Rajesh Bindal, J.
1. In terms of directions given by this Court in ITC Nos. 60 and 61 of 1984, the following questions of law arising out of the order of the Income-tax Appellate Tribunal, Chandigarh Bench, Chandigarh (for short 'the Tribunal'), in ITA Nos. 118, 119, 163 and 164 of 1982 for the asst. yrs. 1979-80 and 1980-81, have been referred for opinion of this Court:
1. Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee firm is entitled to the deduction under Section 80J of the IT Act, 1961, on its own capital employed in the industrial undertaking in assets, such as the power generator, office equipment, furniture, etc., though it does not own the industrial undertaking which has only been taken on lease by it ?
2. Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the provisions of Section 37(3A) which restrict the allowance of expenditure on publicity and advertisement are not applicable and that instead the provisions of Section 37(3D) apply to the case ?
2. Briefly the facts, as noticed by the Tribunal, are that vide agreement dt. 31st Aug., 1977, the assessee took on lease the plant and machinery, owned by M/s Rieta Biscuit Co. (P) Ltd. The assets taken on lease included land, factory building, plant and machinery, furniture and fixtures and other equipments. Even the use of brand name owned by the lessor was also permitted. For the asst. yr. 1979-80, the assessee filed his return of income declaring the loss of Rs. 6,58,290.
3. During the course of assessment, it was found that the assessee had claimed deduction under Section 80J of the IT Act, 1961 (for brevity 'the Act'), on the investment made by the assessee in generator, in office equipment and furniture in the factory taken on lease from M/s Rieta Biscuit Co. (P) Ltd. The claim made by the assessee was rejected at the time of assessment by the ITO.
4. The assessee further claimed in the P&L; a/c 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 about the amount of Rs. 3,59,676 (Rs. 3,48,468 + Rs. 11,208) and considered its admissibility keeping in view 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) of the Act. He considered the claim of the assessee in accordance with the provisions of Section 37(3A) of the Act and disallowed a part of the claim. Similar was the position during the year 1980-81.
5. Aggrieved against the orders of assessment, the assessee preferred appeals before the Commissioner of Income-tax (Appeals) [for short 'the CIT(A)'], who while upholding the disallowance of the deduction claimed by the assessee under Section 80J of the Act, accepted the appeal of the assessee on the issue of deductions under Section 37 of the Act holding that it would be Section 37(3D) of the Act which would be applicable and accordingly the AO was not justified in making additions by disallowing the expenses. Both the parties aggrieved against the orders passed against them on two issues by the CIT(A) approached the Tribunal.
6. The Tribunal allowed the appeals of the assessee thereby reversing the order of the CIT(A) in disallowing the deduction under Section 80J of the Act. The appeals filed by the Revenue challenging the order regarding deduction granted under Section CODE OF CR of the Act was dismissed. This is how the matter is before us for consideration of both the issues.
7. We have heard learned Counsel for the Revenue and with his assistance have gone through the paper book.
8. As far as the first question regarding admissibility of deduction under Section 80J of the Act is concerned, the Tribunal, while accepting the appeal of the assessee, observed as under:
25. The authorities below were mainly influenced by the provisions of Section 80J(4) and rejected 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 explit were not 'transferred' to the assessee by the lessor company within the meaning of the term 'transfer' used in Section 80J(4)(ii) of the Act. The assessee not about (sic) 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 someone else. So far as the assessee is concerned, its business activity concerned only after the acquisition of the 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 deductions under Section 80J as claimed. In the case of CLT v. Neo Phaima (P) Ltd. (1982) 28 CTR (Bom) 223 : (1982) 137LTR 879 (Bom), the Hon'ble Bombay High Court, after considering Calcutta High Court judgments in the cases of Addl. C1T v. A. Mukheijee & Co. (P) Ltd. (1978) 113 LTR 718 (Cal). and Griffon Laboratories (P) Ltd. v. CIT (1979) 119 1TR 145 (Cal) and Delhi High Court judgment in the case of Orient Longman Ltd. v. CIT (1981) 130 LTR 477 (Del) 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 of the Act. 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 equipments 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.
