1. This appeal is filed by the assessee against the order of the Commissioner, Trivandrum, dated 22-4-1983 under Section 263 of the Income-tax Act, 1961 ('the Act') and it pertains to the assessment year 1979-80. The learned Commissioner felt that the assessment completed by the ITO on 30-4-1981 under Section 143(3) of the Act was erroneous as well as prejudicial to the interests of the revenue and it required revision by him for the reason that while completing the assessment, the claim for advertisement, publicity and business promotion expenditure totalling to Rs. 71,521 was allowed as a deduction instead of restricting the allowance as per the terms of Section 37(3A) of the Act. in view of the fact that the total of such expenditure exceeded Rs. 40,000. The assessee filed his reply dated 16-4-1983 before the Commissioner objecting to the revision and contending that the order of the ITO was neither erroneous nor prejudicial to the interests of the revenue and hence there was no need to invoke the revisional powers under Section 263. The Commissioner for the reasons contained in the impugned order held that there was no substance in the objections filed by the assessee and his assumption of jurisdiction was quite in order.
He, accordingly, set aside the assessment for being redone. He directed the ITO that while framing the reassessment, the assessee should be given a reasonable opportunity of being heard on the points mentioned in paragraph Nos. 5 and 6 of his order and allow appropriate deduction after duly taking into consideration the finding given by him in his order in paragraph No. 4. Aggrieved against the said order of the Commissioner, this present appeal is filed by the assessee.
2. The two main points in controversy are, whether the graded disallowance contemplated under Section 37(3A) is to be applied to the whole of the expenditure incurred towards advertisement, publicity and business promotion expenses by the assessee or whether such disallowance is to be applied for such expenses incurred for each business held by the assessee. The second question is, whether Radhas Perfumery Enterprises which was previously run by a firm and which came into the exclusive ownership of the assessee from 1-4-1978 is an industrial undertaking set up for the manufacture or production of any article and if so, whether expenditure on advertisement, publicity and sales promotion by the said business is exempt from the operation of Sub-section (3A) of Section 37 by virtue of Section 37(3B).
3. The assessee has got interest in two distinct and separate proprietary business concerns (i) Radha's Perfumery Enterprises, and (ii) Kerala Sabdam, which is a weekly magazine.
4. In this appeal it was firstly urged by the learned counsel for the appellant-assessee that each business should be taken separately for purposes of disallowances under Section 37(3A). The learned counsel submitted that the following is the bifurcation of advertisement, publicity and business promotion expenses incurred by his two concerns: Advertise- Business Publi- TotalEnterprises 33,010 12,137 -- 45,247KeralaSabdam Weekly -- 9,537 16,737 26,274 71,521 The further case of the assessee was that the following three items of expenditure which formed part of Rs. 12,137 mentioned above did not come under the category of either advertisement, publicity or sales promotion expenses:Dr. Rajakrishnan 1,028.00Advertisement in smallNewspapers 3,075.00Canvassing expenses paid toShri Sasidharan 1,281.40 5,384.40 If this amount is excluded from Rs. 45,247 then the resultant figure would fall below Rs. 40,000 in which case Section 37(3A) would be inapplicable even in the case of Radha's Perfumery Enterprises. Under the circumstances, the learned counsel for the assessee maintained that the assumption of jurisdiction under Section 263 by the Commissioner is not warranted and, therefore, his impugned order is liable to be set aside. The learned counsel for the assessee brought to our notice the commentary in Sampath Iyengar's Law of Income-tax, Seventh edn., Vol.
2, where the learned author while discussing the law under Section 28 of the Act, states as follows: ... This clause also lays down that the profits of each and every business carried on by the assessee will have to be separately computed, but should thereafter be all put together and aggregated to arrive at the profits and gains taxable under this head. (p.
1111) This statement of law by the learned author is dependent upon the decisions of the Madras High Court in South Indian Industrials Ltd. v.CIT  3 ITR 11 and Ram Chandra Munna Lal v. CIT  17 ITR 394 (Punj.) as well as the decision of the Supreme Court in CIT v. P.M.Muthuraman Chettiar  44 ITR 710. The learned counsel submitted that Section 28 is a provision under which the profits and gains of business or profession will be computed. When profits or gains from each business are to be separately computed then the provisions of Section 37(3A) should also be applied to each of the businesses carried on by an assessee. The learned counsel also submitted that a harmonious construction of the provisions of Section 37(3A) would also justify his stand.
