1. These cross-appeals by the assessee and the revenue are directed against the two orders of the Commissioner (Appeals) both dated 30-1-1982 but relating to the assessment years 1979-80 and 1980-81. In order to appreciate the grievances of the parties before us, it is necessary to go into the factual background of the case before projecting the issues. The factual background is as under.
2. A private limited company known as Rieta Biscuit Co. (P.) Ltd. ('the Lessor') incorporated under the Indian Companies Act, 1956, with its registered office at Patiala, was in possession of, as its business assets, land, factory, building, machinery, plant, furniture, fixture and other equipments for the purposes of manufacture of biscuits, etc.
However, the said company was not running on sound financial grounds, as stated in the letter dated 17-11-1980 addressed to the ITO by the assessee now in appeal before us. The said company was virtually a sick unit. This Rieta Biscuit Co. (P.) Ltd. had, as on 31-8-1977, the following shareholders registered in the shareholders' list: 3. On 23-8-1977, a firm was constituted evidenced by an instrument of the said date executed and drawn up on that date. The business of the partnership was to be carried on by the firm of Bakeman's Home Products. This partnership was constituted by six partners, i.e., This partnership was formed, 'with an object to run the factory owned by Rieta Biscuit Co. (P.) Ltd.' for the manufacture and sale of biscuits and allied products against such arrangement as may be arrived at with the said company after negotiations. For this purpose, the parties to this instrument of partnership authorised Seth Charan Dass being the party of the first part to this instrument to negotiate with the management of the said company on behalf of the partnership concern for the above purpose. This partnership was deemed to have commenced with effect from 23-8-1977. Clause (6) of the instrument provides that the accounts books of the firm will be closed on 30-6-1978 and the books of account will be maintained on mercantile system of accounting.
The shares of the partners respectively are 10 per cent, 10 per cent, 30 per cent, 14 per cent, 18 per cent and 18 per cent. Two of the partners mentioned above, namely, Sanjiv Gupta and Rajiv Gupta had passed their M.B.A. examination.
On 31-8-1977, an agreement was entered into between Rieta Biscuit Co.
(P.) Ltd. (lessor) and the firm of Bakeman's Home Products (lessee) both having their registered office at Patiala respectively through Shri Om Sarup s/o Late Sham Lal Aggarwal being the managing director of lessor company and Seth Charan Dass partner representing the firm of Bakeman's Home Products (the lessee). The important terms and conditions of this agreement which appears at pages 1 to 15 of the assessee's paper book are as under : (i) The lessor agreed to allow the firm, namely, the lessee, to use all its fixed assets as per its balance sheet as on 30-8-1977 (being the same as on the date of the agreement, namely, 31-8-1977) including the land, factory building, machinery, plant, furniture, fixture and other equipments except one ambassador car. This agreement was for a period beginning from 31-8-1977 and ending 30-6-1979. Clause (9) of this agreement provided terms of its renewal. In addition to the above assets leased by the lessor to the lessee, the lessor also agreed to provide at its own cost the following assets for use by the lessee along with other assets mentioned above : (c) one tonne kg. Yaro base scale valued approximately at Rs. 20,000.
(ii) In return of the use and exploitation of the above assets of the lessor, the lessee agreed to pay to the lessor a sum equivalent to 2 per cent of the value of the goods manufactured by the lessee during the period ending 30-6-1979 subject, however, to minimum of Rs. 6 lakhs for each of the periods from 1-9-1977 to 30-6-1978 and from 1-9-1978 to 30-6-1979. In addition to it, 3 per cent of the net sales affected by the party of the second part, i.e., lessee, during each of these two periods was to be paid. Clause (4) provided the determination of value of the goods manufactured for working out the payment to the lessor.
(iii) Since the lessor was carrying on the same business as was intended to be carried on by the lessee, Clause (6) of the agreement provided that the lessee will have the option to purchase all the finished products if any, as may be in stock with the lessor as on 30-8-1977. It was also provided in this clause that the lessee could also purchase from the lessor all goods in process, raw materials, general stores, packing materials, etc., if any. The lessor also conceded that the lessee may sell the biscuits, etc., manufactured by it by branding the same as Rieta Biscuits if it so liked.