9. Learned Counsel for the Revenue submitted that the Tribunal had gone wrong in accepting the plea of the assessee granting deduction under Section 80J of the Act on the investment made by the assessee on generator and office equipment only, when the plant and machinery was not owned by it. He further submitted that the term 'transfer' as used in Section 80J(4)(ii) of the Act has been given a very narrow meaning by the Tribunal to hold that once the land, building, plant.and machinery, etc. were leased out by M/s Rieta Biscuit Co. (P) Ltd. to the assessee, the same did not mean transfer of the assets. Accordingly, the submission was that the view expressed by the Tribunal while accepting the appeal of the assessee is erroneous. Accordingly, the question referred deserves to be answered in favour of the Revenue and against the assessee. He has relied upon CTT v. Laxmi Metal Industries (1998) 146 CTR (All) 722 : (1999) 236 LTR 130 (All), CTT v. Alcock Ashdown & Co. Ltd., Etc. (1997) 139 CTR (SC) : (1997) 224 LTR 353 (SC), CTT v. Gopal Plastics (P) Ltd. (1995) 215 LTR 136 (Mad), CIT v. Shri Yamuna Mills Co. Ltd. (1995) 215 LTR 153 (Guj), CTT v. Caps & Caps : [1989]179ITR235(MP) , CIT v. Century Enka Ltd. : [1999]239ITR802(Cal) , CIT v. Century Enka Ltd. : [1999]239ITR804(Cal) , Bajaj Tempo Ltd. v. CIT : [1992]196ITR188(SC) , Lohia Machines Ltd. and Anr. v. Union of India and Ors. : [1985]152ITR308(SC) , and CFT v. Nippon Electronics (India) (P) Ltd. (1990) 81 CTR (Kar) 24 : (1990) 181 FTR 518 (Kar).
10. In none of the cases referred to by the counsel for the Revenue, the issue under consideration was in a case where the machinery had been taken on lease by the unit who was claiming deduction. It would be suffice to add here regarding these judgments that issue for consideration before the Courts was merely as to whether the assessees involved therein were industrial concerns or not and as to whether they were engaged in manufacture of any goods or not. The conditions as are available under Section 80J of the Act to be eligible to claim deduction under the Act were not there in those cases.
11. To appreciate the contentions raised by learned Counsel for the Revenue, it would be in the fitness of the things to extract the relevant provisions of Section 80J of the Act, which are as under:
80J. Deduction in respect of profits and gains from newly established industrial undertakings or ships or hotel business in certain cases.--(1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains reduced by the deduction, if any, admissible to the assessee under Section 80HH or Section 80HHA of so much of the amount thereof as does not exceed the amount calculated at the rate of six per cent per annum on the capital employed in the industrial undertaking or ship or business of the hotel, as the case may be, computed in the manner specified in Sub-section (1A) in respect of the previous year relevant to the assessment year (the amount calculated as aforesaid being hereafter, in this section, referred to as the relevant amount of capital employed during the previous year).
(1A)(I) For the purposes of this section, the capital employed in an industrial undertaking or the business of a hotel shall, except as otherwise expressly provided in this section, be computed in accordance with Clauses (II) to (IV) and the capital employed in a ship shall be computed in accordance with Clause (V).
(II) The aggregate of the amounts representing the values of the assets as on the first day of the computation period of the undertaking or of the business of the hotel to which this section applies shall first be ascertained in the following manner:
(i) in the case of assets entitled to depreciation, their WDV;
(ii) in the case of assets acquired by purchase and not entitled to depreciation, their actual cost to the assessee;
(iii) in the case of assets acquired otherwise than by purchase and not entitled to depreciation, the value of the assets when they became assets of the business;
(iv) in the case of assets, being debts due to the person carrying on the business, the nominal amount of those debts;
(v) in the case of assets, being cash in hand or bank, the amount thereof.
(4) This section applies to any industrial undertaking, which fulfills all the following conditions, namely:
(i) it is not formed by the splitting up, or the reconstruction, of a business already in existence;
(ii) it is not formed by the transfer to a new business, machinery or plant previously used for any purpose;
(iii) it manufactures or produces articles, or operates one or more cold storage plant or plants, in any part of India, and has begun or begins to manufacture or produces articles or to operate such plant or plants at any time within the period of thirty-three years next following the 1st day of April, 1948, or such further period as the Central Government, may, by notification in the Official Gazette, specify with reference to any particular industrial undertaking.
