1983 (3) TMI 102 - AT - Income Tax

Fixed Assets, New Industrial Undertaking, Own Capital, Per Annum, Profits And Gains, Sales Promotion

Summary

Issues Involved:
1. Disallowance of payments made under the terms of the agreement as excessive or unreasonable under Section 40A(2)(a) of the Income-tax Act, 1961.
2. Rejection of deduction claims under Section 80J of the Income-tax Act, 1961.
3. Applicability of Section 37(3D) concerning advertisement, publicity, and sales promotion expenses.

Detailed Analysis:

1. Disallowance of Payments under Section 40A(2)(a):

The primary issue was whether the payments made by the assessee-firm to the lessor company under the terms of the agreement were excessive or unreasonable as per Section 40A(2)(a) of the Income-tax Act, 1961. The Income Tax Officer (ITO) had disallowed a portion of the payments, arguing that the payments were excessive based on the written down value of the leased assets. The Commissioner (Appeals) upheld this disallowance.

Upon review, the Tribunal noted the following:
- The agreement between the lessor and lessee was genuine, based on commercial considerations, and acted upon in good faith.
- The ITO's assessment of the payments as excessive was unwarranted. The Tribunal emphasized that the reasonableness of expenditure should be judged from the businessman's perspective, not the revenue's, citing Supreme Court rulings in cases like CIT v. Walchand & Co. (P.) Ltd. and J.K. Woollen Manufacturers v. CIT.
- The Tribunal concluded that the payments were wholly and exclusively laid out for the business purposes of the assessee and were not excessive or unreasonable. Therefore, the disallowance by the ITO and the Commissioner (Appeals) was set aside, and the entire payments were directed to be allowed.

2. Rejection of Deduction Claims under Section 80J:

The second issue was the rejection of the assessee's claim for deduction under Section 80J, which provides tax benefits for profits derived from new industrial undertakings. The ITO and Commissioner (Appeals) had rejected the claim on the grounds that the assessee had not set up a new independent unit and that the business was a continuation of an existing one.

The Tribunal's analysis included:
- The assessee had acquired the right to use and exploit the lessor's assets but did not own them, meaning there was no "transfer" of assets as envisaged in Section 80J(4).
- The Tribunal emphasized a liberal construction of Section 80J, as directed by the Supreme Court in CIT v. Webbing & Belting Factory Ltd. and CIT v. Orient Paper Mills Ltd.
- The Tribunal found that the assessee was indeed running an industrial undertaking and manufacturing articles, thus qualifying for the deduction under Section 80J. However, the deduction would be calculated based on the assessee's own capital employed in the industrial undertaking, excluding the leased assets.
- The orders of the lower authorities were set aside, and the ITO was directed to compute the deduction in accordance with the Tribunal's observations.

3. Applicability of Section 37(3D) on Advertisement, Publicity, and Sales Promotion Expenses:

The final issue was whether the expenses on advertisement, publicity, and sales promotion were allowable under Section 37(3D). The ITO had disallowed a portion of these expenses, but the Commissioner (Appeals) had allowed them, holding that Section 37(3D) applied to the assessee's case.

The Tribunal's findings included:
- Section 37(3D) was applicable for the assessment years 1979-80 and 1980-81, providing that the restrictions in Section 37(3A) would not apply to expenditure on advertisement, publicity, or sales promotion for industrial undertakings in their initial years.
- Since the Tribunal had already determined that the assessee was running an industrial undertaking, the provisions of Section 37(3D) were applicable.
- The Tribunal upheld the Commissioner (Appeals)'s decision, finding no reason to interfere with the allowance of these expenses.

Conclusion:

The Tribunal allowed the appeals of the assessee, setting aside the disallowances and rejections made by the ITO and Commissioner (Appeals) concerning payments under Section 40A(2)(a) and deductions under Section 80J. The Tribunal also dismissed the revenue's appeals, confirming the applicability of Section 37(3D) to the assessee's advertisement, publicity, and sales promotion expenses.