Chandurkar, J.:— The assessee, Bombay Burmah Trading Corporation Ltd, Bombay, carries on business in tea, coffee and timber. It has branches outside India. Employees working in the foreign branches earned salaries outside India and were paid by the branches in which they worked.
2. In the course of assessments for the assessment years 1964-65 and 1965-66, for which respective previous years ended on May 31, 1964, and May 31, 1965, a common question had arisen pertaining to the disallowance in the matter of expenditure incurred by the assessee in providing perquisites to its employees. During those years, the ITO disallowed the sums of Rs. 68,543 and Rs. 1,50,119 respectively as being in excess of 1/5th of the total expenditure referred to in s. 40(c)(iii) of the Act. That view was confirmed by the AAC, in appeal filed by the assessee. Its contention was that the ITO should have first calculated the value of the perquisites in terms of the relevant Rules and if such value was in excess of 1/5th of the salary of that employee, then only that excess should be disallowed. The Tribunal took the view that for the purposes of s. 40(c)(iii), actual expenditure incurred was the only expenditure which could be taken into consideration and there was no warrant for the view to limit the expenditure to the extent of the value of the perquisite in the hands of the employees. Another question which arose in the course of the assessment for the assessment year 1964-65, was whether the expenditure amounting to Rs. 31,899 and legal expenses totalling Rs. 10,350 in connection with the issue of bonus shares was admissible as a revenue expenditure. The ITO and the AAC took the view that both items were in the nature of capital expenditure. The Tribunal 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.
3. The assessee had also incurred in the assessment year 1965-66 an expenditure of Rs. 52,500 by way of fees paid to the Registrar of Companies for the enhancement of capital from Rs. 3 crores to Rs. 10 crores. This enhancement was inclusive of the issuance of;bonus shares, the value of which was Rs. 70 lakhs. The balance pertained to the enhancement of equity capital. The ITO and the AAC disallowed this expenditure. The Tribunal, however, directed 1/10th of the expenditure being allowable on the ground that it related to the issue of bonus shares of Rs. 70 lakhs. Thus Rs. 5,250 was held to be an allowable deduction.
4. In connection with the expenditure incurred on account of benefit, amenity or perquisite to the overseas employees for the assessment year 1965-66, the assessee claimed that the entire amount should be allowed to be deducted by virtue of second proviso to s. 40(c)(iii). These arguments were rejected by the ITO, the AAC as well as by the Tribunal. Arising out of the order of the Appellate Tribunul, six questions have been referred to this court under s. 256(1) of the I.T Act, 1961. Out of them, first three questions are at the instance of the assessee and the remaining three at the instance of the Revenue. These questions are as follows:
Question No. 1:
“Whether, on the facts and in the circumstances of the case, the claim of the assessee that for the purposes of section 40(c)(iii) of the Income-tax Act, 1961, what is to be taken into account is the value of the benefit or amenity or perquisite in the hands of the employee on account of any expenditure incurred by an employer and not the entire expenditure incurred by the employer has been rightly rejected?”
Question No. 2:
“Whether, on the facts and in the circumstances of the case, the provisions of section 40(c)(iii) of the Income-tax Act, 1961, applied in the case of the employees in its overseas branches?”
Question No. 3:
“Whether, on the facts and in the circumstances of the case, the sum of Rs. 47,250 paid as fees by the assessee to the Registrar of Companies for the enhancement of capital was an allowable revenue expenditure?”
Question No. 4:
“Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 31,899 incurred by the assessee during the year in connection with the issue of bonus shares and splitting of shares was an allowable revenue expenditure and not in the nature of capital expenditure.”
Question No. 5:
“Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 10,350 incurred by the assessee for the assessment year 1964-65, as legal expenses in connection with the issue of bonus shares was an allowable revenue expenditure and not in the nature of capital expenditure?”
Question No. 6:
“Whether, on the facts and in the circumstances of the case, the sum of Rs. 5,250 estimated by the Tribunal to be the expenditure incurred by the assessee by way of fees in connection with the issue of bonus shares out of the total fees of Rs. 52,500 was an allowable revenue expenditure and not in the nature of capital expenditure?”
