Expenditure related to renewal of sleepers and rails for the company’s railway

sidings- whether capital or revenue expenditure.

1.A public limited company has vast network of railway sidings in its collieries. Some of the railway sidings are fully owned by the company while others are jointly owned by the company and the Railways.

2.The expenditure on the private sidings consists of sub-grade work and super-grade work involving the blasting and laying of the sleepers and rails. The total cost of these sidings was borne by the company. These sidings are shown by the company under ‘Fixed Assets-Railway Sidings’ in its balance sheet, and are depreciated at 15 per cent as per the Income-tax Act.

3.Regarding the jointly owned railway sidings (also called ‘assisted sidings’), the querist has stated that the expenditure capitalised for these sidings “would represent only the expenditure on sub-grade work and depreciated as such from the date of commissioning of the track”.

4.The Railways treat both types of sidings as under their ownership notionally during the operational period. The Railways maintain both the sidings to ensure fitness of the track and safety of the rolling stock according to their own standards. For these services, the Railways charge the company interest and maintenance charges at the stipulated rates.

5.The querist has also mentioned that periodically major renewal of track is undertaken by the Railways, when sleepers alone, or sleepers as well as rails, are replaced. Replacing the sleepers and the rails costs the company approximately Rs. 11 lakh to Rs. 12 lakh per k.m. The company’s practice hitherto has been to treat the aforesaid cost as revenue expenditure since “renewal restores the track to the original standard as laid initially and does not expand its capacity in true terms except stretching its life.”

6.In the case of private sidings, the cost of renewal of super-grade work is directly borne by the company and the Railways hand over the abandoned rails to the company.

7.The querist has sought the opinion of the Expert Advisory Committee regarding the appropriate method of treatment of the expenditure on replacement of sleepers alone, and the renewal of sleepers and the rails.

Opinion December 29, 1988

1.The Committee notes that para 23 of Accounting Standard 10 (AS-10) on ‘Accounting for Fixed Assets’, issued by the Institute of Chartered Accountants of India, recommends as follows:

“Subsequent expenditures related to an item of fixed asset should be added to its book value only if they increase the future benefits from the existing asset beyond its previously assessed standard of performance.”

In this connection, the Committee is of the view that while deciding whether subsequent expenditure resulted in an increase in the future benefits from the asset or not, recognition should be given both to the increase in the benefits ‘per annum’ as well as increase in benefits through extension of the life of the asset. Thus, even if there was no increase in the annual capacity, but the life of the asset was substantially increased, it would be taken as an increase in the future benefits from the concerned asset beyond its previously assessed standard of performance.

2.On the basis of the specific facts and circumstances of the query, the Committee is of the opinion, that the expenditure incurred on replacement of sleepers and rails should be treated as a capital expenditure provided it increases life of the asset concerned. The expenditure incurred on replacement of sleepers in normal course, being of the nature of maintenance expenditure, should be treated as a revenue expenditure.

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