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income-tax Officer Vs. Ciffies Chemicals and - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(1985)11ITD707(Mum.)
Appellantincome-tax Officer
RespondentCiffies Chemicals and
Excerpt:
.....that since this was the second year immediately succeeding the previous year in which the industrial undertaking was set up for the manufacture and production of pharmaceutical products, the assessee's case is governed by the provisions of section 37(3d) of the income-tax act, 1961 ('the act), and, therefore, the provisions of section 37(3a) will not be applicable. the ito, therefore, made a disallowance of 15 per cent out of the expenses on advertisement, publicity and sales promotion, as laid down under section 37(3a). there was, thus, an addition of rs. 17,662 on this account. when the matter went up in appeal, the commissioner (appeals) held that in the first place. the sales promotion, advertisement and publicity expenses amounted to only rs. 68,905 and not rs. 1,17,752, as.....
Judgment:
1. This is an appeal filed by the revenue against the order of the Commissioner (Appeals).

2. The assessee is a private limited company, which was incorporated in July 1974. It took over a going concern, Pharmaceuticals and Allied (India) Company, for the manufacture of pharmaceutical products by agreement dated 11-6-1975. We were given to understand, at the time of the hearing of the appeal, that even though Pharmaceuticals and Allied (India) Company was taken over by agreement dated 11-6-1975, the actual manufacture of pharmaceutical products commenced only in the subsequent year, i.e., the previous year relevant to the assessment year 1977-78.

The ITO did not accept the claim of the assessee-company that since this was the second year immediately succeeding the previous year in which the industrial undertaking was set up for the manufacture and production of pharmaceutical products, the assessee's case is governed by the provisions of Section 37(3D) of the Income-tax Act, 1961 ('the Act), and, therefore, the provisions of Section 37(3A) will not be applicable. The ITO, therefore, made a disallowance of 15 per cent out of the expenses on advertisement, publicity and sales promotion, as laid down under Section 37(3A). There was, thus, an addition of Rs. 17,662 on this account. When the matter went up in appeal, the Commissioner (Appeals) held that in the first place. the sales promotion, advertisement and publicity expenses amounted to only Rs. 68,905 and not Rs. 1,17,752, as worked out by the ITO and, therefore, the disallowance under Section 37(3A) comes to only 15 per cent of Rs. 68,905, i.e., Rs. 10,336 and not Rs. 17,662. The Commissioner (Appeals) further held that since this was the third year of commencement of manufacturing activity of the assessee-company, which had set up an industrial undertaking for manufacture of articles, the provisions of Section 37(3D) will be applicable and, hence, there is no case for any disallowance under Section 37(3A). He, therefore, deleted the entire disallowance of Rs. 17,662 under Section 37(3A) made by the ITO. The revenue is aggrieved and has, therefore, come up in the present appeal before us.

3. The learned departmental representative, Shri Kumar, submitted to us that the provisions of Section 37(3D) applied only to a new industrial undertaking and not to an undertaking which was already existing since a long time ago and was acquired by the assessee as a running concern.

We were taken to the provisions of Section 37(3D), as it then existed, in order to point out that the stress is on the assessee's setting up an industrial undertaking for the manufacture or production of articles and this implies that the industrial undertaking has been set up by the assessee and not acquired by the assessee from any person who had earlier set it up. In this connection, Shri Kumar submitted that the manufacturing activity under consideration here was the business of Pharmaceuticals and Allied (India) Company, which was taken over by the assessee as a going concern by agreement dated 11-6-1975. Summing up, Shri Kumar vehemently argued before us that the Commissioner (Appeals) wrongly held that the assessee's case was covered by the provisions of Section 37(3D) and, therefore, there was no justification for any disallowance under Section 37(3A).

4. On the other hand, the assessee's learned counsel, Shri Goyal, submitted to us that the concern of Pharmaceuticals and Allied (India) Company had become a sick unit, which had ceased production and when it was taken over by the assessee-company by agreement dated 11-6-1975, it had to do a lot of spade work before commencement of production. Our attention was invited to the assessment order for the assessment year 1976-77, dated 9-3-1981, as well as the order of the Commissioner (Appeals), dated 14-6-1982, where a clear finding has been given that the production had not started and there was no sale, no manufacturing and no production. He, therefore, submitted that this was an industrial undertaking which commenced production during the previous year relevant to the assessment year 1977-78 and was, therefore, entitled to exemption from the operation of Section 37(3A) for the year in which the production has actually commenced, that is the assessment year 1977-78 and the two succeeding assessment years 1978-79 and 1979-80, which includes the assessment year 1979-80 under consideration in the present appeal. On this basis, Shri Goyal vehemently argued before us that the claim of exemption from the operation of Section 37(3A) was rightly allowed by the Commissioner (Appeals) and the addition on this account made by the ITO amounting to Rs. 17,662, was rightly deleted in appeal by the Commissioner (Appeals).

5. We have carefully considered the rival submissions. Section 37(3D), inserted by the Finance Act, 1978, with effect from 1-4-1979, till its omission by the Finance (No. 2) Act, 1980, with effect from 1-4-1981, stood as follows : (3D) 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 purposes 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.

This speaks of an assessee, who has set up an industrial undertaking for the manufacture or production of any article and does not specify that it must be a newly established industrial undertaking. Reference, in this connection, may usefully be made to Section 80J of the Act, which also deals with an industrial undertaking whose income is included in the assessee's total income for the purpose of deduction under Chapter VIA of the Act, Sub-section (4) whereof clearly lays down that the deduction under Section 80J will only be available to an industrial undertaking which apart from satisfying the other conditions, is not formed by the splitting up, or the reconstruction, of a business already in existence ; or is not formed by the transfer to a new business of machinery or plant previously used for any purpose. There is no such restriction, as in the case of Section 80J, in the case of the industrial undertaking mentioned in Section 37(3D).

This clearly shows that irrespective of whether the industrial undertaking set up by the assessee was previously used by some other person or is formed by the splitting up or reconstruction of a business already in existence, Sub-section (3D) of Section 37, exempting that industrial undertaking from the operation of Section 37(3A) for the year in which the undertaking begins manufacture or production and for . the subsequent two succeeding years, will be applicable.

This also stands to reason because irrespective of whether the industrial undertaking was earlier used by some other person or has been formed by the transfer to a new business of machinery or plant previously used for any other purpose, more expenses will be necessary for advertisement, publicity and sales promotion in the year in which the industrial undertaking begins manufacture or production and for the two succeeding years than in the case of other similar concerns or in the case of that concern itself after the third year. Considering all this and looking to the totality of the facts and circumstances, we have no hesitation in coming to the conclusion that the Commissioner (Appeals) rightly held that the industrial undertaking set up by the assessee for manufacture and production of pharmaceutical products will be governed by the provisions of Section 37(3D) for the year of commencement of manufacture or production and the succeeding two years and, therefore, for the assessment year 1979-80 under consideration in the present appeal, the assessee-company will be governed by the provisions of Section 37(3D), exempting the industrial undertaking from the operation of Section 37(3A). This means that the disallowance of Rs. 17,662 under Section 37(3A) made by the ITO was not justified and was rightly deleted in appeal by the Commissioner (Appeals). On this issue, therefore, the order of the Commissioner (Appeals) appears to be correct and is upheld.


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