5. Before we take up the several questions for consideration, it is necessary to refer to the relevant provisions of s. 40(c)(iii) of the Act which, at the material time, read as follows:
Section 40
“Notwithstanding anything to the contrary in sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head ‘Profits and gains of business or profession’………
(c) in the case of any company—…
(iii) any expenditure incurred after 29th day of February, 1964, which results directly or indirectly in the provision of any benefit or amenity or perquisite, whether convertible into money or not, to an employee (including any sum paid by the company in respect of any obligation which but for such payment would have been payable by such employee, to the extent such expenditure exceeds one-fifth of the amount of salary payable to the employee for any period of his employment after the aforesaid date,
Provided…
Provided further that nothing in this sub-clause shall apply to any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite to an employee whose income chargeable under the head ‘Salaries’ is seven thousand five hundred rupees or less………
Explanation 2.— In sub-clause (iii), the word ‘salary’ shall have the meaning assigned to it in clause (h) of rule 2 of Part A of the Fourth Schedule.”
6. Mr. Munim, appearing on behalf of the assessee, has contended that the provisions of s. 40(c)(iii) will come into operation only if the money value of the perquisites computed in accordance with r. 3 of the I.T Rules, 1962, will exceed one-fifth of the amount of salary payable to the employee. His argument is that the words “such expenditure” in s. 40(c)(iii) must be construed as referring to the value of the perquisite in the hands of the employee and that the I.T authorities and Tribunal were in error in holding that the provisions of s. 40(c)(iii) were attracted without ascertaining the money value of the perquisite. The argument runs contrary to the plain wording of s. 40(c)(iii). The main part of s. 40(c)(iii) clearly provides that where any expenditure results directly or indirectly in the provision of any benefit or amenity or perquisite, if such expenditure exceeds one-fifth of the amount of salary payable to the employee for any period of his employment after the 29th day of February, 1964, then such excess amount shall not be allowed as a deduction. It is not necessary for the purposes of s. 40(c)(iii) that the benefit or amenity or perquisite must always be convertible into money, because the section itself uses the phraseology “whether convertible into money or not”. The words “such expenditure” clearly refer back to “any expenditure incurred after 29th day of February, 1964, which results directly or indirectly in the provision of any benefit or amenity or perquisite”. In order to see whether the provisions of s. 40(c)(iii) are attracted or not, all that the tax authority is to do is to find out whether there is any expenditure which resulted directly or indirectly in the provision of any benefit or amenity or perquisite and whether that expenditure exceeds one-fifth of the amount of salary payable to the employee concerned for any period of his employment after the 29th day of February, 1964. If the expenditure exceeds one-fifth of the amount of salary payable, that excess has to be disallowed by way of deduction by the tax authorities. It appears that the foundation of the arguments advanced before us by Mr. Munim lies in a decision of the Calcutta High Court in CIT v. Britannia Industries Co. Ltd., [1982] 135 ITR 35. It is no doubt true that, on the facts of that case, the Calcutta High Court took the view that the value of the perquisite of the free car provided by the assessee-company to its employees should be worked out at Rs. 150 per month in respect of each employee to whom the free use of the assessee's car was provided. The value of the perquisite of the free car provided to the employees for the purposes of assessment, under the head “salary” was computed at. Rs. 150 per month in accordance with the provisions of r. 3 of the I.T Rules, 1962. Mr. Munim, the learned counsel for the assessee, has contended that just as in the Calcutta case, the value of the perquisite was computed under r. 3 of the I.T Rules, 1962, similarly the value of the perquisite should be computed in accordance with r. 2, which was the rule relevant for the purposes of the present case. If the facts of the Calcutta case are carefully gone into, it would appear that in that case it was not possible either for the assessee or the Department to positively find as to what part of the expenditure could be attributable to the perquisite in the form of free use of the car which was also used for business purposes. This apportionment in respect of the use of the car for the personal use by the employees and for business purposes, posed a difficulty in that case and the judgment shows that recourse was, therefore, taken to r. 3 of the Rules. This would be clear from the following observations of the Division Bench at page 38:
“There was no dispute about the fact that there was no material in support of the contentions made by the Department that the cars were allotted to the employees exclusively for their full-time use. It was also found by the ITO in a roundabout way that the car was used both for the business purpose and for the personal use of the employees, because he himself had estimated half of the expenses on maintenance and running of the cars as perquisite of the employees. There would have been some merit in the contention of the Department had there been material on record to show what was the total use of the cars and what was the use of the car relating to the personal work of the employees. Naturally, it was rightly found by the Tribunal that there was no material in support of the ITO's estimate that 50 per cent, of the expenses relating to the maintenance and running of the cars were for the personal use of the employees.”
