Syed Shah Mohammed Quadri, J.:— This is a reference under Sec. 256(1) of the Income Tax Act (for short ‘the Act’) made by the Income Tax Appellate Tribunal, Hyderabad. In this case, both the assessee as well as the Department sought for reference of questions for opinion of this Court. The following questions are referred at the instance of the assessee:
“Whether on the facts and in the circumstances of the case, the assessee is entitled to deduction in the computation of total income of the expenditure of Rs. 77,300/- incurred for raising additional capital by issue of bonus shares to the existing share holders”?
“Whether on the facts and in the circumstances of the case the assessee is entitled to deduction of Sur-tax payable under the Companies (profits) Sur Tax Act, 1964 as business expenditure under Sec. 37 of the Income Tax Act or alternatively as expenditure incidental to carrying on of the business deductible under Sec. 28 of the Income Tax Act while computing income under the head ‘business’”?
2. At the instance of the department, the following questions are referred:
“Whether on the facts and in the circumstances of the case, the Appellate Tribunal is correct in law in holding that (a) reimbursement of salaries paid to gardener, sweeper, watchman; (b) repairs to buildings and depreciation on buildings; (c) depreciation on furniture given to the employees and (d) payment of water charges should not be taken into account in computing the addition under Sac. 40 A (5)?
“Whether on the facts and in the circumstences of the case, the Appellate Tribunal is correct in holding that weighted deduction under Sec. 35-C is permissible on Rs. 1,26,420/- and Rs. 1,16,812/- representing reserve for bad debts and depreciation”?
3. The learned Standing Counsel for Income Tax Department, Sri Suryanarayana, has submitted that all the questions stated above are covered by the judgments of this Court. The learned counsel for the respondent, Sri Ratnakar, submitted that the first question could not be said to be covered by any earlier decision of this Court against the assessee but has agreed that the other questions are covered by earlier judgments of this Court. We shall first dispose of the questions which are said to be covered by the judgments of this Court.
4. It is agreed that the second question is covered by a judgment of this Court in Vazir Sultan Tobacco Co, Ltd. v. Commissioner of Income tax 169 I.T.R 35 and Vazir Sultan Tobacco Co. Ltd. v. Commissioner of Income tax 174 I.T.R 689. Following these decisions, the question is answered in the negative that is against the assessee and in favour of the revenue.
5. The last two questions are covered by a judgment of this Court in R.C No. 190/82 dated 11-11-1987. Following this judgment, these questions are answered in favour of the revenue and against the assessee.
6. We are thus left with the first question. The facts relevant for answering this question may be noticed. The assessee is a public limited company engaged in manufacture and sale of cigarettes. It incurred an expenditure of Rs. 77,300/- for raising additional capital by way of issuing bonus shares to the existing shareholders and in the assessment year 1978-79 claimed to deduct the same as a revenue expenditure in computing its income. The Income-tax Officer disallowed the said deduction holding it to be a capital expenditure. The First Appellate Authority, the Commissioner of Income Tax (Appeals), confirmed the order passed by the Income Tax Officer. On further appeal, the Income Tax Appellate Tribunal upheld the contention of the revenue that the expenditure in question was capital expenditure. In doing so, the Appellate Tribunal followed its earlier decision in respect of the same assessee for the assessment year 1976-77. In that case, it had taken the view that the amounts spent in connection with raising the capital of the company was a capital expenditure, and referred the question of admissibility of expenditure to this court.
7. The learned Standing Counsel for Income tax submits that the first question is also covered by judgment of this Court in this assessee's case in the above stated refereace reported in Vazir Sultan Tobacco Co. Ltd. v. Commissioner of Income Tax (2 supra). He adds that whether the additional capital is raised by issuing equity shares or by issuing bonus shares the result is the same, namely, that there is increase in the capital of the company and, therefore, the said judgment of this court squarely applies. Sri Ratnakar, the learned counsel for the assessee, on the other hand, contends that the said judgment of this Court relates to expenditure incurred in raising of additional capital by equity shares and inasmuch as the question in this case relates to expenditure incurred in raising of additional capital by issue of bonus shares to the existing shareholders, it does not cover the question raised herein. According to the learned counsel, the question is covered in favour of the assessee by the judgment of this Court in Warner Hindustan Ltd. v. Commissioner of Income Tax (3). He says that by issuing bonus shares, no additional amount is received by the company, therefore different considerations should govern.
