Ajit K. Sengupta, J. - (1.)In this reference under Section 256(1) of the Income-tax Act, 1961, for the assessment year 1977-78, the following questions of law have been referred to this court :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that the legal charges of Rs. 12,000 paid by the assessee for obtaining the advice of the solicitors regarding dilution of its shareholding in pursuance of the provisions of the Foreign Exchange Regulation Act, 1973, is a revenue expenditure under Section 37 of the Income-tax Act, 1961 ?

(2.)Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the remuneration of Rs. 24,000 paid to one of its directors, Sri V.S.K. Nadar, by the assessee, does not attract the provisions of Section 80VV read with Section 37(1) of the Income-tax Act, 1961 ?
(3.)Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the expenditure of Rs. 15,814 as presentation of wrist watches to employees was a revenue expenditure incurred wholly and exclusively for the purpose of the assessee's business ?"
2. The first question relates to the assessee's claim for Rs. 12,000 paid for obtaining the advice of the solicitors regarding dilution of its shareholding in conformity with the provisions of the Foreign Exchange Regulation Act, 1973. Both the Income-tax Officer and the Appellate Assistant Commissioner rejected the claim. The Tribunal, however, allowed the claim as a revenue expenditure deductible under Section 37.

3. Following the decision of this court in Income-tax Reference No. 54 of 1989 (Avery India Ltd. v. CIT [1993] 199 ITR 745), where the judgment was delivered on July 18, 1991, we hold that the expenditure, irrespective of the requirement under the provisions of the Foreign Exchange Regulation Act, 1973, is for augmentation of the capital base of the company and is, therefore, an expenditure of capital nature not allowable as deduction under Section 37. We, therefore, answer the first question in the negative and in favour of the Revenue.

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