For upgrading items on counter, i guess you mean like
Ring of mind (+3 intellect permanent after 30 battles). This is interesting idea, and doable, but only for 1 lvlup i think. Because you lvlup item from 1st to 2nd lvl, and then what ? How does counter resets, and start counting next 15-20 battles for that `new`2nd lvl item ?
And problem with this is, later in game when you get 1st lvl from Bill`s portrait and want to upgrade it but have no more enemy stacks to fight.
Simple fight item to upgrade it was great, higher lvl of item, tougher battle and it was great. But as you said it, it created problems with number of items in game
Sry for not being of much help here

Good luck.