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9. Question No. 1 in R. A. No. 962/(Cal) of 1986 is in two parts. The first part relates to disallowance of Rs. 7,500 representing the statutory fee paid in connection with the application to raise the authorised share capital. The second part relates to Rs. 500 representing the application fee paid for issue of bonus shares. So far as the expenditure incurred in connection with raising of the authorised share capital is concerned, there is a judgment of this court in the case of Brooke Bond India Ltd. v. CIT , wherein it was held, following the judgment of the Bombay High Court in the case of Tata Iron and Steel Co. Ltd., In re AIR 1921 Bom 391, that the result of the expenditure was to change the income-earning apparatus or structure. The finding of fact made by the Tribunal was that the expenditure had changed the capital base of the company. The capital base was reinforced on a permanent basis. This was the main purpose of the expenditure. In view of that, it was held that the change in the income-earning apparatus or structure was brought about by raising additional capital. The expenditure incurred for that purpose had to be treated as capital expenditure. The judgment was followed by a Division Bench of this court in the case of Union Carbide India Ltd. v. CIT , where it was held that the fees paid to the Registrar of Companies in connection with the increase of the authorised capital of a company was capital expenditure and hence not allowable under Section 37.

10. In that view of the matter, the first part of question No. 1 must be held to be capital expenditure. The second part relates to the application fee paid for issue of bonus shares. By issue of bonus shares, the capital structure of the company is not changed at all. A part of the reserves of the company has been capitalised. Both from the point of view of the company and from the point of view of the shareholder, no significant change really comes about as a result of issue of bonus shares. The effect of the issue of bonus shares has been explained by the Supreme Court of the United States of America quoting from an earlier decision in the case of FAsner v. Macomber [1920] 252 US 189. The observation was quoted with approval by the Supreme Court in the case of CIT v. Dalmia Investment Co. Ltd. , where the question of valuation of bonus shares was considered. In that case, Hidayatullah J. explained the consequences of issue of bonus shares. He observed at page 579 that, "in other words, by the issue of bonus shares pro rata, which ranked pari passu with the existing shares, the market price was exactly halved, and divided between the old and this bonus shares. This will ordinarily be the case but not when the shares do not rank pari passu and we shall deal with that case separately. When the shares rank pari passu, the result may be stated by saying that what the shareholder held as a whole rupee coin is held by him, after the issue of bonus shares, in two 50 paise coins. The total value remains the same, but the evidence of that value is not in one certificate, but in two". Hidayatullah J. explained the result of issue of bonus shares in the following words at page 578 : "The floating capital used in the company which formerly consisted of subscribed capital and the reserves now becomes the subscribed capital".

11. On the issue of bonus shares, a portion of reserves of the company have to be transferred and shown as subscribed capital. This has nothing to do with the capital structure of the company. The profit-making apparatus remains the same. There is no addition or alteration to the profit-making apparatus. The total funds available with the company will remain the same. As a result of the issue of bonus shares, there will be no change in the capital structure of the company.

12. Therefore, the questions are answered as follows :