Allahabad High Court
Commissioner Of Income-Tax vs Agra Beverages Corporation P. Ltd. on 16 November, 2007
Equivalent citations: [2008]300ITR286(ALL)
Author: Bharati Sapru
Bench: Prakash Krishna, Bharati Sapru
JUDGMENT Bharati Sapru, J.
1. Heard learned Counsel for the Revenue, Sri R. K. Upadhyaya and Sri Shubham Agrawal, learned Counsel appearing on behalf of the assessee.
2. This is a reference under Section 256(1) of the Income-tax Act, 1961. Two questions have been referred for the opinion of this Court. The first question is at the instance of the Revenue which is given below:
Whether the Income-tax Appellate Tribunal is legally correct in permitting the assessee to change its method of accounting in respect of bottles and crates and in coming to the conclusion that 'bottles and crates' constitute 'plant' totally disregarding the past practice of the assessee in regard to these items ?
3. The second question is at the instance of the assessee, which is as under:
Whether the Income-tax Appellate Tribunal is legally correct in holding that the settle (bottles) and crates in the assessee's case do not constitute its stock-in-trade and should be treated as 'plant' ?
4. The first question, which is at the instance of the Revenue is taken up.
5. The facts of the case are. The assessee is a private limited company and filed its return of income for the assessment year 1979-80 showing a net loss of Rs. 5,39,870. The assessment was completed by the Assessing Officer under Section 143(3) on a net loss of Rs. 3,15,890 in 1982.
6. The assessee claimed to 100 per cent, depreciation under Section 32(1)(ii) on bottles and crates treating these as 'plant used in the business of manufacture of soft drinks run by the assessee-company. In the assessment proceedings, the claim of the assessee was negatived on the ground that the assessee-company all along in the past had been treating the bottles and crates as stock-in-trade.
7. Subsequently, the assessee went in appeal before the Commissioner of Income-tax (Appeals), Agra, who held that the assessee-appellant was entitled to 100 per cent, depreciation on crates and bottles as each of the items being in the nature of the plant and each item is less that Rs. 750 in value. He, therefore, directed the Assessing Officer to verify the cost of these items during the accounting year and allow depreciation at 100 per cent, by his order dated February 20, 1984.
8. Feeling aggrieved by the order of the Commissioner of Income-tax (Appeals), the Department filed the second appeal before the Income-tax Appellate Tribunal who has confirmed the finding of the Commissioner of Income-tax (Appeals), Agra, in favour of the assessee.
9. Hence, the Revenue had come up against the said decision and has raised the following questions in reference for the opinion of this Court:
1. Whether the Income-tax Appellate Tribunal is legally correct in permitting the assessee to change its method of accounting in respect of settle (bottles) and crates and in coming to the conclusion that 'bottles and crates' constitute 'plant' totally disregarding the past practice of the assessee in regard to these items ?
2. Whether the Income-tax Appellate Tribunal is legally correct in holding that the bottles and crates in the assessee's case do not constitute its stock-in-trade and should be treated as 'plant' ?
3. Whether the assessee is entitled to change its method of accounting in respect of bottles and crates disregarding the Allahabad High Court's decision in the case of Balraj Virmani v. CIT , Shiv Prasad Ram Sahai v. CIT and Dr. Ishwari Prasad v. CIT ?
10. Having heard both sides at length. This Court, in I. T. R. No. 183 of 1993 (CIT v. Agra Beverages Corporation P. Ltd. [2008] 300 ITR 295 (Appex) in the case of the same assessee, has held that bottles and crates in the assessee's case do not constitute stock-in-trade and should be treated as plant. The question was answered in favour of the assessee and the following decisions of these High Courts were relied upon:
(1) CIT v. Prem Nath Monga Bottlers P. Ltd. .
(2) CIT v. Margadarsi Chit Fund P. Ltd. .
(3) CIT v. Saurashtra Bottling P. Ltd. .
11. Respectfully following the decisions of this Court given in I. T. R. No. 183 11 of 1993 (CIT v. Agra Beverages Corporation P. Ltd. [2008] 300 ITR 295. We answer the above questions in the affirmative, i.e., in favour of the assessee and against the Department.
12. On the second question, learned Counsel for the assessee has argued at 12 length.
13. The facts with regard to the second question which are being reproduced below for facility of reference are that the assessee-company owns a bottling plant and manufactures soft drinks, viz., "Double Seven", Vidhu, Soda, etc. The products are sold in bottles in the market with trade name.
14. The assessee used to manufacture and sell Coca Cola and Fanta since its 14 inception. The Government of India banned the manufacture and sale of Coca Cola and Fanta in India. The assessee was, therefore, constrained to obtain bottling rights of a new product, viz. "Bibhu" and "Double Seven". The business of the company had to be reorganised and set up to manufacture a new brand of product. In order to popularise the new product, the assessee had to incur expenditure in its territories of U.P., Delhi, etc. There was business competition in the market with the other suppliers, viz., Campa Cola, Thums-up, etc.
15. Learned Counsel for the Department has argued that the Assessing Officer disallowed advertisement expenditure to the extent of Rs. 1,13,878 in terms of Sub-section (3D) of Section 37 of the Income-tax Act.
16. In appeals, the learned Commissioner of Income-tax (Appeals) deleted the addition made by the Assessing Officer on the ground that the assessee was covered by Section 37(3D) of the Act.
