2001 (6) TMI 26 - HC - Income Tax

Summary

Issues:
Claim of exemption under section 37(3D) of the Income-tax Act, 1961 for advertisement, publicity, and sales promotion expenses incurred by the assessee in relation to an industrial undertaking.

Analysis:
The judgment delivered by the High Court of Madras pertained to the claim of exemption under section 37(3D) of the Income-tax Act, 1961 by an assessee company. The company had taken over a business previously run by an American company, manufacturing and marketing cosmetic products. The company claimed exemption for expenditure on advertisement, publicity, and sales promotion under section 37(3D) on the grounds of setting up an industrial undertaking. Initially, the claim was rejected by the Assessing Officer but later accepted by the Commissioner and affirmed in appeal, leading to the Revenue challenging the decision before the High Court.

The relevant provision, section 37(3D) of the Income-tax Act, as applicable during the assessment year in question, allowed for exemption of expenditure on advertisement, publicity, or sales promotion incurred by an assessee who had set up an industrial undertaking for manufacturing or production of articles. The exemption applied for the year in which the undertaking began manufacturing such articles and the two subsequent years. The critical aspect was the interpretation of the term "set up" in the context of the industrial undertaking.

The High Court emphasized that the benefit of exemption under section 37(3D) was intended for an assessee who establishes an industrial undertaking that commences manufacturing within the specified period. In this case, where the product remained the same, and expenditure on publicity was ongoing before the formation of the assessee company, it was determined that the company did not "set up" an industrial undertaking within the meaning of the provision. The Court clarified that the year in which the industrial undertaking is established is crucial, not the year of ownership change.

In contrast to a decision cited by the Revenue, the Court distinguished the applicability of section 37(3D) concerning a new product and reiterated that the provision required the establishment of the industrial undertaking within the specified timeframe. The Tribunal's view was deemed erroneous, leading to the judgment favoring the Revenue and rejecting the claim for exemption under section 37(3D) by the assessee company.

In conclusion, the High Court of Madras ruled against the assessee company's claim for exemption under section 37(3D) of the Income-tax Act, 1961, emphasizing the necessity of establishing an industrial undertaking within the stipulated period for availing the benefits provided under the provision.