However, it was agreed upon that the lessee will be free to give any other brand name to the goods manufactured by it during the continuance of this agreement.
(iv) As pointed out supra, Clause (9) embodied the terms of renewal of this agreement. The lessee was given the option to extend the term of this agreement beyond 30-6-1979 for a further period of five years or for any period lesser than that on the same terms and conditions as contained in this agreement. However, it was a reiteration to it, namely, that the payment of said minimum of Rs. 6 lakhs by the lessee to the lessor will be per annum beginning from 1-7-1978 onwards. It was, however, averred that in case the equivalent of 2 per cent of the value of the goods manufactured by the lessee during any period after 1-7-1978 exceeded a sum of Rs. 6 lakhs, that will be the amount payable by the lessee to the lessor in place of the first said amount of Rs. 6 lakhs per annum. This clause also provided that the lessor shall have no option to terminate this agreement for a further period of five years from 30-6-1979 in case the lessee chooses to keep this agreement in operation for any period extending over five years from 30-6-1979.
This clause also provided that notwithstanding the above-mentioned provisions in Clause (9) of the agreement, the lessor will not be entitled to charge 3 per cent of the net sales as aforesaid, affected by the lessee after 30-6-1979 in case this agreement is extended beyond 30-6-1979 at the option of the lessee.
(v) The lessee was required as a part of this agreement to deposit with the lessor an amount of Rs. 6 lakhs. The said sum of Rs. 6 lakhs will be paid by the lessee to the lessor immediately.
(vi) Clause (12) of the agreement contained the modus of determination of the amount due to the lessor by the lessee in this agreement. Clause (13) provided for recurring repairs of building, machinery and plant or any other fixed assets of the lessor by the lessee. However, major replacements in case of any break down, etc., were the responsibility of the lessor provided the lessee in its turn maintained the machinery and plant in running condition and the building in good condition. At the end of the agreement, the lessee was enjoined upon subject to Clause (12) mentioned supra, to peacefully deliver the possession of the said building, machinery and plant to the lessor without any hindrance and interruptions.
5. The assessee-firm, i.e., the lessee mentioned in this agreement filed the return of its income for the accounting period ending on 30-6-1978 relevant to the assessment year 1979-80 under appeal before us declaring loss of Rs. 6,58,290. The ITO noticed that a sum of Rs. 8,32,191 had been debited in its final accounts. He found that these payments were under the terms of the agreement referred to supra. He was of the opinion that the payment made by the assessee was excessive or unreasonable in terms of Section 40A(2)(a) of the Income-tax Act, 1961 ('the Act'). He gave an opportunity to the assessee as to why a part thereof need not be disallowed to which the assessee submitted replies dated 17-11-1980 appearing at pages 14 to 18 and dated 26-11-1980 appearing at pages 18 to 19 of the assessee's paper book.
The argument of the ITO was that the written down value of the assets leased out by the lessor to the lessee was not such as to justify the substantial payment mentioned in the agreement. For this, detailed reasons are given by the ITO in his order. According to the ITO, out of the total payment of Rs. 8,32,191 mentioned supra, a sum of Rs. 7,20,000 would only be taken into consideration to be admissible as a deduction. The ITO worked out this sum by assuming the value "of the leased out assets at Rs. 48 lakhs and allowing lease money at 15 per cent of that value. He disallowed the balance of Rs. 1,12,191, 'under Section 40A(2)(a) of the Income-tax Act, 1961'. The assessee had made a claim for deduction under Section 80J of the Act, which was rejected by the ITO with the observations that the assessee had not set up any new independent unit because the assessee owned only a generator and other assets such as machinery and plant were offered by the lessor.
According to the ITO, this business of manufacturing biscuits had already been in existence and was being run by Rieta Biscuit Co. (P.) Ltd., Patiala and the assessee had added a generator, office equipment, furniture, etc. and as such the condition laid down under Section 80J(4), i.e., the industrial unit not formed by the splitting up of the business already in existence, are not satisfied. This claim was rejected.