(3A) Notwithstanding anything contained in Sub-section (1) butfwithout prejudice to the provisions of Sub-section (2B) or Sub-section (3), where the aggregate expenditure incurred by an assessee on advertisement, publicity and sales promotion in India exceeds forty thousand rupees, so much of such aggregate expenditure as is equal to an amount calculated as provided hereunder shall not be allowed as a deduction, namely:(i) where such aggregate expenditure does 10 per cent of the adjusted not exceed 1/4 per cent of the turnover or, expenditure ;as the case may be, gross receipts of the (a) 'adjusted expenditure' means the aggregate expenditure incurred by the assessee on advertisement, publicity and sales promotion in India as reduced by so much of such expenditure as is not allowed under subsection (1) and as further reduced by so much of such expenditure as is not allowed (under Sub-section (2B), or Sub-section (3), or both) ; (b) 'turnover' and 'gross receipts' mean turnover or gross receipts, as the case may be, as reduced by any discount or rebate allowed by the assessee.
6. The learned counsel, further submitted that the departmental Circular No. 240 dated 17-5-1978 (see Taxmann's Direct Taxes Circulars, Vol. II, 1985 edn., p. 767 also) supports his viewpoint. The said circular as far as relevant for our purpose is as follows: In order to place a curb on extravagant and socially wasteful expenditure on advertisement, publicity and sales promotion at the cost of the Exchequer, the Finance Act, 1978 has inserted a new Sub-section (3A) in Section 37 for the disallowance of a part of such expenditure in the computation of taxable profits.... (p. 773) 7. The learned counsel for . the assessee submits that taxable profits of each business is to be computed under Section 28 and so the disallowance under Section 37(3A) is to be made from out of the profits earned in each of the businesses.
8. As against this contention, the learned departmental representative contended that the wordings used in Sub-section (3A) are: "where the aggregate expenditure incurred by an assessee on advertisement, publicity and sales promotion in India exceeds Rs. 40,000". The sub-section, therefore, according to him, contemplated the total expenditure incurred by the assessee and not by each of the businesses belonging to the assessee. When his attention is drawn to Sub-section (3A)(z) of Section 37 and his explanation is sought for as to how he would reconcile the wordings used in Sub-section (3A) on the one hand and Sub-section (3A)(i) on the other, the learned departmental representative tried to explain that for quantifying the disallowance only Section 37(3A) may be used. But that is quite different from saying the aggregate expenditure incurred by an assessee on advertisement, etc., should not be considered for disallowance under Section 37(3A). This argument of the learned departmental representative is not appealing to Us. Each business carried on by the assessee is separate and distinct from another. Radha's Perfumery Enterprises is engaged in manufacturing soaps Radha's Ayurvedic Soap, whereas Kerala Sabdam is a weekly, published by the assessee. Two separate books of account were maintained for the two businesses.
Profit and loss account and balance sheets were separately maintained and in fact, the profits derived by each of the businesses were 'separately arrived at and subsequently they were aggregated. When in fact the profits and losses suffered by two businesses are to be separately computed under the provisions of Section 28 unless the disallowance for each of the businesses is quantified, the real profits in each of the businesses cannot be known.
Further, as per the departmental Circular No. 240 dated 17-5-1978 the Legislature inserted Sub-section (3A) of Section 37 in order to disallow a part of wasteful expenditure on advertisement, publicity and sales promotion in computing "the taxable profits. It is common knowledge that taxable profits shall be determined for each business.
Therefore, even on a rational interpretation of the departmental circular, one cannot escape coming to the conclusion that the disallowance under Section 37(3A) should be made for each of the businesses carried on and not from out of the total income or aggregate sums, all expenditures on advertisement, publicity and sales promotion expenses of all the businesses put together. In this regard, we uphold the argument of the learned counsel for the assessee.
9. It is contended by the learned departmental representative that even assuming that the disallowance should be made for each of the businesses separately even then in the case of Radha's Perfumery Enterprises the total expenditure coming under that head was Rs. 45,247. The learned departmental representative further argued that no doubt the assessee who has now come forward with a plea that three items mentioned above aggregating Rs. 5,384.40 should not be considered as expenditure coming under this head, in fact did not canvas before the Commissioner that Rs. 1,281.40 paid as canvassing expenses to Dr.
Radhakrishnan Menon and Shri Sasidharan did not come under sales promotion expenses. Therefore, for the first time the item of Rs. 1,281.40 is sought for exclusion. 'He argues that excluding Rs. 1,281.40 from Rs. 5,384.40 the amount sought for exclusion was Rs. 4,103 and even if that amount is excluded from the total of Rs. 45,247 incurred as expenditure for business promotion and publicity expenses, the remaining would exceed Rs. 40,000 and, therefore, in that way the assumption of jurisdiction by the learned Commissioner is quite valid.
From the impugned order of the Commissioner it would appear to us that the exclusion of Rs. 1,281.40 was not sought for. However, for the reasons which we presently set out, the assumption of the jurisdiction by the learned Commissioner appears to us to be not valid.