(iv) in a case where the industrial undertaking manufactures or produces articles, the undertaking employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power:
Provided that the condition in Clause (i) shall not apply in respect of any industrial undertaking which is formed as a result of the reestablishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in Section 33B, in the circumstances and within the period specified in that section:
Provided further that, where any building or any part thereof previously used for any purpose is transferred to the business of the industrial undertaking, the value of the building or part so transferred shall not be taken into account in computing the capital employed in the industrial undertaking:
Provided also that in the case of an industrial undertaking which manufactures or produces any article specified in the list in the Eleventh Schedule, the provisions of Clause (iii) shall have effect as if for the words 'thirty-three years', the words 'thirty-one years' had been substituted.
Explanation 1 : For the purposes of Clause (ii) of this sub-section, any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled, namely:
(a) such machinery or plant was not, at any time, previous to the date of the installation by the assessee, used in India;
(b) such machinery or plant is imported into India from any country outside India; and
(c) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of the Indian IT Act, 1922 (11 of 1922), or this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee.
Explanation 2 : Where in the case of an industrial undertaking, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed twenty per cent of the total value of the machinery or plant used in the business, then, for the purposes of Clause (ii) of this subsection, the condition specified therein shall be deemed to have been complied with and the total value of the machinery or plant or part so transferred shall not be taken into account in computing the capital employed in the industrial undertaking.
12. The Tribunal had relied upon Addl. CTT v. A. Mukherjee & Co. (P) Ltd. (1978) 113 LTR 718 (Cal), Griffon Laboratories (P) Ltd. v. CIT (1979) 119 LTR 145 (Cal), Orient Longman Ltd. v. CFT (1981) 130 LTR 477 (Del), and CLT v. Neo Pharma (P) Ltd. : [1982]137ITR879(Bom) .
13. In A. Mukherjee's case (supra), the issue before the Calcutta High Court was that as to whether an assessee was engaged in manufacturing of books or not when part of the infrastructure to manufacture the same was not available with him and he was outsourcing the same from outside. Considering the issue in the light of these facts, it was held by the Court that in order that a publisher of books should be a manufacturer of books it is wholly unnecessary for him to be a book binder himself. A publisher may get the books printed by any printer. The same was followed by Delhi High Court in Orient Longman Ltd.'s case (supra).
14. In Griffon Laboratories (P) Ltd.'s case (supra), the Calcutta High Court again held that to earn the benefit of the concessional rate of tax as an industrial company, it is not necessary that the assessee should be owner in possession of the manufacturing plant and machinery before it can said to be a manufacturer of goods.
15. To similar effect is the judgment in Neo Pharma (P) Ltd. 's case (supra) by the Bombay High Court.
16. As per the scheme of Section 80J of the Act, it is evident that certain specified deductions are provided out of the profits and gains from newly established industrial undertakings in certain cases as the title of the section itself says. It is provided therein that if the gross total income of the assessee includes any profits and gains derived from an industrial undertaking certain specified percentage of the capital employed in the industrial undertaking, is to be excluded. The capital employed in an industrial undertaking is to be computed in accordance with Clause (II) which provides that the same shall be aggregate of the amounts representing the values of the assets as on the first date of the computation period ascertained in the following manner:
(i) in the case of assets entitled to depreciation, their WDV;
(ii) in the case of assets acquired by purchase and not entitled to depreciation, their actual cost to the assessee;
(iii) in the case of assets acquired otherwise than by purchase and not entitled to depreciation, the value of the assets when they became assets of the business;
(iv) in the case of assets, being debts due to the person carrying on the business, the nominal amount of those debts;
(v) in the case of assets, being cash in hand or bank, the amount thereof.