7. It was in view of these facts that the Calcutta High Court came to the conclusion that “if the value of the perquisite of the car provided by the company to its employees is to be taken in the hands of the emloyees for the purpose of assessment of the employees under the head” Income from salaries” at Rs. 150 per month, the same value should be taken in the hands of the assessee-company which is the employer for the purpose of working out the ceiling under s. 40(c)(iii)”. The decision of the Calcutta High Court cannot be read as an authority that in all cases, for the purpose of s. 40(c)(iii), the value of the perquisite in the hands of the employees computed, in accordance with relevant rules, must be ascertained. It is not possible, therefore, to accept the argument of the learned counsel for the assessee that the value of the benefit or amenity or perquisite in the hands of the employees has to be taken into account for the purposes of s. 40(c)(iii). Accordingly, question No. 1 has to be answered in the affirmative and against the assessee.
8. The answer to the second question turns on the construction of the second proviso to s. 40(c)(iii) of the Act. The learned counsel for the assessee has relied upon a decision of the Madras High Court in Addl. CIT v. Brakes India Ltd., [1979] 118 ITR 820. In that case, the Division Bench of the Madras High Court, while construing the second proviso, took the view that cl. (iii) of s. 40(c) will not come into operation where no income of an employee is chargeable under the head “Salaries”. Relying on that decision, the learned counsel for the assessee has contended that overseas employees of the assessee-company did not have any income chargeable to Indian income-tax under Chap. IVA of the I.T Act, 1961 or, in other words, income chargeable under the head “Salaries” in their case was nil, and, therefore, by virtue of the second proviso to s. 40(c)(iii), provisions in s. 40(c)(iii) would not be attracted with the result that no disallowance under that provision would be permissible. Mr. Joshi, appearing on behalf of the Revenue, has supported the view taken by the Tribunal and contended that the intention of enacting the second proviso was that a disallowance of expenditure was not permissible only if the expenditure has resulted in the provision of a benefit or amenity or perquisite to an employee whose chargeable income was Rs. 7,500 or less under the head “Salaries”. The argument was that it had to be shown before the provisions in s. 40(c)(iii) are excluded that the expenditure has resulted in benefit or amenity or perquisite to an employee whose income chargeable to tax was Rs. 7,500 or less.
9. A reference to the second proviso to s. 40(c)(iii) would indicate that the words used by the Legislature are “an employee whose income chargeable under the head ‘Salaries’ is Rs. 7,500 or less”. If emphasis is laid on the quantum of the salary, then it is possible to argue as has been contended on behalf of the Revenue that the disallowance is made improperly in a case where expenditure has resulted directly or indirectly in the provision of benefit or amenity or perquisite to an employee whose chargeable income is Rs. 7,500 or less. But if emphasis is laid on the use of the word “chargeable” under the head “Salaries”, then it can be argued as has been done on behalf of the assessee that where no income of an employee is chargeable under the head “Salaries”, such income is also less than Rs. 7,500 and, therefore, the provisions with regard to the disallowance of expenditure will not come into operation. Having regard to the possibility that both the views are plausible, the better course, in our view, would be to follow the view which has already been taken by the Madras High Court in the case of Brakes India Ltd., [1979] 118 ITR 820, cited above. The salary payable in that case was to a foreign technician and, admittedly, his salary could not be brought to tax under the I.T Act. Under s. 10(6)(iii), the ITO had allowed the expenditure of perquisite only to the extent of one-fifth of the amount of salary payable to him, holding that the second proviso was not applicable, on the ground that the income chargeable under the head “Salaries” was more than Rs. 7,500. The argument on behalf of the assessee in that case was that the salary paid to the foreign technician was exempt from tax and his income chargeable under the head “Salaries” was nil and the second proviso was, therefore, attracted. The argument on behalf of the Revenue in that case was that in order to attract the second proviso, there should be some income chargeable under the head “Salaries”, at least one rupee to say that this is less than Rs. 7,500 but where there is no income chargeable under the head “Salaries” the proviso would not be attracted. Considering these arguments, the Division Bench has observed as follows (p. 824):
“Having given our anxious and careful consideration we are of the view that the words ‘Rs. 7,500 or less’ would include a nil amount as well and it could not be understood to mean ‘from one rupee to Rs. 7,500’. The legislature had not used any words which would imply that at least there should be one rupee which is chargeable under the head. ‘Salaries’ in order to attract the provisions of the proviso. We are also unable to find any rationale or logic for not giving the benefit of the proviso to a case where no part of the amount paid is chargeable under the head ‘Salaries’.”
