Per Shri T. V. K. Nataraja Chandran, Accountant Member -In this appeal by the revenue the issue involved is, whether the disallowance of publicity expenditure under section 37(3A) of the Income-tax Act, 1961 (the Act) is justified or not. The connected issue is, whether in the case of the assessee section 37(3D) applied or not. The facts of the case lie in a small compass.
2. The assessee was a partner of the firm, Padmalaya Pictures, Bangalore. That firm produced a picture by the name Patnavasam. After producing the firm the first was dissolved with effect from 28-2-1978. The assessee acquired the exploitation rights of the film as per dissolution deed dated 1-3-1978. During the accounting year ending on 31-3-1979 the assessee exploited the film through Sree Films, Vijayawada. The assessee claimed publicity expenses of Rs. 1,81,862. Applying the provisions of section 37(3A), the ITO disallowed Rs. 27,279. On appeal, the AAC was of the view that the assessees business was an industrial undertaking for the manufacture or production of articles and, therefore, the provisions of section 37(3D) applied and, consequently, the disallowance under section 37(3A) was not called for. In this regard he has relied on the decision of the Commissioner (Appeals) in the case of Dhakshayani Combines [IT Appeal No. 38 of 1980-81, dated 30-9-1981] wherein it has been held that production of cine films constituted manufacture of an industrial product and, therefore, it was an industrial undertaking. The learned product and, therefore, it was an industrial undertaking. The learned departmental representative has reiterated the grounds taken by the revenue in this appeal and urged that inasmuch as the assessee did not produce any film during the relevant accounting year but only exploited the rights of film already produced by the dissolved firm, the provisions of section 37(3D) were not attracted and alternatively contended that production of motion picture or films did not constitute manufacture or production of an article by an industrial undertaking in terms of section 37(3D). It was further contended that the AAC failed to appreciate that there should be a setting up of an industrial undertaking which should be continued in the succeeding years and this condition was not satisfied by the assessee. Therefore, he urged that the order of the AAC should be set aside and that of the ITO be restored.
3. The learned counsel for the assessee contended that it was the assessee who produced the film and, therefore, the provisions of section 37(3D) were attracted and consequently, supported the order of the AAC.
4. We have duly considered the rival submissions and the record of the case. At the outset, we have to observe that the copy of dissolution deed dated 1-3-1978 was not made available to us for perusal and appreciation of the facts of the case. On the face of the record it is an admitted fact that the assessee has obtained only the exploitation rights of the film. Patnavasam from the defunct firm, Padmalaya Pictures, Bangalore, and he has exploited the picture through Sree Films. Vijayawada. Therefore, it is clear to us that the film was produced by the defunct film, the exploitation rights were acquired by the assessee and the film was exhibited through Sree Film, Vijayawada. Therefore, the assessee stands in the capacity of a distributor though he acquired the film by virtue of dissolution deed dated 1-3-1978. In this connection, it is to be pointed out that the assessee has acquired the rights of the exploitation of the film after he ceased to be a partner of the firm on 28-2-1978. Therefore, it cannot be said that the assessee has produced the film himself and in any case within the accounting year relevant for the assessment year 1979-80. Section 37(3D) reads as under :
'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 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.'
A persual of the aforesaid section shows that the assessee should set up an industrial undertaking and incur an advertisement expenditure for the purpose of business of such undertaking in the previous year in which the assessee manufactures or produces articles and in each of the two succeeding previous years. Only if these conditions were satisfied the limitation of allowance of expenditure on advertisement contained in section 37(3A) would be inapplicable or otherwise not. The learned representative of the assessee has also not brought to our notice the factual position regarding the setting up of an industrial undertaking in the previous year relevant for the assessment year 1979-80 and in the two subsequent years. It is also not known whether the assessee has subseqnetly produced any picture of his own and incurred and expenditure by way of publicity. In this connection we have to observe that AAC has merely relied on the decision of the Commissioner (Appeals) in the case of Dhakshayani Combines (supra) without giving any finding of fact in this regard. The relevant portion of the order of the Commissioner (Appeals) reads as under :
'I have carefully considered the above submissions. I am not in agreement with the leaned representative in his claim that there should be no expenditure on advertisement, publicity or sales promotion so far as feature films are concerned. In fact such expenditure in feature films start right from the muhurat day and continue till the release of the pictures themselves. The claim that making massive publicity is inherent in the nature of the film business and that makes it distinct from the publicity campaign launched by other industries also does not make much of a material difference on a plain regarding of the sections. Further, the tax is on the income of producer concerned. Therefore, reference to turnover and gross receipts would have to be taken to as references to the assessee-producer and not as referring to the collections made by the distributors or the theatre owners.'
The aforesaid extract of the order of the Commissioner (Appeals) emphasised by us clearly shows that the reference to turnover or gross receipts contained in section 37(3A) would apply to the case of assessee-producer and not collections made by the distributors from theatre owners. In other words, the Commissioner (Appeals) has held that the provisions of section 37(3D) apply only to the case of the assessee-producer and, consequently, the disallowance under section 37(3A) is not applicable to such assessee. There is no dispute regarding the fact that the production of feature films is an industrial undertaking and support can also be taken from Circular No. 24 [F. No. 6/22/68-IT (A-I), dated 23-7-1969 see Taxmanns Direct Taxes Circular Vol. 1, 1985 edn., p. 854]. On the facts of the case available on record, there is nothing to show that the assessees business in an industrial undertaking and he has incurred the publicity expenditure in the capacity of a producer in the year of manufacture. Consequently, we are of the considered opinion that the provisions of section 37(3D) were not applicable and consequently the limitation of expenditure contained in sub-section (3A) of section 37 was rightly attracted. In this case there is no dispute regarding the quantum of disallowance but the dispute is with regard to the applicability of section 37(3A) and section 37(3D). For the reasons stated by us, we have no hesitation in setting aside the order of the AAC as it is not justified in law and in the circumstances of the case and upholding the order of the ITO which is in accordance with law.
5. In the result, the appeal of the revenue is allowed.