17. Sub-section (4) of Section 80J is quite relevant, which provides for preconditions for claiming deduction under Section 80J of the Act. It is only when an industrial undertaking fulfils all the conditions laid down therein that it is entitled to claim deduction under Section 80J of the Act. In consonance with the title of the section, it is provided therein that, the industrial undertaking should not have been formed by splitting up or the reconstruction of a business already in existence. It is further provided that it should not have been formed by the transfer to a new business of machinery or plant previously used for any purpose. The intention of the legislature regarding non-availability of deduction to the industrial undertakings using old building, plant and machinery is further evident from the provisos/Explanations to Sub-section (4) of Section 80J of the Act. Second proviso thereto provides that where building or any part thereof which was not used prior to its transfer to the new industrial undertaking, the value of such building shall not be added for computation of the capital employed. In fact, this proviso was added consequently with the amendment of Clause (ii) of Sub-section (4) where the word 'building' was deleted. Expln. 1 provides that any machinery or plant used by any person other than the assessee outside India shall not be regarded as plant and machinery previously used for any purpose in India for the purpose of Clause (ii) of Sub-section (4). Expln. 2 further provides that where any plant and machinery previously used for any purpose is transferred to a new business then for the purpose of Clause (ii) of Sub-section (4), the conditions laid down therein shall be deemed to be satisfied in case its value does not exceed 20 per cent of the total value of machinery or plant used for the business. However, this was subject to the condition that the value of old plant and machinery transferred in the new business even upto 20 per cent in value shall not be taken into consideration for computing capital employed to determine the deduction admissible under this section.
18. From a comprehensive reading of Section 80J of the Act, in our opinion, it is envisaged to provide deduction out of the gross total income derived from a newly established industrial undertaking by using the machinery which was not already in use for any purpose or that the newly industrial undertaking is not formed by splitting up or reconstruction of a business already in existence.
19. If the facts of the present case are examined in the light of the conditions laid down under Section 80J of the Act to entitle an industrial undertaking deduction from the gross total income, it is revealed that the land, building, plant and machinery, furniture and fixtures, etc. were originally set up and used by M/s Rieta Biscuit Co. (P) Ltd. On 23rd Aug., 1977, the assessee firm was constituted with an object to run the factory owned by M/s Rieta Biscuit Co. (P) Ltd. which even enabled the lessee/assessee company to use the brand name owned by the lessor. Meaning thereby that the admitted facts on record are that the plant and machinery being used by the assessee company was previously being used by M/s Rieta Biscuit Co. (P) Ltd. not for any other purpose but for the same purpose.
20. The Tribunal in our opinion had gone wrong in giving a very narrow meaning to the term 'transfer' used in Clause (ii) of Sub-section (4) of Section 80J of the Act. The term is not used in the restricted sense of transfer of ownership. The object of Section 80J of the Act is to grant benefit to the newly established industrial undertaking and once it is found in the facts and circumstances of the present case that in fact the assessee was carrying on the business to manufacture the same products by taking the building, plant and machinery, etc. on lease, it could be eligible for grant of deduction under the section only in case conditions put in Expln. 2 to Section 80J(4) of the Act are satisfied, which provides that the value of such plant and machinery should not exceed 20 per cent of the total value of the plant and machinery used for the business but that is not so in the present case. Accordingly, there is no option but to hold that a lessee of a plant and machinery will not be entitled to a deduction on the additional investments made by him as the conditions put in Expln. 2 to Section 80J(4) of the Act have not been complied with.
21. As far as second issue regarding applicability of Section 37(3A) or Section 37(3D) of the Act for admissibility of expenditure on certain advertisement, etc. is concerned, the Tribunal while rejecting the appeal of the Revenue opined that in the case in hand, provisions of Section 37(3D) of the Act would be applicable. Learned Counsel for the Revenue submitted that once the assessee is not found to be entitled to deduction under Section 80J of the Act, the view expressed by the Tribunal to hold that the provisions of Section 37(3D) of the Act would be applicable would automatically be erroneous as in that case the provisions of Section 37(3A) of the Act would be applicable. However, we do not find any substance in the contention raised. For applicability of Section 80J of the Act there are certain conditions specified. The deduction envisaged therein is admissible only to a new industrial unit whereas learned Counsel for the Revenue could not point out any such condition under Section 37(3D) of the Act, which only provides that the assessee should have set up an industrial undertaking for the manufacture or production of any article. In the present case, it is not disputed that the industrial undertaking for the manufacture of articles was set up and once it is so, in our opinion, the view expressed by the Tribunal is not wrong when it directed that the provisions of Section 37(3D) of the Act would be applicable and not Section 37(3A) of the Act.
22. In view of our above discussions, the question No. 1 is answered in favour of the Revenue and against the assessee, whereas question No. 2 is answered against the Revenue and in favour of the assessee.
The reference is disposed of accordingly.