8. Section 37 of the Income Tax Act provides inter alia, any expenditure not being in the nature of capital expenditure or personl expenses of the assessee laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and Gains of Business or Profession.,” In this case, the controversy is of limited extent, namely, whether the expenditure in question is in the nature of capital or revenue expenditure which is one of the thorny problems that frequently arise before the courts For purposes of this case, we consider it unnecessary to go back to the principles stated by Lord Cave, L.C in Atherton v. British Insulated and Helsby Cables Ltd. (10 TC 155) and discuss tests laid down in subsequent leading cases in view of the recent judgment of the Supreme Court in Alembic Chemical Works Co., Ltd. v. Commissioner of Income Tax, Gujarat (4). Further, the issue in this case is narrowed down to whether the first question is eovered by a judgment of this Court in Vazir Sultan Tobacco Co. Ltd. v. Commissioner of Income Tax (2 supra) or in Warnet Hindustan Ltd. v. Commissioner of Income Tax (3 supra). However, before dealing with these and other cases cited at the bar, it would be useful to bear in mind the general rule, though not universal, that expenditure on creation of capital asset is on capital account and is therefore not an allowable deduction. In capitalising its accumulated profits and issuing bonus shares to the share holders, the profits are transmuted into capital. What happens is that the accumulated profits which are available for distribution as dividends, are transmuted into capital resulting in the increase of the capital of the company. Therefore, whether the capital of the company is raised by issuing equity shares or by issuing bonus shares, the result is the same, namely, that the capital base of the company is enlarged. It is on this premise we would examine the cases cited before us.
9. In Warner Hidustan Ltd. v. Commissioner of Income Tax (3 supra), the Income Tax. Appellate Tribunal referred the following two questions among others to the High Court under Section 256(1) of the Act.
“Whether on the facts and in the circumstances of the case, the sum of Rs. 18,000/- paid by way of legal and consultation fee 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?
“Whether on the facts and in the circumstances of the case, the sum of Rs. 22,500/- expended by the 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?”
10. These questions were answered in favour of the assessee. In that case, the assessee incurred an expenditure of Rs. 18,000/- by way of legal and consultation fees in connection with issue of bonus shares and Rs. 22,500/- by way of fees to the Registrar of Companies for increasing its authorised capital and claimed deduction of the said amounts in computing its profits for the assessment year 1973-74. The Income Tax Officer disallowed the claim holding the same to be of capital nature. On appeal, this view was confirmed by the Appellate Assistant Commissioner. On further appeal to the Appellate Tribunal, the decision of the Appellate Authority was confirmed and at the instance of the assessee the questions above mentioned were referred to the High Court for opinion. While dealing with the first of the above noted questions, the Division Bench of this Court of which one of us (Jeevan Reddy, J) was a party, held——
“The expenditure in question was not laid in connection with issuance of the bonus shares.”
11. It further observed:
“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.”
12. In view of these findings, the court held that the expenditure was not capital expenditure.
10. In regard to the second question the Division Bench observed:
“.. 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. 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.”
13. For these reasons this Court held that the expenditure was not a capital expenditure. This decision of the Division Bench was explained by another Division Bench of which also Jeevan Reddy, J was a party in Vazir Sultan Tobacco Co. Ltd. v. Commissioner of Income Tax (2 supra). In that case, at the instance of the present assessee, the following question was referred to this Court for opinion.
“Whether, on the facts and in the circumstances of the case, the assessee is entitled to deduction in the computation of total income of the expenditure of Rs. 20,82,994/- incurred for raising additional capital by issue of ordinary shares”?
14. That question was answered in favour of the revenue and ag???nst the assessee. In the assessment year 1976, 1977, the assessee sought to deduct Rs. 20,82,994/- which were expended for raising additional capital by issuing ordinary shares. The I.T.O rejected the claim and both the first appellate authority and the Appellate Tribunal confirmed the same. Answering the said question, this Court held that the expenditure was incurred in acquiring an asset of enduring advantage, so it was in the nature of capital expenditure and was not deductible. The Bench observed:
“. a bench of this Court also allowed a similar expenditure, but that was on the reasoning and the said expenditure by itself does not amount to an increase in the capital base of the company and that is an expenditure laid out merely for obtaining permission for raising the authorised capital It was held that it is not obligatory for a company obtaining such permission to raise the authorised capital necessarily. It may or may not raise it. It is on the said reasoning that this Court held that the fee paid to the Registrar of Companies for obtaining permission for raising the authorised capital cannot be treated as capital expenditure.
