J.P. Devadhar, J.
1. Since the issues effectively required to be answered in these two references are common, both these references are heard together and disposed of by this common judgment. The questions referred by the Income-tax Appellate Tribunal ('the I. T. A. T.'), in these two references at the instance of the respective parties, under Section 256(1) of the Income-tax Act, 1961, read as follows :
I. T. R. No. 624 of 1987, Filmyug Pvt. Ltd. v. CIT :
Question No. 1 (At the instance of the assessee) :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the provisions of Sub-section (3D) of section 37 of the Income-tax Act, 1961, were not applicable in respect of the expenditure on publicity for sales promotion incurred by the assessee in the assessment years 1979-80 and 1980-81?' Question No. 2. (At the instance of the Revenue) :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that for computing the disallowance under Section 40(c) of the Income-tax Act, 1961, in respect of expenditure which resulted in remuneration, benefit or amenities to the managing director, Shri J. Om Prakash, amount of Rs. 3,50,000 paid in the accounting year relating to the assessment year 1979-80 and Rs. 5,00,000 paid in the accounting year relating to the assessment year 1981-82 for the professional work of directing motion pictures under production should not be taken into account ?' I T. R. No. 404 of 1987, CIT v. Uttam Chitra, (both the questions at the instance of the Revenue) :
Question No. 3 :
'Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the assessee-firm which is engaged in production of film is an industrial undertaking engaged in the manufacture and production of an article within the meaning of Section 80J(4)(iii) of the Income-tax Act ?' Question No. 4 : 'Whether, on the facts and circumstances of the case, the Tribunal was justified in holding that the assessee is entitled to the benefit of section 37(3D) of the Income-tax Act and thereby deleting the addition of Rs. 51,186 out of the expenses incurred on advertisement and publicity by invoking section 37(3A) ?'
2. Counsel on both sides fairly state that question No. 2 raised above is covered by the decision of this court in the case of Nav Ketan International Films Pvt. ltd. v. C/T : [1994]209ITR976(Bom) in favour of the assessee. In this view of the matter, we answer question No. 2 in the affirmative and in favour of the assessee.
3. Similarly, counsel on both sides fairly state that question No. 3 (in I. T. Reference No. 404 of 1987) is covered by the decision of this court in the case of CIT v. D.K. Kondke : [1991]192ITR128(Bom) in favour of the assessee. Accordingly, question No. 3 is answered in the affirmative and in favour of the assessee.
4. To answer questions Nos. 1 and 4 it is necessary to set out a few facts. At the threshold it is necessary to note that in these two references two different Benches of the Income-tax Appellate Tribunal have taken diametrically opposite views in the matter of interpretation of Section 37(3D) of the Income-tax Act. In the case of Filmyug Private Limited, one Bench of the Income-tax Appellate Tribunal held that the exemption under Section 37(3D) will not be available as the assessee had been in existence for several years and had been producing several pictures in the past. In other words, the Tribunal held that even though the assessee (Filmyug) began manufacturing a new picture in the relevant previous year, exemption under Section 37(3D) will not be available to the assessee as the assessee undertaking was not set up in the relevant previous year. In the case of Uttam Chitra, another Bench of the Income-tax Appellate Tribunal held that each picture is a new product and exemption under Section 37(3D) is available to each picture, even though the assessee undertaking (Uttam Chitra) had been in existence for several years in the past and had produced several pictures in the past.
5. Although there are divergent views of the Tribunal in these two references, since the basic facts in both the cases are similar, for answering questions Nos. 1 and 4 above, we have taken the facts relating to question No. 1 in the case of Filmyug Pvt. Ltd. (I. T. R. No. 624 of 1987) for the sake of convenience, and the decision in this case will apply to question No. 4 raised in Income-tax Reference No. 404 of 1987 as well.
6. The assessee, Filmyug Private Limited, is a private limited company. The assessment years relevant for the purpose herein are assessment years 1979-80 and 1980-81.
7. During the year under consideration the assessee had completed and released the picture 'Apnapan', the cost of which was shown at Rs. 80,55,503.79. In the profit and loss account for the assessment year 1979-80, the assessee debited a sum of Rs. 7,31,838 under the head 'Publicity in respect of picture Apnapan' included in the cost of production. Out of the said amount, a sum of Rs. 6,63,182 attracted the provisions of Section 37(3A) of the Income-tax Act, 1961. As per the provisions of the said section, 15 per cent. of Rs. 6,63,182 had to be disallowed. Similarly, in the assessment year 1980-81, 15 per cent. of Rs. 1,60,776 had to be disallowed under the said provision. The assessee objected to the said disallowances on the ground that the provisions of Section 37(3D) of the Income-tax Act were attracted.