6. The assessee had claimed in the profit and loss account deduction of a sum of Rs. 3,48,468. There was also a claim of deduction of the sum of Rs. 11,208 as sales promotion expenses. The ITO, thus, worked out the amount of Rs. 3,59,676 (Rs. 3,48,468+Rs. 11,208) and considered its admissibility keeping in view the restrictions imposed in Section 37(3A) of the Act. According to the ITO, it was pertinent to note that the assessee had not set up any industrial undertaking as it had merely taken a factory on lease for a period of two years and the case of the assessee was, therefore, for these expenses not covered by the provisions of Section 37(3D). He considered the claim of the assessee in accordance with the provisions of Section 37(3A). The ITO has mentioned in the said order that the assessee furnished details as mentioned in Section 37(3B). Out of the total expenses of Rs. 3,59,678, the ITO allowed expenditure under Section 37(3B) to the extent of Rs. 18,761. There was, thus, a balance of Rs. 3,40,915. Out of this Rs. 3,40,915 the ITO disallowed 15 per cent which was quantified at Rs. 51,136. This was added back to the total income of the assessee. This assessment was completed on 28-4-1981 determining net loss of Rs. 4,30,420 to be divided amongst the partners.
7. For the assessment year 1980-81, the assessee had filed a return declaring total income of Rs. 52,510 on 28-7-1980. After discussing the terms of the agreement on the lines discussed for the assessment year 1979-80 and after considering the claim under Section 80J and the expenditure on publicity, etc., the ITO disallowed lease money to the extent of Rs. 2,50,000 ; rejected the claim for deduction under Section 80J and disallowed Rs. 1,04,560 out of publicity and advertisement expenses considering the provisions of Section 37(3A), 37(3B) and 37(3D). This assessment was completed on 26-11-1981.
8. These assessments were challenged in appeal before the Commissioner (Appeals), Chandigarh, The Commissioner (Appeals) confirmed the disallowance of payments made under the terms of the agreement respectively amounting to Rs. 1,12,191 and Rs. 2,50,000. He also upheld the ITO's action in not entertaining the claim under Section 80J for each of the assessment years under appeal. However, the learned Commissioner (Appeals) held that Section 37(3D) is applicable to the case of the assessee and the additions made by the ITO to the extent of Rs. 51,136 and Rs. 1,04,560, respectively, for the assessment years 1979-80 and 1980-81 are unjustified. Now in the appeals of the assessee, the grievance is that the learned Commissioner (Appeals) erred in upholding the disallowance of the amounts mentioned above for the respective two years paid under the terms of the agreement and in not allowing the assessee deduction under Section 80J for each of the assessment years under appeal. On the other hand, the revenue is aggrieved with the deletion of the two amounts mentioned by us supra for the assessment years 1979-80 and 1980-81 by holding that Section 37(3D) was applicable to the case of the assessee. Hence, the cross-appeals.
9. The learned counsel for the assessee submitted before us that insofar as the terms of the agreement are concerned, the fact of payment is not in doubt, the agreement has been accepted and the revenue has disallowed part of payment on the ground that they are excessive or unreasonable considering the provisions of Section 40A(2)(a). He. however, submitted that the authorities below have failed to show how the provisions of this section were applicable and the disallowance is merely on conjectures and surmises. He submitted that insofar as the reasonableness of the payment is concerned, the best judge is the businessman and not the revenue in view of the following judgments-CIT v. Walchand & Co. (P.) Ltd.  65 ITR 381 (SC), J.K. Woollen Manufacturers v. CIT  72 ITR 612 (SC) and Aluminium Corporation of India Ltd. v. CIT  86 ITR 11 (SC).
It was, thus, contended by the learned counsel for the assessee that it was for the lessee to decide what is reasonable payment for exploitation of assets of another business man and taking into account such commercial consideration the agreement referred to supra had been entered into which is not in doubt and the payments made thereunder, therefore, are not covered by the section invoked by the authorities below. Amounts paid may be fully allowed.
