2007 -TMI - 2064 - SUPREME COURT OF INDIA
Point: Whether the expenditure on replacement of an asset is capital expenditure or revenue expenditure?
Ramaraju Surgical Cotton Mills, the assessee is a manufacturing company. It replaced some of its assets during the relevant assessment year so as to increase its production capacity. The replacement was not for the reason that the old assets were worn out but for increasing the production capacity. However even on replacement of the assets, the production capacity of the company remained constant. Hence the expenditure on replacement was claimed as revenue expenditure under Sec. 37 of the Income Tax Act, 1961 by the assessee company in its Income tax return for that year.
The court held that any expenditure to fall in the purview of capital expenditure definition, it should provide long term benefit. However in the given case, replacement of an asset does not contribute to any benefit, long term or short term and hence it is revenue expenditure.
Link=
https://www.taxmanagementindia.com/visitor/Detail_Case_Laws.asp?ID=2064
Message likes :
1 times
You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now
Click here to login now
Similar Resolved Queries
Unanswered Queries
- Section 54F - Exemption on LTCG in 2026 for HP purchased in 2023
- STCG....................................................
- Sales return eway bill
- TAN for Partnership
- AMOUNT RECEIVED UNDER COMPULOSRY ACQUISITION OF AGRICULTURAL LAND
- Long Term Service award taxability in hands of company
- Is E Way Bill Valid If Transport ID Not Mentioned in PART A But Vehicle details mentioned in PART B
- Loan by Partnership Firm
- AY 26-27 ITR-4 FILING U/S 44-ADA
- Plot of land. Cost of Acquisition
- Standard Deduction claim for EPFO Pension and ICICI Prudential Life Annuity
- Sales amount in Gstr1
- CG after sale of flat
- E Commerce GSTR1 & 3B how to file
- Nomination of Bank for refund in itr 2
- GST Cancellation without jurisdiction
- Legal Opinion on Registrar's Refusal to Investigate a Society for Non-Renewal and Non-Compliance
- GST Refund_RFD-01
- Form10BD was uploaded successfully without any Error but after 24 hours, Form10BE are not available
- Annexure B utility for GST Refund
Trending Online Classes
-
DT & Audit (Exam Oriented Fastrack Batch) - For May 26 Exams and onwards Full English
CA Bhanwar Borana & CA Shubham Keswani
Subscribe to Pro
Join an elite circle of professionals
CAclubindia