8. The Income-tax Officer did not agree with the contention of the assessee and held that Section 37(3D) is applicable only in the case of a newly set up undertaking and it is not applicable to an undertaking which has already been established and is in the business. Since the assessee was established and in existence for several years and had produced several pictures in the past it was held that the assessee cannot be considered to be a new industrial undertaking within the meaning of Section 37(3D) of the Income-tax Act. Accordingly, it was held that although production of the new film had begun in the relevant previous year, since the assessee undertaking was not set up in the relevant previous year, the exemption under Section 37(3D) will not be available to the assessee. On appeal, the Commissioner of Income-tax (Appeals) set aside the order of the Income-tax Officer by holding that the restrictive provisions contained in Section 37(3D) have to be liberally interpreted and every picture being a new product requires advertisement and expenditure on such advertisement is covered by the provisions of Section 37(3D) and as such the assessee cannot be processed under Section 37(3A) of the Income-tax Act. On further appeal filed by the Revenue, the Income-tax Appellate Tribunal set aside the order of the Commissioner of Income-tax (Appeals) by holding that in order to secure exemption, the undertaking should have begun to manufacture or produce articles in the relevant previous year and if the undertaking had been manufacturing or producing articles in the prior years, the provisions of Section 37(3D) would not apply. According to the Tribunal the word 'begins' in Section 37(3D) indicates that only such undertakings which begin to manufacture or produce articles in the relevant previous year are covered under Section 37(3D). The Tribunal held that in the present case the assessee was set up several years back and had produced pictures for several years in the past and had not begun to manufacture pictures in the relevant previous year herein, and hence, the provision of Section 37(3D) is not applicable. On a reference application filed by the assessee, under Section 256(1) of the Income-tax Act, the Tribunal has referred the above question No. 1 for the opinion of this court.
9. Mr. M.M. Desai, learned counsel on behalf of the assessee, relying upon the judgment of the Andhra Pradesh High Court in the case of CIT v. Hyderabad Bottling Co. P. Ltd. : [2000]243ITR476(AP) submitted that the benefit of Section 37(3D) is available to every new product even if the industrial undertaking manufacturing the said new product has been functioning for several years. He submitted that for marketing every new picture advertisements and publicity expenses are required to be incurred and for the production of every new picture additional investments are made on the capital equipment. According to him, Section 37(3D) applies to every new picture, irrespective of it being manufactured by an existing undertaking or by a newly set up undertaking. Accordingly, he submitted that the Tribunal was in error in holding that the exemption under Section 37(3D) of the Income-tax Act was not available to the assessee.
10. Mr. R.V. Desai, learned senior counsel appearing on behalf of the Revenue, on the other hand, relying upon the decision of the Madras High Court in the case of CIT v. Ponds India Ltd. : [2002]253ITR686(Mad) , submitted that an industrial undertaking which had been set up long prior and which had commenced manufacturing, several years earlier, cannot be regarded as industrial undertaking 'set up' for the purpose of Section 37(3D) of the Income-tax Act. According to him the benefit under Section 37(3D) of the Income-tax Act is available only to an undertaking which has begun to manufacture articles in the previous year. In other words, the submission on behalf of the Revenue was that the exemption under Section 37(3D) would be available only if the undertaking was set up in the previous year in which the production of a product or article commenced. In the instant case, it was submitted that, since the assessee-company was established several years ago and the assessee had produced several films in the past, the benefit of exemption notification under Section 37(3D) would not be available to the assessee, even though the production of the new picture was undertaken by the assessee in the relevant previous year.
11. We have heard counsel on both the sides and perused the records placed before us. Section 37(3A) to 37(3D) were introduced in the Income-tax Act with effect from April 1, 1979, by the Finance Act, 1978. The said provisions were repealed by the Finance (No. 2) Act, 1980, with effect from April 1, 1981. Thus, these provisions were in force only for the assessment years 1979-80 and 1980-81.
12. In the memorandum explaining the provisions of the Finance Bill, 1978 (see [1978] 111 ITR 158), the legislative intent for introducing Section 37(3A) to 37(3D) to the Income-tax Act has been explained as follows :
'Measure for placing a curb on certain expenses in businesses and professions :
24. Disallowance of a part of expenditure on advertisement, publicity and sales promotion.--In order to place a curb on extravagant and socially wasteful expenditure on advertisement, publicity and sales promotion at the cost of the Exchequer, it is proposed to make a provision for the disallowance of a part of such expenditure in the computation of taxable profits. The main features of the proposed provision are indicated hereunder :
(a) The provision will apply only in relation to expenditure on advertisement, publicity and sales promotion in India.
(b) Although the provision will apply to all categories of taxpayers carrying on any business or profession, no disallowance will be made in cases where the aggregate amount of such expenditure does not exceed Rs. 20,000.
(c) Where a taxpayer has set up an industrial undertaking for the manufacture or production of any articles, no disallowance will be made under this provision in respect of the expenditure incurred by the taxpayer for the purposes of the business of such undertaking for a period of three accounting years, namely, the accounting year in which such undertaking begins to manufacture or produce articles and the two accounting years immediately following that year.'
13. Section 37(3D) introduced by the Finance Act, 1978, reads as under :
'(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.'