10. With regard to the claim under Section 80J for each of the assessment years under appeal, the learned counsel for the assessee submitted that Section 80J does not require for admissibility of a deduction ownership of the asset as a prerequisite. If, in fact, the assessee is manufacturing articles and the gross total income of the assessee includes any profits and gains derived from such industrial undertaking, etc., the deduction is admissible irrespective of the fact that the asset with the aid and exploitation of which the profits are earned belongs to someone else. The allowance was admissible in view of the following judgments. Addl. CIT v. A. Mukherjee & Co. (P.) Ltd.  113 ITR 718 (Cal.), Griffon Laboratories (P.) Ltd. v. CIT  119 ITR 145 (Cal.) and CIT v. Neo Pharma (P.) Ltd.  137 ITR 879 (Bom.).
In view of the above judgments, it was contended that factually the assessee has manufactured goods, run an industrial undertaking and is as such entitled to deduction under Section 80J. The authorities below erred in refusing his claim for the assessment years under appeal.
11. Opposing these submissions, the revenue contended that the orders of the authorities below were fully justified insofar as the disallowance of payments under the agreement are concerned because these were excessive or unreasonable considering the provisions of Section 40A(2)(a). Insofar as the relief under Section 80J is concerned, the orders of the Commissioner (Appeals) were supported with the further submission that in view of the judgment of the Madras High Court in the case of CIT v. Universal Radiators (P.) Ltd.  128 ITR 531, the assessee is not entitled to deduction under Section 80J and since the assessee was not entitled to deduction, the lessor could only claim.
12. Arguing their own appeals, it was contended by the revenue that the action of the ITO in disallowing part of the payments under Section 37(3A) is fully justified. This is so because Section 37(3D) is not applicable. Therefore, the Commissioner (Appeals) erred in giving the assessee necessary relief. On the other hand, the learned counsel for the assessee supported the order of the learned Commissioner (Appeals) and justified his conclusion that the assessee was covered by the provisions of Section 37(3D) and as such no disallowance was justified.
13. We have given careful consideration to the rival submissions.
Before we consider the issues, we would like to bring into focus the relevant provisions of law so far as the first issue before us is concerned, i.e., the payment made by the assessee as a lessee to a private limited company, being the lessor. In the case of Walchand & Co. (P.) Ltd. (supra), the Hon'ble Supreme Court held that in applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the revenue. This proposition of law was reiterated by the said Court in the case of J.K.Woollen Manufacturers (supra). In the latter case, the Court further added that it is, of course, open to the Tribunal to come to a conclusion either that the alleged payment is not real or that it is not incurred by the assessee in the character of a trader or it is not laid out wholly and exclusively for the purpose of the business of the assessee and to disallow it.
14. In the case of Aluminium Corpn. of India Ltd. (supra), the assessee company had under an agreement appointed another company as their sole selling agent for the initial period of five years. The selling agent was entitled to commission on the sales of its products whether made through the agent or directly to the customers. The selling agent was responsible for the payment, of the price due from the purchasers immediately after the goods left the assessee's works or godown. Such payment had to be made on presentation of documents by the assessee not later than a fortnight after the goods were despatched and in default of payment the assessee was entitled to charge interest. The agent was also responsible for due fulfilment of all contracts made by the assessee and also for the consequences of breach of contract by any customer and all losses and damages arising therefrom to the assessee.
The payments made under the said agreement in the said case were disallowed. The disallowance was confirmed by the AAC. However, the Tribunal upheld the claim of the assessee for payment of commission holding that the commission was expended for purposes of the assessee's business. The agreement was entered into bona fide and had been acted upon and the department had not impugned it as a sham. Upon a reference of the question : whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the commission was allowable as a business expenditure, the High Court answered the question in the negative, i.e., against the assessee. On appeal to the Supreme Court, it was held reversing the decision of the High Court that the Tribunal had given good reasons in support of its conclusion.
The primary facts found by the Tribunal and the factual inferences drawn therefrom were not open to review by the High Court. The payments were, thus, held as allowable.