15. At page 695:
To questions were decided in that case. One related to the fees paid to the Registrar for obtaining permission for raising the authorised capital, which was held to be revenue expenditure. This aspect has already been dealt with by us hereinbefore. The other question decided related to the deductibility of legal and consultation fees paid in connection with the issue of bonus shares. Before issuing bonus shares, it was explained in that case, the assessee had to obtain legal and technical advice and some small expenditure was incurred in that behalf. The legal and technical opinion pertained to the question whether bonus shares should be issued or not. In that sense, the expenditure was unconnected with the bonus shares actually issued. They could as well not have been issued after obtaining the said opinion. In this case, it is not the fee paid to lawyers as in that case, but it is brokerage and other commission paid in connection with the actual issue of additional shares. We are, therefore, unable to see the relevance of the principle of the said decision in the facts of this case.
16. In the instant case, as stated above, expenditure of Rs. 77,300/- was incurred for raising additional capital by issue of bonus shares to the existing share-holders. Therefore, in our view, the judgment in Warner Hindustan Limited case (3 supra) has no application to the facts of this case and the ratio of the opinion in the case of the assessee reported in Vazir Sultan Tobaco Co. Ltd. case (2 supra) squarely applies.
17. The learned counsel for the assessee placed reliance on the judgment of the Bombay High Court also in Bombay Burmah Trading Company v. C.I.T 145 I.T.R 793. In that case one of the questions which fell for consideration of the Bombay High Court was whether a sum of Rs. 47,250/- paid as fees to the Registrar of Companies for enhancement of the capital was an allowable revenue expenditure. The Bombay High Court answered the question in the negative and against the assessee. In so doing, it followed the judgment of the Supreme Court in India Cements Ltd. v. C.I.T 60 I.T.R 52. The Supreme Court referred to an earlier decision of the Bombay High Court in In re Tata Iron and Steel Co. Ltd.7, approved the view taken by the Bombay High Court that if the cost of raising the original capital cannot be deducted from profit after the first year, it is difficult to see how the cost of raising additional capital can be treated in a different way and that expenses incurred in raising capital are expenses of exactly the same character whether the capital is raised at the flotation of the company or therafter and observed—
“obtaining capital by issue of shares is different from obtaining loan by debenture”.
18. The view taken by our High Court in Vazir Sultan Tobacco Company case (2 supra) is in accord with the ratio in the above case. However, the expenditure incurred (amounting to Rs. 31,899/- and legal expenses totalling to Rs. 10,350/-) in connection with the issue of bonus shares, was held admissible as a revenue expenditure. Both the I.T.O and the first appellate authority took the view that the said items are in the nature of capital expenditure. The Appellate Tribunal, however, took the view that both the items of expenditure were incurred in the course of the carrying on of the business of the assessee, because instead of declaring dividends, the assessee thought fit to issue bonus shares and since the expenditure incurred in connection with the declaration of dividends was an allowable expenditure, the same would be the position in respect of expenditure incurred in connection with bonus shares. With respect we cannot agree with this reasoning. However, to ascertain the nature of the expenses incurred, the Bombay High Court took into consideration the grounds of appeal, treated the same as annexure to the reference and observed that the expenditure was made under the head “Printing and Stationery” and “Postage and Telegrams”. Observing that this expenditure cannot be said to have been incurred for purposes of raising any additional capital and that it was spent or expended in the normal course of business, held that the said expenditure cannot be t???eated as being of capital nature.
