Jeevan Reddy, J.:— Eight questions have been referred under section 256(1) of the Income-tax Act, 1961, four at the instance of the assessee and four at the instance of the Department. Out of the eight questions, five questions are concluded one way or the other by the decisions of this court or the retrospective amendment of the law, as the case may be. With a view to clear the ground, we shall first refer to these questions and also point out in what manner they are concluded. The first question is: “Whether the Tribunal was right in holding that the words ‘regular assessment’ occurring in section 214 refer only to the original assessment or the first assessment made by the Income-tax Officer and not to any order which may be passed pursuant to an appellate order?” This question was referred at the instance of the assessee. But it is concluded against the assessee by the decision of this court in Nizam's Religious Endowment Trust v. ITO, [1981] 131 ITR 239. Following the said decision, the said question is answered in the affirmative, i.e, against the assessee and in favour of the Revenue.
2. The second question, also referred at the instance of the assessee, is: “Whether surtax payable by the assessee for the year under the Companies (Profits) Surtax Act, 1964, is deductible or is otherwise to be reckoned in arriving at the total income of the assessee for the assessment year 1973-74?” This question too is concluded against the assessee by the decision of this court in Vazir Sultan Tobacco Co. Ltd. v. Commissioner Of Income-Tax., [1988] 169 ITR 35. Following the said decision, we answer the said question in favour of the Revenue and against the assessee. The third question referred at the instance of the Revenue is: “Whether the Appellate Tribunal was justified in law in holding that the technical fees paid to M/s. Warner Lambert Pharmaceutical Co. of U.S.A for the assessment year 1973-74 was revenue expenditure?” In CIT v. Warner Hindustan Ltd., [1986] 160 ITR 217, this court held, in the case of this very assessee, that the technical fees so paid constitutes capital expenditure. Accordingly, we answer this question in the affirmative, i.e, against the assessee and in favour of the Revenue (sic). It is, however, clear that whatever benefits the assessee is entitled to on the footing that the expenditure was incurred on acquisition of plant and machinery, it will certainly be entitled to and may be allowed, if not already allowed.
3. The fourth question, referred at the instance of the Revenue, is: “Whether the Tribunal was justified in law in holding that the pre-paid expenses and pre-paid insurances constituted assets for the purpose of calculating the capital under rule 19A?” This question has to be answered in favour of the assessee, following the decision of this court in CIT v. Warner Hindustan Ltd., [1986] 160 ITR 217, 228. Accordingly, this question is answered in the affirmative, i.e, in favour of the assessee.
4. The fifth question, referred at the instance of the Revenue, is: “Whether the asseseee is entitled to depreciation under section 32(1) on scientific research assets relating to the business carried on by it the cost of which has been allowed as deduction in full under section 35 in an earlier year, in the facts and circumstances of the case?” This question has to be answered in favour of the Revenue and against the assessee in the light of the amendment to section 35(2)(iv), brought in with retrospective effect from April 1, 1962, by the Finance (No. 2) Act, 1980.
5. The three questions that remain for consideration are the following:
“Whether, on the facts and in the circumstances of the case, the sum of Rs. 18,000 paid by way of legal and consultation fees in connection with the issue of bonus shares constituted expenditure which was deductible in computing the assessee's total income for the assessment year 1973-74?” (referred at the instance of the assessee).
“Whether, on the facts and in the circumstances of the case, the sum of Rs. 22,500 expended by th assessee by way of fees paid to the Registrar of Companies for increasing its authorised capital was deductible in arriving at its total income for the assessment year 1973-74?” (referred at the instance of the assessee).
“Whether, on the facts and in the circumstances of the case, the salary of the manager and the steno engaged in export activities, was entitled to weighted deduction under sub-clause (iii) of section 35B(1)(b) of the Income-tax Act, 1961, after verification of the claim by the Income-tax Officer to the extent that the salary related to export services?” (referred at the instance of the Revenue).