15. In the light of the above position of law, we examine the case of the assessee on merits relating to the payment made under the terms of the agreement. The terms of the agreement show that it was purely on commercial considerations. The lessor has independent existence. The assessee is a firm. The parties to the agreement have, as is apparent from the terms of the agreement abstracted supra by us, zealously guarded their commercial interests. The agreement is based upon commercial considerations. The parties to the agreement have acted upon the terms in good faith. The revenue has not doubted at all the genuineness of the agreement. In fact, in terms of agreement the ITO worked out the sum of Rs. 7,20,000 as admissible under the terms of the agreement. It was only the 'excessive part' of it that he was of the opinion was not covered because it, according to him, was excessive and unreasonable. This conclusion drawn by the ITO is unwarranted on the facts of the case.
16. The assessee-firm was formed with the very object of running a factory of the type as was owned by the lessor who was not running it on sound commercial lines. The lessor, therefore, apparently wanted to make the best of the bargain and abstracted good terms from the lessee in lieu of plant and machinery and other hereditaments that it offered to the lessee. The lessee-assessee, on the other hand, have thought that with the business acumen of the partners, it would be able to convert a sick concern into a profitable venture. At the point of time when the agreement was entered into it could not be said with certainty that there will be such profits as would make the payments under the agreement look excessive or unreasonable to the revenue's point of view.
17, We find that if the assessee had to set up an establishment of the type that it got under the terms of the agreement, substantial capital investment would be necessary for import of requisite machinery and it would have sufficient gestation period in which substantial amount would remain locked up. The assessee, therefore, thought that the terms of the agreement with the lessor for parting with the assets for exploitation by the assessee for the manufacture of biscuits was a better proposition. After careful perusal of the terms of the agreement we find that the lessor did not have anything which could be said as payment without commercial considerations. Even according to the ITO, the value of the assets in the market though negligible on the basis of the written down value would be substantial to the extent of Rs. 48 lakhs at the time when the agreement was entered into. The assessee in fact claims that the value of such a plant and machinery would be much higher and that in the terms of the agreement, the assessee saw commercial gains and no benefit of the type to the lessor that may be said to be given on extra commercial considerations. We have carefully perused clauses (3), (4), (7) and (8) to (13) of the agreement. It becomes clear that both the parties were trying to protect their respective commercial interests to the utmost. Thus, Clause (6) provided that the lessee, being party of the second part will have the option to purchase all the 'finished goods' and 'in-process' products.
It even got, under Clause 7, the right to use the lessor's brand name if it so decided. It, of course, further secured the right under this clause to give any other brand name to the goods manufactured by it during the continuance of the agreement. It in fact utilised this right and option and named and branded its products as 'bakeman'.
18. Under Clause 9 the lessee secured a valuable right in the form of an option to extend the term of this agreement beyond 30-6-1979 for a further period of five years or for a period lesser than that, on the same terms and conditions. This right and option was in fact exercised for its benefit when the goods manufactured and sold under its own brand found favour with the consumers. This clause also shows how contested were the terms from both the sides. Under this clause the lessor protected its own interest by providing that 'the payment of the said minimum of Rs. 6 lakhs by the party of the second part to the party of the first part, will be per annum beginning from 1-7-1978 onwards, provided that in case the equivalent of 2 per cent of the value of goods manufactured by the party of the second part, during any period after 1-7-1978 exceeds a sum of Rs. 6 lakhs, that will be the amount payable' by the assessee. On the other hand, the lessee included a term to deprive the lessor of right of termination of the agreement for a further period of five years in case the lessee exercised its option to so extend it. Moreover, the lessee deprived the lessor under this clause of the right of charging 3 per cent of the net sales as aforesaid affected by the lessee after 30-6-1979. Clause 13 enjoined upon the lessor 'to effect major replacements in case of any breakdown, etc., at its own cost'.
19. Thus, it can be easily seen that the parties to the agreement had, from either side, commercial consideration as the first priority.
