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.
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
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.
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= http://www.taxmanagementindia.com/visitor/Detail_Case_Laws.asp?ID=2064
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