6. For the sake of convenience, we shall refer to these three questions as questions Nos. 6, 7 and 8. (The Tribunal has not numbered the eight questions referred and that is why we are adopting the above procedure). We shall first take up the 6th question for consideration.
7. The assessee claimed deduction in respect of a sum of Rs. 18,000 paid by it by way of legal and consultation fees in connection with the issue of bonus shares. The Income-tax Officer disallowed the amount holding that the expenditure was of capital nature, relying upon a decision of the Income-tax Appellate Tribunal, Hyderabad. On appeal, the Appellate Assistant Commissioner agreed with the Income-tax Officer. He refused to follow the decision of the Bombay Bench of the Income-tax Appellate Tribunal taking a contrary view. When the matter came up before the Income-tax Appellate Tribunal, it too preferred to follow the view taken by the Hyderabad Bench in preference to the view taken by the Bombay Bench. The contention of Sri Dastoor, learned counsel for the assessee, is that this amount was paid to the Investment Corporation of India who were the assessee's “registrars and share transfer agents” on account of legal and consultation service in connection with the issue of bonus shares. It is in the nature of fees paid to a lawyer for obtaining legal advice. The issuance of bonus shares involves several financial and legal aspects and with a view to ensure compliance with the several regulatory measures applicable in that behalf, such advice was obtained. Reliance is placed upon the decision of the Supreme Court in Empire Jute Company Ltd. v. CIT, [1980] 124 ITR 1.
8. On the other hand, it is contended by learned standing counsel for the Revenue that the issue of bonus shares has the effect of increasing the share capital and that any expenditure incurred affecting the capital structure is also capital in nature. Reliance is placed upon the decision of the Calcutta High Court in Brooke Bond India Ltd. v. Commissioner Of Income-Tax, West Bengal-Iii., [1983] 140 ITR 272.
9. We are inclined to answer this question in favour of the assessee in view of the decision of the Supreme Court in the case of Empire Jute Company Ltd., [1984] 124 ITR 1. In this decision, it was held by the Supreme Court that the test of enduring benefit is not a certain or conclusive test and that it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. It was held that where, by incurring a certain expenditure no new asset was created and there was no addition to, or expansion of the profit-making apparatus of the assessee, nor was the expenditure laid out to acquire a source of profit or income, the expenditure cannot be treated as on capital account. What is material, it was observed, was to consider the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable. In the case before us, the expenditure in question was not laid out in connection with the issuance of bonus shares. The expenditure was in connection with the legal advice and consultation services preliminary to such issue. It cannot be said that this expenditure was incurred to obtain an enduring benefit or that by incurring this expenditure, the capital base or the fixed-capital of the company was enlarged. The expenditure was only for obtaining legal and consultation services and, therefore, cannot be treated as on capital account. In this view of the matter, we do not think that the decision of the Calcutta High Court in Brooke Bond India Ltd. v. Commissioner Of Income-Tax, West Bengal-Iii., [1983] 140 ITR 272 is of any help to the Revenue.
10. On the 7th question again, the decision of the Supreme Court in the case of Empire Jute Company, [1980] 124 ITR 1 is relevant. This amount was spent by the assessee by way of fees to the Registrar of Companies for increasing its authorised capital. The increase in the authorised capital does not by itself result in expanding the capital base or the fixed capital of the company. This expenditure is more in the nature of expenditure laid out for facilitating the assessee's operations and to enable it to carry on its business more efficiently and profitably. In this connection, we may refer to the decision of the House of Lords in IRC v. Carron Company, [1968] 45 TC 18, which was referred to with approval by the Supreme Court in the said case. The facts in Carron Company's case were that the company, which was incorporated by a charter in 1773, contained many features which had become archaic and unsuited to modern conditions and were operating as handicaps in the efficient and profitable conduct of the company's affairs. The company, therefore, petitioned for a supplementary charter as a result of which the company's affairs were reorganised and its commercial performance improved. The question was whether the expenditure incurred by the company in obtaining the charter and in defending, the action, and certain payments made to two dissenting shareholders in that behalf, constituted revenue expenditure or not. It was held that inasmuch as the object of obtaining the new charter was to remove the obstacles to profitable trading and inasmuch as the removal of the said restrictions facilitated the day to day operations of the company, the expenditure was on revenue account. Applying the said principle to the facts of this case, it must be held that the said expenditure was laid out merely to remove or raise the restriction placed on the authorised capital of the assessee. This was done with a view to facilitate a better conduct of the assessee's business. We may again point out that by merely obtaining an authorisation for increasing the authorised capital, the fixed capital of the company was not enhanced or enlarged. In this connection, we may refer to the annual report of the assessee for the year 1972, which shows that while the authorised capital rose from Rs. 1½ crores in the previous year to Rs. 3 crores in this year, the issued and subscribed capital remained the same at Rs. 30 lakhs (5% non-cumulative redeemable preference shares of Rs. 10 each) and Rs. 98 lakhs (equity shares of Rs. 10 each fully paid-up). This aspect shows that on account of the increase in the authorised capital, the fixed capital or share capital of the company remained unaltered.