Moreover, it is easier to sit in an armchair and try to find whether the payment is excessive or unreasonable with what may be called 'hind sight'. A successful industrial undertaking does not necessarily operate upon the strength of its capital, though it is indeed important. Much depends upon the business acumen of the parties involved. This is amply demonstrated by the example in hand. Whereas Rieta Biscuits were finding it difficult to make any headway with the same plant and machinery, the lessee-assessee has made it a thumping success. So the genuine payments wholly and exclusively made for the purpose of the business cannot be considered excessive or unreasonable by applying the subjective standards of the ITO, because the highest Court of this land has laid down, as seen supra, that reasonableness of the expenditure has to be seen from businessman's point of view.
20. The payments made under the agreement duly reached the lessor and the lessor company has been assessed to tax on these sums in the assessment years 1978-79 and 1979-80. Thus, applying the principles laid down by the Supreme Court in the case of J.K. Woollen Manufacturers (supra), we give a finding of fact that our conclusion on facts is that the payments envisaged under the agreement are real, that these have been incurred by the assessee-firm in the character of a trader and that these are wholly and exclusively laid out for the purpose of the business of the assessee. The agreement was a genuine document and acted upon by the parties. The payments are on facts of the case not excessive or unreasonable.
21. The ITO referred to Clause (a) of Sub-section (2) of Section 40A, but he failed to appreciate the depth and expense of this Section 40A(2) as a whole. He only saw part (a) of Sub-section (2) which invested him with the powers to fiddle with the payments. He, however, failed to pick out any specific provisions from Sub-clauses (i) to (vi) given under Clause (b) ibid and to clinch the issue by showing factual basis for it. He had as such no legal authority to disallow the payments as he did because he cannot merely disallow a payment actually and factually made without showing by what statutory provision it has been particularly hit and what is the material on record for its application. The provisions that he thought as applicable did not warrant his action and the Commissioner (Appeals) erred in supporting him without himself analysing the relevant provisions and showing their applicability to the facts of the case. This section is not applicable to the facts of this case as discussed by us above. For the years under appeal the orders of the authorities below on this issue are, therefore, set aside and the entire payments made by the lessee to the lessor in terms of the impugned agreement are directed to be allowed.
The assessee succeeds on this issue in each year.
22. Having disposed of ground No. 1 in each year of the assessee's appeal as above, we come to the only other ground ; being ground No. 2, relating to deduction under Section 80J. The facts set out above show that the assessee got a factory on lease for manufacture of biscuits and other products of home consumption. These assets like land, factory building, machinery, plant, furniture, fixtures and other equipment.
The lessor also provided one matador van, two Avery scales and one tonne kg. yaro scale. These assets under the terms of the agreement remained the property of the lessor. The lessee only got a right of their use and exploitation for business purposes. There was no 'transfer' of these assets within the meaning of this word as envisaged in Section 80J(4).
23. To the assets acquired for commercial use as mentioned in para 22 supra, the assessee added a generator, office equipment and furniture, etc. and its own cost and ownership. Since the assessee had started the manufacture of articles under such set up, it claimed deduction in respect of profits and gains derived therefrom in terms of Section 80J for both the assessment years under appeal. The ITO rejected this claim on the ground that 'no independent unit has been set up by the assessee-firm'. He further observed that 'the conditions laid down in Section 80J(4), i.e., it is not formed by the splitting up or the reconstruction of a business already in existence are not satisfied'.
The Commissioner, (Appeals) in appeal held that 'the assessee has not set up a new industrial undertaking and is not entitled to the claim of Rs. 62,041 under Section 80J' Hence, this ground in each of the appeals by the assessee and the contentions by the rival parties before us, 24. Before we come to the claim of the assessee on merits, we must keep in focus the guidelines laid down by the Hon'ble Courts while dealing with such matters. In CIT v. Webbing & Belting Factory Ltd.  68 ITR 186, the Supreme Court of India held that Section 80J, which is intended to encourage the setting up of new industrial undertakings, must be construed liberally. Again in CIT v. Orient Paper Mills Ltd.  94 ITR 73 (Cal.), it was laid down that such liberal construction must be in a broad commercial sense from a common sense point of view. Keeping these guidelines in view we proceed to analyse and consider the claim of the assessee.