10. The next contention of the assessee was that he became the proprietor of Radha's Perfumery Enterprises only from 1-4-1978 and, therefore, he must be deemed to have started manufacture or production only from 1-4-1978 and as such, the entire expenditure on advertisement, publicity and sales promotion incurred by him for the purposes of the said business is not liable for disallowance under Section 37(3A) as it comes under the exempted category of business within the meaning of Section 37(3D) which is as follows: 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.
11. The learned departmental representative opposed this argument and invited our attention to the wordings of Sub-section (3D). According to him, the important test is, who had set up the industrial undertaking.
Under the said sub-section the emphasis is on the undertaking and not on the assessee. According to him, a business can continue irrespective of the firm being dissolved. In this case, the retiring partners allowed the remaining partner to carry on the business and, therefore, the continuing partner, who is the assessee herein, was continuing the business previously carried on by the firm. Thus, there is no scope to hold that the assessee had set up the industrial undertaking for the manufacture or production of any article.
12. On the other hand, the learned counsel for the assessee argues that from the date when the assessee became the sole proprietor he must be deemed to have set up an industrial undertaking.
13. After hearing both sides, we are of the view that the argument of the learned counsel for the department appears to us to be fallacious.
What is meant by setting up was explained by the Hon'ble Supreme Court in CWT v. Ramaraju Surgical Cotton Mills Ltd.  63 ITR 478. At page 479 in the head note of the decision of the Supreme Court held that 'a unit cannot be said to have been set up unless it is ready to discharge the function for which it is being set up. It is only when the unit has been put into such a shape that it can start functioning as a business or a manufacturing organisation that it can be said that the unit has been set up'. Admittedly Radha's Ayurvedic Soap was the product which was being manufactured by the partnership firm of three partners out of which the assessee is one. On 1-4-1978 the remaining two partners retired from partnership and in the retirement deed dated 1-4-1978, a copy of which is filed before us, it is clearly stated that from 1-9-1977 to 31-3-1978 they carried on the business in the name and style of Radha's Perfumery Enterprises and from 1-4-1978 the business was taken over by the continuing partner, the assessee herein, and the retiring partners should receive the amount due to them respectively in respect of the shares in the said business and the capital, stock, effects and goodwill thereof. The retiring partners should withdraw from the business leaving the same to be carried on by the continuing partner, the assessee herein, for his own benefit or otherwise, as he may think proper. Therefore, a reading of the retirement deed dated 1-4-1978 executed by the retiring partners would leave us in no doubt to come to the conclusion that the Radha's Ayurvedic Soap manufacturing was already commenced and continued for some time by a firm and subsequently the right of carrying on such business was made over to the assessee. We fully agree with the learned departmental representative that the stress in Sub-section (3D) of Section 37 was on the undertaking but not on the assessee. If that be so, the manufacture of Radha's Ayurvedic Soap began only from 1-9-1977. For Radha's Perfumery Enterprises the accounting year was from 1-9-1977 to 31-3-1978. That means in the accounting year relevant to the assessment year 1979-80 that is on 1-4-1978 the business came into the hands of the assessee as a proprietary concern. Therefore, while submitting his return for this assessment year, he disclosed the profits of Radha's Perfumery Enterprises only from 1-4-1978 to 30-11-1978. It cannot be disputed that in the hands of the firm the manufacture of Radha's Ayurvedic Soap would be a new undertaking. Under Sub-section (3D) the exemption would be available in the year in which the 'industrial undertaking' begins to manufacture and the succeeding two previous years. Now the question that falls for consideration is what will happen if in the succeeding two years there is a change in the ownership of business. Whether on that ground Section 37(3D) exemption should be denied. This aspect is clearly governed by the Bombay Bench decision in ITO v. Ciffies Chemicals & Pharmaceuticals (P.) Ltd.  21 TTJ (Bom.) 409. There the Bombay Tribunal held that: ... 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, Clause (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.... (p.
411) From the facts of the Bombay Bench case, the manufacture of pharmaceutical products was suspended for some time and it was revived again. The question is whether the person who had revived the industry can be said to have set up the industry and whether his incomes under the excluded category of businesses. The Tribunal 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 and the succeeding two years. In this case also the manufacture began only from 1-9-1977 and as the assessee continued the manufacture from 1-4-1978 and as the accounting year fell in the second year of the business after the unit began manufacturing, the assessee, in our opinion, following the Bombay Tribunal decision is entitled to exemption under Section 37(3D). In view of this finding, the assumption of jurisdiction by the learned Commissioner under Section 263 would not be valid.
14. In the result, the appeal is allowed and the revisional orders of the Commissioner are hereby cancelled.