11. It is true that on this question there has been a conflict of opinion among the High Courts in the country. While the Madras High Court has taken the same view as we are doing in CIT v. Kisenchand Chellaram (India) Pvt. Ltd., [1981] 130 ITR 385, a contrary view has been taken by the Bombay High Court in Bombay Burmah Trading Corporation Ltd. v. CIT, [1984] 145 ITR 793, by the Delhi High Court in Bharat Carbon & Ribbon Manufacturing Company Ltd. v. CIT, [1981] 127 ITR 239 and by the Himachal Pradesh High Court in Mohan Meakin Breweries Ltd. v. Commissioner Of Income-Tax. (No. 2), [1979] 117 ITR 505. But we find that in the decisions which have taken a contrary view, the decision of the Supreme Court in Empire Jute Company's case, [1980] 124 ITR 1 was not considered. The approch of these courts is that inasmuch as the increase in the limit of the authorised capital entitles the company/assessee to issue fresh shares and thereby increase its capital, the expenditure is in the nature of capital expenditure laid out for acquiring an enduring benefit. But, as we have pointed out above, the mere raising of authorised capital does not by itself affect the share capital of the company. The company may, as a fact, issue fresh shares or it may not. It is true that the increase in the authorised share capital is obtained for ultimately raising the share capital of the company, but that is a subsequent step. For the above reasons, we are unable to agree with the decisions of the Bombay, Himachal Pradesh and Delhi High Courts. We are in agreement with the decision of the Madras High Court, where it has been held that the expenditure incurred to increase the authorised capital of the company is bound up with the functioning and financing of the business and cannot be treated as on capital account. It was held that merely because the expenditure related to the raising of the authorised capital, it cannot, on that account, be classified as capital expenditure. So far as the 8th question is concerned, the Tribunal has not decided the matter finally but has merely remitted the matter to the Income-tax Officer to verify the assessee's claim under section 35B(1)(b) of the Act and to allow the weighted deduction if it is found entitled to it. Learned standing counsel, however, says that the Tribunal has upheld the claim for weighted deduction and has only remitted the matter to the Income-tax Officer for calculating the amount. We do not agree. Indeed, Mr. Dastoor, learned counsel appearing for the assessee, conceded that the Tribunal has not recorded any such finding and that the matter is left at large. It is now for the Income-tax Officer to see and verify whether the claim of the assessee falls under any one of the sub-clauses of clause (b) of sub-section (1) of section 35B and to allow the deduction only when he is satisfied that the claim falls under one or the other of the sub-clauses. We agree that Mr. Dastoor's understanding of the Tribunal's direction is the correct one. In this view of the matter, it is unnecessary for us to answer the 8th question. The Income-tax Officer will look into the matter and decide the question of allowability of deduction claimed under the said provision in accordance with law and in the light of the observations contained herein above.
12. For the above reasons, we answer questions Nos. 6 and 7 in favour of the assessee and decline to answer question No. 8. Our answers to questions Nos. 1 to 5 have already been recorded in the earlier part of this judgment. No costs.