25. The authorities below were mainly influenced by the provisions of Section 80J(4) in rejecting the claim for deduction made by the assessee-firm. However, we find that they erred in understanding the import of this Sub-section (4). The machinery and plant and other assets about which the assessee obtained a right to use and exploit were not 'transferred' to the assessee by the lessor company within the meaning of the term 'transfer' used in Section 80J(4)(ii). The assessee no doubt is manufacturing articles and is an industrial undertaking notwithstanding the fact that its manufacturing activity was carried on with the aid and exploitation of assets belonging to sameone else. So far as the assessee is concerned, its business activity commenced only after the acquisition of plant and machinery, etc., on lease from the lessor. The fact that the assessee is not the owner of such assets should not stand in the way of its getting deduction under Section 80J as claimed. In the case of Neo Pharma (P.) Ltd. (supra), the Hon'ble Bombay High Court, after considering the Calcutta High Court judgments in the case of A. Mukherjee & Co. (P.) Ltd. (supra), Griffon Laboratories (P.) Ltd. (supra) and Delhi High Court judgment in the case of Orient Longman Ltd. v. CIT  130 ITR 477, followed them by holding that "though the plant and machinery for the purpose of manufacture belonged to pharmed and the services of certain employees of pharmed were also utilised in that process, the manufacturing activity was really that of the assessee".
26. In the case before us, the manufacturing activity is entirely carried on by the assessee with the aid and assistance of assets acquired on lease the terms of which have been considered supra. We are, therefore, convinced that the income of the assessee was in the form of profits and gains derived from an industrial undertaking within the meaning of Section 80J. And for purpose of this benefit by way of deduction the 6 per cent of the capital employed in the industrial undertaking has to be worked out. In our opinion, such capital must be of the assessee running the industrial undertaking. The assessee, therefore, cannot include the value of leased plant and machinery and other hereditaments in the computation of capital employed. However, the assessee is entitled to such deduction on its own capital employed in the industrial undertaking in various assets such as the power generator, office equipment and furniture, etc. We accordingly set aside the orders of the authorities below on this issue as well and direct the ITO to compute the deduction under Section 80J in accordance with law taking into account our above observations and directions for each of the assessment years under appeal. Since the assessee succeeds on both the grounds in each of the appeals, the appeals of the' assessee are allowed. Before we close, however, we would like to observe that the Madras High Court case of Universal Radiators (P.) Ltd. (supra) relied upon by the revenue turns on its own facts and in no way goes against the claim of the assessee and does not really say that only a lessor is entitled to relief under such circumstances.
27. Now coming to the appeals of the revenue, we find only one ground in each year relating to allowance of advertisement expenditure incurred by the assessee and allowed fully by the Commissioner (Appeals). The Commissioner (Appeals) held that Section 37(3D) applies to the case of the assessee. Section 37(3D) was inserted by the Finance Act, 1978, with effect from 1-4-1979 and was omitted by the Finance (No. 2) Act, 1980, with effect from 1-4-1981. It was, thus, applicable to the assessment years 1979-80 and 1980-81 which are under appeal before us. It provided that in a case where an assessee has set up an industrial undertaking for the manufacture or production of any articles, nothing in Sub-section (3A) shall apply in respect of any expenditure on advertisement, publicity or sales promotion incurred by the assessee, for the purpose of the business of such undertaking, in the previous year in which such undertaking begins to manufacture or produce such articles and each of the two previous years immediately succeeding that previous year. In other words, this benefit was available for three assessment years. The years under appeal are within this period and also covered by the span of existence of this Sub-section. The only dispute was that the ITO did not consider that the assessee was producing Or manufacturing articles because the machinery was taken on lease.
28. However, we have held above while dealing with the issue of Section 80J deduction that the assessee is running an industrial undertaking which is manufacturing and producing articles. As such the ITO was in error which was rightly corrected by the Commissioner (Appeals). In such a case the provisions of Section 37(3A) which restricts the allowance of expenditure on the prescribed lines are not applicable.
The order of the Commissioner (Appeals) as such requires no interference. Appeals of the revenue are, therefore, not justified, These are dismissed.
29. In the result, appeals of the assessee allowed and that of the revenue dismissed.