14. Thus, the provisions of Sections 37(3A) to 37(3D) were introduced by the Finance Act, 1978, with a view to place a curb on extravagant and socially wasteful expenditure on advertisement, publicity and sales promotion. Section 37(3A) contemplated disallowance of the expenditure on advertisement, publicity and sales promotion in excess of the percentage set out therein. Section 37(3D) provides that the ceiling prescribed under Section 37(3A) will not apply to the expenditure incurred on a product manufactured or produced by an industrial company for a period of three years, commencing from the previous year in which the undertaking begins to manufacture or produce the article and for the two subsequent years thereafter. The term 'industrial undertaking' in Section 37(3D) is not defined in the Income-tax Act and there is nothing to show that Section 37(3D) applies only to newly established undertakings. Therefore, it is reasonable to construe that the exemption under Section 37(3D) is available to every new product, for the first three previous years including the previous year in which the undertaking begins to manufacture that new product. As a result, in the first three years of its production, (including the previous year in which its manufacture began) the ceiling on the expenditure on account of advertisement, publicity or sales promotion of the said product prescribed under Section 37(3A) would not apply. For example, if an undertaking begins to manufacture cool drink of brand 'A' on April 1, 1979, then Section 37(3D) will apply to that product for the previous year from April 1, 1979 to March 31, 1980, and two subsequent previous years. However, the point in dispute is, if the above industrial undertaking was already in existence for several years and had been manufacturing cool drink of brand 'A', and if the said undertaking begins to manufacture cool drink of brand 'B' on April 1, 1979, whether exemption under Section 37(3D) in respect of brand 'B' would be available to that undertaking One Bench of the Tribunal, in the case of Filmyug Pvt. Ltd. held that the benefit under Section 37(3D) would not be available and another Bench of the Tribunal in the case of Uttam Chitra held that the benefit of Section 37(3D) would be available.
15. In our opinion, the setting up of an industrial undertaking in the year in which it begins to manufacture an article is not at all contemplated under Section 37(3D) of the Income-tax Act. The only requirement under the section is that the industrial undertaking should be one which is set up for manufacturing or producing articles. There is no warrant to construe the words 'set up an industrial undertaking' in conjunction with the words 'in the previous year in which such undertaking begins to manufacture or produce such articles' occurring in Section 37(3D) of the Act and hold that Section 37(3D) applies only to such undertakings which are set up in the previous year in which the production of that article begins. In our opinion, Section 37(3D) applies to (1) an industrial undertaking which is set up to manufacture or produce article, and (2) it is available to a product for three previous years commencing from the previous year in which the said undertaking begins to manufacture that product. Thus, Section 37(3D) applies to every new product for three previous years, irrespective of the fact, whether the new product was manufactured by an existing undertaking or by a newly set up undertaking. The contention of the Revenue that Section 37(3D) contemplates two conditions, i.e., (1) the setting up of an undertaking in the previous year, and (2) that undertaking begins to manufacture an article in the said previous year, cannot be accepted as it is too narrow a construction which is not contemplated under the section. Accepting the contention of the Revenue would mean that a new product that too manufactured by a newly set up undertaking alone will be eligible for deduction under Section 37(3D) and that the benefit of Section 37(3D) would not be available to a new product, if it is manufactured by an existing unit. In other words, according to the Revenue to avail of the benefit of Section 37(3D) for every new product there should be a new undertaking set up. In our opinion, the setting up of an undertaking in the previous year in which the production of an article begins is not a condition precedent for availing of the benefit of Section 37(3D). What is essential is the existence of an undertaking set up for manufacturing or producing articles and such undertaking when begins to manufacture or produce an article, then the benefit of Section 37(3D) will be available for three previous years commencing from the previous year in which the undertaking begins to manufacture that product.
16. In this view of the matter, we concur with the decision of the Andhra Pradesh High Court in the case of Hyderabad Bottling Co. P. Ltd. : [2000]243ITR476(AP) , wherein it is held that the benefit of deduction under Section 37(3D) can be given to a new product even if the industrial undertaking set up by the assessee is already functioning. With respect, we express our inability to concur with the decision of the Madras High Court in the case of Ponds India Ltd. : [2002]253ITR686(Mad) , wherein it is held that what is material for Section 37(3D) is the year in which the industrial undertaking is set up. As stated hereinabove, in our opinion, irrespective of the year in which the undertaking is set up, the benefit under Section 37(3D) is available to a product for three previous years, commencing from the previous year in which the undertaking begins to manufacture that product. Accordingly, we disagree with the finding given by the Tribunal in the case of Filmyug Pvt. Ltd., and answer question No. 1 raised at the instance of the assessee, in the negative and in favour of the assessee and we concur with the findings given by the Tribunal in the case of Uttam Chitra and answer question No. 4 raised at the instance of the Revenue in the affirmative and in favour of the assessee. To sum up, we answer :
Question No. 1 : In the negative and in favour of the assessee.
Question No. 2 : In the affirmative and in favour of the assessee.
Question No. 3 : In the affirmative and in favour of the assessee.
Question No. 4 : In the affirmative and in favour of the assessee.
17. Both the references are disposed of in the above terms, with no order as to costs.