10. Having regard to this view of the Madras High Court which we are inclined to follow in the interest of uniformity of the construction of the provisions of the I.T Act, the second question has to be answered in the affirmative and in favour of the assessee.
11. Coming to the 3rd question, the controversy is whether a sum of Rs. 47,250 paid as fees to the Registrar of Companies for enhancement of capital, is allowable as revenue expenditure. Mr. Munim, appearing on behalf of the assessee, relied upon a decision of the Madras High Court in CIT v. Kisenchand Chellaram (India) P. Ltd., [1981] 130 ITR 385, in which the Madras High Court has positively taken the view that such amount must be treated as a sum spent only for the purposes of business and there was no capital element in expenditure. The Madras High Court has observed that (p. 392):
“Just as the expenditure on money borrowed for a capital purpose did not affect the allowance, similarly the fact that the expenditure contributed to the increase in capital should not make a difference to its allowability, if it was otherwise not capital expenditure.”
12. It is no doubt true that the Madras High Court has taken the view that the expenditure incurred for the enhancement of the capital was allowable as a revenue expenditure, but this decision runs counter to a series of decisions of other courts which held to the contrary. We may refer to the decision of the Supreme Court in India Cements Ltd. v. Commissioner Of Income Tax, Madras., [1966] 60 ITR 52. That was a case in which the question was whether the expenditure incurred on account of stamp duty, registration fees, lawyer's fees in connection with the loan obtained from the Industrial Finance Corporation, was admissible as business expenditure and the Supreme Court held that the amount was not in the nature of capital expenditure and was laid out or expended wholly and exclusively for the purposes of the assessee's business. What is, however, important is that the Supreme Court in that case has highlighted the difference between the obtaining of capital by issue of shares and obtaining of loan by debentures. The Supreme Court has referred to the earlier decision of this court in In re Tata Iron and Steel Co. Ltd., [1921] 1 ITC 125. In that case, the Tata Iron and Steel Co. Ltd. had incurred an expenditure of Rs. 28 lakhs as underwriting commission paid to the underwriters on an issue of Rs. 7 lakhs preference shares of Rs. 100 each and the company claimed to deduct this amount as expenses under s. 9(2)(ix) of the Indian I.T Act, 1918. Macleod C.J in that case had taken the view 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 floatation of the company or thereafter. Accordingly, he held that Rs. 28 lakhs could not be treated as expenditure (not in the nature of capital expenditure) solely incurred for the purpose of earning the profits of the company's business. The other judge, Shah J., also came to the same conclusion, relying upon the decision of Texas Land and Mortgage Co. v. Holtham, [1894] 3 TC 255, 260 (QB). While dealing with this case, the Supreme Court had pointed out the difference between the English I.T act and the indian i.t act and observed as follows (p. 61):
“Rightly or wrongly, the English courts have held that the amount obtained by the issue of debentures is capital employed within the meaning of the rule, but this does not give us any guidance in interpreting the words ‘capital expenditure’ occurring in section 10(2)(xv) of the Act. In our opinion, the Bombay High Court was wrong in relying on Texas Land and Mortgage Company v. Holtham. But we do not say that the Tata Iron and Steel Co.'s case, [1921] 1 ITC 125 (Bom) was wrongly decided. Obtaining capital by issue of shares is different from obtaining loan by debentures.”
13. The reasoning of the Madras High Court in Kisenchand Chellaram's case, [1981] 130 ITR 385, proceeds on the footing that expenditure on money borrowed for the capital purpose was a revenue expenditure and, therefore, it was held that the fact that expenditure contributed to the increase in capital should not make a difference to its allowability, this would run counter to the observations of the Supreme Court, where it was expressly pointed out that the expenditure incurred for the issue of preference shares could not be said to be solely incurred for the purpose of the company's business.
