P. Venkatarama Reddi, J. - (1.) IN this reference case arising at the instance of the Revenue, the High Court is called upon to answer the following question of law : "Whether, on the facts and in the circumstances of the case, the INcome-tax Appellate Tribunal is justified in holding that the assessee is entitled to be covered by exemption under Section 37(3D) in respect of the expenditure on advertisement and publicity incurred on its new product 'Thums up' on the ground that the assessee had set up a new industrial undertaking for manufacturing the said new product ?"
(2.) THE respondent-assessee which is a private limited company engaged in the manufacture and sale of soft drinks, had introduced a new product known as Thums up into the market in the month of July, 1978, i.e., during the year previous to the assessment year 1979-80. For the production of this new soft drink, the Tribunal found that the assessee added an additional storage tank, etc., and made substantial investments for that purpose. An amount of Rs. 78,749 was incurred during the relevant assessment year 1980-81 towards publicity and advertisement expenses pertaining to the new product "Thums up". It is seen from item No. 11 of the assessment order, the statement of case as well as from the question framed that this amount is attributable only towards the advertisement and publicity of the new product Thums up, but not in respect of the other soft drinks produced and marketed by the company. As regards the advertisement expenses relatable to other products are concerned, the assessee did not claim full deduction but only restricted the quantum to the permissible extent allowed under Sub-section (3A) of Section 37. As regards the amount of Rs. 78,749, the assessee claimed deduction of the entire amount on the basis of Sub-section (3D) of Section 37. This was disallowed by the Assessing Officer on the ground that the provision was applicable only to a new industrial undertaking, but not to a new product of an old industrial undertaking. However, the Commissioner allowed the appeal. THE Tribunal confirmed the view taken by the Commissioner of Income-tax (Appeals) holding that the exemption under Section 37(3D) concerns itself more with the product manufactured rather than with the new industrial undertaking which manufactures that product. Alternatively, the Tribunal held that the entire expenditure on advertisement and sales promotion in respect of the new product is deductible under Section 37(3D) for the reason that the assessee must be deemed to have set up a new industrial undertaking by extending its manufacturing capacity. THE correctness of this view has been questioned before us. Learned standing counsel for the Income-tax Department, submits that there is no scope to invoke Sub-section (3D) of Section 37 in a case where there was merely an augmentation of the production capacity and the finding of the Tribunal that a new industrial undertaking came into being during 1979-80 is without any basis and the conclusion is not legally sustainable. It is pointed out that the decision in Textile Machinery Corporation Ltd. v. CIT has no application. We may straightaway point out that neither the decision relied upon by the Tribunal nor the ratio of the judgment in Mettur Chemical and Industrial Corporation Ltd. v. CIT , relied upon by standing counsel has application to the facts of the instant case. The provision considered therein and the factual matrix which gave rise to the reference were materially different.
(3.) AT the outset, it must be pointed out that this court while dismissing I.T.C. No. 42 of 1987, which was an application filed under Section 256(2) by the Department refused to call for the statement of case in the case of the same assessee. The decision of the Tribunal in I. T. A. Nos. 293 and 294 of 1986, which gave rise to I. T. C. No. 42 of 1987, was followed by the Tribunal in ITA No. 857 of 1984, which has given rise to the present reference. In I. T. C. No. 42 of 1987, this court held as follows : "As far as the first question is concerned, the finding of the Tribunal is that the assessee had established a new industrial undertaking and that finding is essentially based on facts. That apart, the Tribunal applied the principle in Textile Machinery Corporation Ltd. v. CIT and CIT v. Indian Aluminium Co. Ltd. , to the effect that where substantial amounts have been spent for expanding an existing unit, the requirements of setting up a new industrial undertaking are satisfied. We do not consider that the Tribunal committed any error in coming to the above conclusion and we are unable, therefore, to direct the Tribunal to refer the question to this court." We have our own doubts whether the rejection of the application on the ground that the conclusion was based on facts and therefore no question of law arises, is a correct approach. But, it is also our view that in the facts and circumstances of the case, the assessee is legitimately eligible to invoke the benefit of Section 37(3D) in so far as the advertisement and sales promotion expenses of the new product "Thums up" are concerned. Keeping in view the objective of the provision and the language employed in the provision--"in the previous year in which such undertaking begins to manufacture or produce such articles", it is reasonable to hold that the production of a new article in connection with which the advertisement and publicity expenses were incurred and for production of which additional investments were made on the capital equipment is within the ambit of Sub-section (3D). There is no reason why the benefit of deduction under Sub-section (3D) should not be given to such new product merely because the industrial undertaking set up by the assessee-company was already functioning. The question whether in fact a new industrial under- taking was set up for manufacturing a new article is not of material significance. We therefore answer the reference in favour of the assessee and against the Revenue. The reference case is disposed of, accordingly. No costs.;