19. Reference is also made to Federal Bank Ltd. v. C.I.T 45 Taxman P. 262. In that case, a banking company which was the assessee in that case, made certain expenditure in connection with the enhancement of the authorised capital and claimed deduction for the same. The Income Tax Officer disallowed the expenditure while the Commissioner (Appeals) held that it was liable for deduction. On appeal by the revenue, the Income Tax Appellate Tribunal restored the order of the Income Tax Officer holding that the expenditure related to the capital structure and, therefore, it was capital expenditure. On reference, the High Court of Kerala held ???hat the expenditure incurred by the assessee was an item of revenue expenditure deductible under Section 37(1). The reaso ning of the High Court is that the expenditure incurred for the enhancement of the authorised capital is only for the purpose of bettering or improving an established business and cannot be for the purpose of a new business and that viewed in the business sense, the enhancement of the authorised capital is only to broaden the capital base which will be conducive to the better conduct and efficiency and profitability of the business. The learned Judges did not agree with the view expressed by the High Courts of Himachal Pradesh, Delhi, Calcutta and Bombay. In view of what we have stated above, we find it difficult to agree with the reasoning of the learned judges.
20. We may with advantage refer to the judgment of the Supreme Court in Alembic Chemical Works Ltd. v. C.I.T Gujarat (4 supra). The question before the Supreme Court was whether the amount spent in acquisition of know-how to produce higher yield and sub-culture of high yielding strain of pencillin is a capital or revenue expenditure. Observing that there was no material before the Tribunal to come to the finding that the appellant had obtained under the agreement a completely new plant with a completely new process and completely new technical know-how from Me???ji, that the assessee from the commencement of its plant has been manufacturing penicillin and even after acquisition of the know-how in respect of which the amount in question was expended, it continued to do so, the Supreme Court held it was a revenue expenditure. It was observed thus:
“(ii) In the infinite variety of situational diversities in which the concept of what is capital expenditure and what is revenue arises, it is well nigh impossible to formulate any general rule, even in the generality of cases, sufficiently accurate and reasonably comprehensive, to draw any clear line of demarcation. However, some broad and general tests have been suggested from time to time ascertain on which side of the line the outlay in any particular case might reasonably be held to fall. These tests are generally efficacious and serve as useful servants; but as masters they tend to be over-exacting.
(iii) The question in each case would necessarily be whether the tests relevant and significant in one set of circumstances are relevant and significant in the case on hand also. Judicial metaphors are narrowly to be watched, for, starting as devices to liberate thought, they end often by enslaving it”.
The idea of “once for all” payment and “enduring benefit” are not to be treated as somthing akin to statutory conditions; nor are the nations of “capital” or “revenue” a judicial fetish. What is capital expenditure and what is revenue are not eternal verties but must need be flexible so as to respond to the changing economic realities of business. The expression “asset or advantage of an enduring nature was evolved to emphasise the element of a sufficient degree of durability appropriate to the context.
There is also no single definitive criterion which, by itself, is determinative whether a particular outlay is capital or revenue. Th??? “once for all” payment test is also inconclusive. What is relevant is the purpose of the outlay and its intended object and effect, considered in a common sense way having regard to the business realities. In a given case, the test of enduring benefit might break down.
21. From a careful reading of the principles laid down by the Supreme Court what follows is that in determining whether an expenditure is of capital nature or of revenue nature, no single test is determinative and that the purpose of the outlay and its intended object and effect, considered in a common sense way having regard to the business realities, is relevant. Thus considering we are of the opinion that the expenditure of Rs. 77,300/- incurred by the assessee in connection with raising of the additional capital by way of issuing bonus shares to the existing shareholders is referable to englarging of the capital base of the company and, therefore, is of capital nature.
22. It has already been noticed that our High Court in Vazir Sultan Tobacco Ltd. v. C.I.T (2 supra) had taken the view that the amount spent in connection with the enhancement of capital is capital expenditure. Following the same, and for the reasons stated above we answer the question against the assessee and in favour of the revenue.
23. Reference is answered accordingly.
24. Immediately after the pronouncement of the judgment, Sri Ratnakar, the learned counsel for the assessee, requested that a certificate be issued under Section 261 of the Income-Tax Act in regard to questions 1 and 2 for preferring an appeal to the Supreme Court. On the first question we are unable to certify that this is a fit case for appeal to the Supreme Court. However, in regard to the second question, it is brought to our notice that in the case of the same assessee, this Court has already granted certificate certifying a similar question as fit for appeal to the Supreme Court. Accordingly with regard to the second question certificate under Sec. 261 of the Income Tax Act, is granted.