14. To mention a couple of other decisions which took a view contrary to that of the Madras High Court, we may refer to a decision of the Allahabad High Court in Upper Doab Sugar Mills Ltd. v. CIT, [1979] 116 ITR 923, where it was held that the expenses incurred in connection with, the issue of additional equity shares is not revenue expenditure and is not deductible and those in Mohan Meakin Breweries Ltd. v. CIT (No. 2), [1979] 117 ITR 505 and Hindustan Gas and Industries Ltd. v. CIT, [1979] 117 ITR 549 (Cal). Having regard to these decisions, question No. 3 has to be answered in the negative and against the assessee.
15. Question Nos. 4, 5 and 6, which are all raised at the instance of the Revenue, relate to the allowability of the Revenue expenditure incurred by the assessee company in connection with the issue of bonus shares. In question No. 4, the allowability of Rs. 31,899 as expenditure is in issue. Different sums are in issue in other questions. Now, we have tried to find out from the orders of the tax authorities and the Tribunal as to the nature of this expenditure, but all that we find is that the AAC has described the expenditure as being in connection with bonus shares and splitting of shares, which according to him, was an activity undertaken for capitalization of profits, resulting in an advantage of an enduring nature. The Tribunal has merely described this amount as expenditure incurred in connection with the issue of bonus shares and splitting of shares. The Tribunal has, no, doubt, allowed this item as an allowable expenditure and the common argument advanced by the learned counsel for the Revenue in respect of all the three items in issue in the three questions referred to at the instance of the Revenue, is that the expenses are in relation to raising of capital. If the argument of the learned counsel is accepted, it would mean that any expenditure incurred in relation to raising capital, would always be of a capital nature. Since we found it necessary to ascertain as to whether these expenses were incurred, we have permitted the assessee to produce before us all the grounds of appeal filed before the AAC.
16. Mr. Joshi, on behalf of the Revenue, had seriously objected to the production of this document. We, however, overruled that objection and we have taken these grounds of appeal as annex. F to the statement of the case. Ground No. 8 shows that the break up of Rs. 31,899, i.e, Rs. 22,699, are expenses under the head “Printing and Stationery” and Rs. 9,200 are the expenses under the head “Postage & Telegrams”. Now, obviously, these are expenses which are incurred consequent upon the issue of bonus shares. These are not expenses which can even be said to have been incurred for the purposes of raising any additional capital. These are expenses which have been incurred in the normal course of business and merely because the printing was done in connection with bonus shares or the stationery was utilized probably for printing in connection with bonus shares and the postage and telegrams are, in some way or other, related to the declaration of bonus shares, it is not necessary for us to treat these expenses as being of a capital nature. The Tribunal was justified in taking the view that this expenditure does not create any asset of an enduring nature.
17. The same will have to be said in respect of legal expenses in question No. 5, incurred in connection with the issue of bonus shares as has been done by the Tribunal. In so far as the sum of Rs. 5,250 referred to in question No. 6 is concerned, the order of the Tribunal reveals that this amount is one-tenth of the total amount of Rs. 52,500 which are the fees paid to the Registrar of Companies for the enhancement of capital. The capital of the company had been raised from Rs. 3 crores to Rs. 10 crores and this has nothing to do with the issue of bonus shares. The value of the bonus shares was only Rs. 70 lakhs. The Tribunal has allocated expenses allowable in connection with bonus shares as one-tenth, the proportion not being in dispute. For the reasons for which the earlier two amounts have been held to be not of capital nature, in our view, the sum of Rs. 5,250 was also rightly allowed as Revenue expenditure by the Tribunal. Questions Nos. 4, 5 and 6 will, therefore, have to be answered against the Revenue. Having regard to what we have said earlier, questions are answered as follows:
Question No. 1: In the affirmative and against the assessee.
Question No. 2: In the affirmative and in favour of the assessee.
Question No. 3: In the negative and in favour of the Revenue.
Questions Nos. 4, 5 and 6: In the affirmative and in favour of the assessee.
18. There will be no order as to costs.