1. This is a reference under section 256(1) of the Income-tax Act, 1961, made at the instance of the assessee. We are asked to answer the following question :
'Whether, on the facts and in the circumstances of the case, the legal expenditure of Rs. 15,086 incurred by the assessee towards fees for conducting an appeal before the Company Law Board in connection with the refusal of registration of shares of M/s. Bajaj Auto Limited is an admissible deduction under section 37 or any other section of the Income-tax Act, 1961 ?'
2. The assessee derives income from the manufacture of auto spare parts, from managing agency commission and from dividends. The assessee acquired 3,643 shares of M/s. Bajaj Auto Limited in or about February, 1968. The board of directors of M/s. Bajaj Auto Limited (now referred to as ' M/s. Bajaj', refused to register the said shares in the name of the assessee. The assessee took proceedings before the Company Law Board under section 111 of the Companies Act, 1956, to compel M/s. Bajaj to register the transfer of the said shares. The matter ultimately went up to the Supreme Court. The Supreme Court held that the directors of M/s. Bajaj had acted arbitrarily and unjustifiably in refusing to register the transfer of the said shares.
3. For the assessment year 1969-70, the assessee claimed as a deduction from its income an amount of Rs. 15,086 paid by it to solicitors towards fees incurred in conducting the appeal before the Company Law Board. The claim was disallowed by the Income-tax Officer. The Appellate Assistant Commissioner, in appeal by the assessee, upheld the Income-tax Officer's stand.
4. The assessee went up to the Income-tax Appellate Tribunal. Upon a review of the authorities, the Tribunal came to the conclusion that in the absence of registration, the purported transfer of the said shares vis-a-vis the assessee would fail. Title would be complete and valid only on registration of the assessee as the shareholder. Therefore, the said expenditure for getting the assessee's name registered in respect of the said shares was incurred towards the acquisition of a new asset and was of a capital nature.
5. Mr. Inamdar, learned counsel for the assessee, submitted that the assessee's title to the said shares was complete when the transferors handed over to the assessee the transfer deeds and the share certificates. Registration by M/s. Bajaj created no new right in the assessee's favour. The Tribunal was, therefore, in error in concluding that the said expenditure was incurred by the assessee for perfecting its rights in respect of the said shares.
6. Mr. Inamdar read to us the judgment of the Madras High Court in CIT v. M. Ramaswamy : 151ITR122(Mad) . Placing reliance upon the decision of the Supreme Court in Vasudev Ramchandra Shelat v. Pranlal Jayanand Thakar  45 Comp Cas 43, the Madras High Court held that if a transferor had transferred the right to get share certificates from the company to the name of the transferee, then, as between the transferor and transferee, the transfer was complete, though the transferee could not exercise his rights as a shareholder vis-a-vis the company, until the transfer of shares was recorded in the register of shareholders. This took away the force of the contention on behalf of the Revenue that till the shares were actually registered by the company in the name of the transferee, the transferee could not be taken to have acquired equitable rights in relation to the shares and become the transferee of the shares. The decision of the Madras High Court noted that transfer forms duly signed by the transferor along with the share certificates had been handed over to the transferee and the transferee had sought registration of the transfer in the books of the company. The company had not refused to recognise the transfer. It had stated that the registers were not available immediately to record the transfer. In the circumstances, the Madras High Court held that the assessee was entitled to set off capital loss against capital gains.
7. It was found by the Tribunal to be the case of the assessee that on account of the refusal to transfer the said shares by the board of directors of M/s. Bajaj, the right of the assessee to exercise voting rights and receive dividends, etc., in respect of the said shares was affected and that in order to protect the investment as well as the voting rights and the right to receive dividends, legal proceedings under section 111 had been initiated.
8. Now, until the said shares were registered by M/s. Bajaj in the name of the assessee, the assessee could not receive dividends on the said shares directly from M/s. Bajaj. It could not exercise the right to vote in respect of the said shares. It acquired no right to bonus or right shares upon the said shares. Qua M/s. Bajaj, it acquired no rights in respect of the said shares. All that the assessee acquired pursuant to the handing over to it of the transfer deeds and the certificates of the said shares was the equitable right to compel the transferors to hand over to it the amounts of the dividends upon the said shares and to exercise the right to vote thereof in the manner dictated by the assessee. To perfect its legal title to the said shares, pursuant to which alone it would directly receive dividends and be enabled to exercise the right to vote, the name of the assessee had to be entered in the share register of M/s. Bajaj in respect of the said shares. To compel M/s. Bajaj to do so, the assessee took action before the Company Law Board and incurred the said expenses. The said expenses were, therefore, incurred in the course of acquisition of the said shares and were of a capital nature.
9. The Madras High Court in the aforementioned case was dealing with an altogether different question upon substantially dissimilar facts. Mr. Inamdar referred to the statement in the judgment of this court in CIT v. Babulal Narottamdas (legal heirs of Narottamdas Jethalal) : 105ITR721(Bom) , that the normal function of a court was to declare a right where there was a pre-existing right or to determine a liability where there was a pre-existing liability. In Mr. Inamdar's submission, the Supreme Court had only declared the pre-existing right of the assessee to the said shares. That is not quite the right way of looking at it. The Supreme Court held that the assessee was entitled to have the said shares transferred to its name and required M/s. Bajaj to do so. The assessee's title to the said shares was perfected and its investment and the income thereon secured when that registration was, in fact, made.
10. Alternatively, it was submitted on behalf of the assessee that no fresh income-earning asset had been acquired by the incurring of the said expenditure, that only an obstacle had been removed, so that the said expenditure could not be regarded as capital expenditure. This submission begs the question considered in regard to the principal argument. Our conclusion upon the principal argument being what it is, the said expenditure must be held to be capital expenditure and not allowable as a deduction.
11. In the result, the question is answered in the negative and in favour of the Revenue.
12. The assessee shall pay to the Revenue the costs of the reference.