Norman Macleod, Kt., C.J.
1. This is a reference by the Chief Revenue Authority under Section 51 of the Indian Income Tax Act VII of 1918 of a certain question regarding the interpretation of Section 9(2)(ix) of the Act in the matter of the income tax assessment of the Tata Iron and Steel Company, which was incorporated and registered in Bombay. For the official year 1919-20 the Company was assessed by the Collector on an income of Rs. 61,84,848 earned in the previous year 1918-19. The Company claimed to deduct from this amount the sum of Rs. 28,00,000 paid to the under-writers on an issue of 7,00,000 preference shares of Rs. 100 each, as expenses which could be deducted under Section 9(2)(ix) of the Act. The Collector decided that the Rs. 28,00,000 were in the nature of capital expenditure and that expenditure incurred in connection with procuring capital was not an allowable deduction from profits for income tax purposes. An appeal to the Commissioner of Income Tax was rejected, and a petition to the Chief Revenue Authority to revise the order of the Commissioner was also rejected. The Chief Revenue Authority declined to refer the case to the High Court but by an order of the High Court of the 12th January 1921 he was directed to do so.
2. The question now referred is whether the above mentioned item of twenty-eight lacs can be allowed under Section 9(2)(ix) of the Indian Income Tax Act as an item of expenditure. The deduction allowed is in respect of any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of earning such profits. It has been argued that the words ' such profits ' refer only to the profits earned in the year for which the profits are assessed but Section 9(1) says that tax shall be payable in respect of profits of any business, and the words ' such profits' refer to the profits earned by the business generally and not to the profits of a particular year on which a particular assessment is levied. This is obvious because expenditure necessarily precedes the earning of profits, and much of the profits of one year must be earned by the expenses incurred in the previous year or years.
3. Now it must be conceded that the Rs. 28,00,000 were expenses incurred in raising fresh capital. The expenses incurred in raising capital on the notation of a Company are included in in the item 'Preliminary Expenses' which are not included in any of the deductions mentioned in Section 9. It seems, however, that it has been the practice of the Income Tax Collector to allow a deduction for such preliminary expanses as are written off out of profits during the first year of a Company's existence. It is difficult to see what warrant there is for such a practice except that, as we are told, it was instituted under the advice of the Advocate General some years ago. If then it is admitted that the cost of raising the original capital cannot be deducted from profits after the first year, it is difficult to see how the cost of raising additional capital can be treated in a different way. Expenses incurred in raising capital are expenses of exactly the same character whether the capital is raised at the flotation of the Company or thereafter : The Texas Land and Mortgage Co. v. William Holtham (1894) 63 L.J.Q.B. 496. It was never suggested in that case that the expenses incurred in raising debentures were monies wholly or exclusively laid out or expended for the purpose of the trade, manufacture, adventure or concern of the Company, which are the words used in the corresponding section in 5 & 6 Vic. c. 35. And if these Rs. 28,00,000 could not be treated as wholly laid out for the purpose of the trade of the petitioners, they could not be treated as incurred solely for the purpose of earning the profits of the petitioners' trade. The argument that these Rs. 28,00,000 cannot be treated as in the nature of capital expenditure as the Articles of Association do pot admit of their being paid out of the capital raised, which must stand in the Books of the Company at its par value, can easily be disposed of. Preliminary expenses which include the expenses of raising capital on the notation of a Company appear in the balance sheet as a paper asset, and are not deducted from the capital which is entered as a liability at its par value. In the same way if shares or cash are paid for the goodwill of a business, the capital liability is not reduced by such payment but the value of the goodwill appears as a paper asset. Any Company which is prudently managed will write off as soon as possible its preliminary expenses out of profits and then proceed to write down the value of the goodwill from the same source. But that is purely a question of prudent management and if the share-holders are desirous of distributing the profits without writing off prelimimary expenses and the value of the goodwill they can do so. This appears to me to be the real test. As long as the law allows preliminary expenses and good-will to be treated as assets, although of an intangible nature, the money so spent is in the nature of capital expenditure just as much as money spent in the purchase of land and machinery.
4. In my opinion, therefore, these twenty-eight lacs cannot 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.
5. The petitioners must pay the costs of the reference. Each party to pay their own costs of the rule.
6. I agree that the item of twenty-eight lacs of rupees cannot be allowed as an item of expenditure under Section 9(2)(ix) of the Indian Income Tax Act (VII of 1918.)
7. The item represents the amount of commission for underwriting seven-hundred thousand preference shares issued in accordance with the resolution of the Company to increase the capital by seven crores of rupees. In substance it means so much money paid for underwriting the shares, i. e., for raising the required capital. The manner in which the item is dealt with for the purpose or adjusting the accounts cannot alter the real nature of the expenditure. In the case of a running concern like the Company in question the sum may be and would be ordinarily debited to the profit account without showing any reduction in the amount of the new capital in the account books. The question whether the item falls properly within the scope of Section 9(2)(ix) must depend upon the real nature of the expenditure.
8. The clause in question relates to expenditure (not in the nature of capital expenditure) incurred solely for the purpose of earning such profits', i. e,, profits derived from the business carried on by the Company. The item in question could be deducted (1) if it is not in the nature of capital expenditure and (2) if it has been spent solely for the purpose of earning the profits.
9. I am of opinion that the sum spent by way of commission for underwriting the shares as in the present case is in the nature of capital expenditure. The expression ' capital expenditure' is not defined and the words ' in the nature of capital expenditure' make the meaning of the expression more elastic in its application to the facts of each case. Having regard to the substance and not merely the form of the matter, I have come to the conclusion that the sum paid is in the nature of capital expenditure.
10. There is no direct authority on this point. I think, however, that the ratio decidendi in The Texas Land and Mortgage Co. v. William Holtham (1894) 63 L.J.Q.B. 496 and the principles underlying the decision in The Royal Insurance Co. v. Watson  A.C.I. lend support to this conclusion.
11. In this view of the matter it is strictly not necessary to consider whether the sum can be held to have been expended solely for the purpose of earning each profits as the section contemplates. I do not feel any difficulty in rejecting the suggestion made by the learned Advocate-General that the 'profits' referred to in the clause must mean the profits of one particular year in which the expenditure in question is incurred. There is no such limitation in the section : and, in the absence of any words indicating such a limitation, it is clear that the contention cannot be accepted. Apart from this point, however, I have grave doubts as to whether the expenditure in question, if not in the nature of capital expenditure, could be said to have been incurred solely for the purpose of earning the profits, For the purpose of this reference it is unnecessary to pursue the point, and I refrain from expressing any definite opinion thereon.
12. I concur in the order as to costs.