17. Aggrieved, the Department went in appeal before the Tribunal and while allowing the appeal, the Tribunal has observed as under:
6. The provision of Sub-sections (3A) and (3D) of Section 37 may be noted at this stage for appreciating the controversy. Sub-section (3A), as far as it is relevant for our purpose, reads as below:
Notwithstanding anything contained in Sub-section (1)...where the aggregate expenditure incurred by an assessee on advertisement, publicity and sales promotion in India exceeds Rs. 40,000, so much of such aggregate expenditure as is equal to an amount calculated as provided hereunder shall not be allowed as a deduction....' Just below the above provision there is a table indicating the percentage of disallowance in different situations.
7. The above Sub-section (3A) thus, provides that, if the expenditure on advertisement, publicity and sales promotion in India exceeded Rs. 40,000 in the accounting period in question, part of the said expenditure would be disallowed according to the table given in Sub-section (3A).
8. Sub-section (3D) of Section 37 is an exception to the operation of Sub-section (3A) referred to above. It reads as below:
In a case where an assessee has set up an industrial undertaking for the manufacturing or production of any articles, nothing in subsection (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.
9. From the wording of Sub-section (3D) above, it would be clear that in order to bring the case within the exception provided therein, the assessee should be able to show:
(i) That he has set up an industrial undertaking for the manufacture or production of any article ; and
(ii) That such undertaking has begun to manufacture or produce such articles within the previous year.
On the above conditions being fulfilled, the exception from the operation of Sub-section (3A) would be available to the assessee in respect of the year referred to above, and two previous years immediately succeeding the said previous year.
10. The primary condition, therefore, that has to be fulfilled by an assessee in order to bring the case within Sub-section (3D) is to show that he has set up an industrial working would naturally be for the production of an article. The production of an article is, thus result of the setting up of the industrial undertaking, and unless it can be shown by a person that an industrial undertaking had been set up and that such undertaking has started manufacturing articles within the previous years, the provisions of Sub-section (3D) would not apply.
18. Learned counsel for the Revenue has argued that the assessee has not 18 set up any industrial undertaking during the previous year under consideration. The industrial undertaking, namely, the bottling plant was in existence for a considerable period before the beginning of the previous year under consideration. In the said plant, the assessee has started bottling Double Seven during the year under consideration, instead of Coca Cola and Fanta, etc., in the earlier years. The assessee is, therefore, not eligible for any relief under Sub-section (3D). Without setting up an industrial undertaking, the assessee does not become eligible for relief under subsection (3D). The Commissioner of Income-tax (Appeals) misunderstood Sub-section (3D) that if a new product, is manufactured by an existing industrial undertaking, even then it would have to be said that an industrial undertaking has been set up. Setting up of an industrial undertaking is a physical act and it clearly implies that an undertaking, which hitherto was not there has been set up during the previous year and that this industrial unit has started manufacturing articles during the previous year. The industrial undertaking may be set up with the help of the old machinery or by the splitting of the existing business. But, nevertheless an industrial undertaking must come into existence during the previous year, which earlier was not in existence. A unit of the existing industrial undertaking for the manufacture of a new item cannot be regarded as setting up an industrial undertaking.
19. In support of his argument, learned Counsel for the Department has 19 placed reliance on a decision of the Karnataka High Court in the case of Bangalore Soft Drinks P. Ltd. v. CIT . In this decision, the court came to the conclusion that the Tribunal has recorded a finding of fact that the assessee had not set up any new industrial undertaking and, therefore, no question of law arose.
20. Learned Counsel for the assessee has very strenuously argued that taking into account the facts and circumstances of the instant case, the assessee would be entitled to benefit of the provisions of Section 37(3D) as inserted by the Finance Act, 1978, with effect from April 1, 1979, to April 1, 1981. The case in hand relates to the assessment year 1979-80 as stated above.
21. Learned Counsel for the assessee has argued that the case, which has been cited above stipulates the words "set up" an industrial undertaking. He argued that this phrase does not contain the word "new".
22. According to learned Counsel for the assessee in order to get the benefit of Section 37(3D), three conditions are to be fulfilled:
(i) benefit is granted to an industrial undertaking ;
(ii) it should be set up (established) by an assessee ;
(iii) it should involve in manufacturing/production process.
23. In case these three conditions are fulfilled, the assessee would become entitled to the benefit of Section 37(3D) of the Act. However, the stipulation as stated above, does not include the word "new".
24. Learned Counsel for the assessee has argued that Sub-section (3A) to Section 3 7 (3D) is not applicable where an industrial undertaking begins to manufacture in the previous year. He further contends that there is no requirement of the aforestated provision that unit should have been set up in the previous year. The benefit of Section 37(3D) is granted not from the time from when an industry was set up but from when it began to manufacture. It applies even if new product is manufactured by existing industrial undertaking.
25. He has further argued that the object of Section 37(3D) is to encourage diversification of existing units, so that they could launch new product and benefit of the promotional expenditure is given. However, the benefit of Section 37(3D) is not to be granted to new unit and such benefit to new unit is granted under Sections 80J and 80HH, whereby the word "new" is specifically used. It is further argued that the benefit is not granted on the investment (capital employed) in the industry (as is the case in Section 80J), but the benefit is granted on the advertisement expenses incurred by it.
26. Learned Counsel for the assessee has argued that the words "set up" which is used in the expression as "set up" and argued that it means an established organisation. Every unit is new when it is set up for the first time. It is not required that unit should be new in the year when the benefit under Section 37(3D) is claimed.
27. Learned counsel for the assessee has argued that the word "new" not being included in the expression as "set up an industrial undertaking" cannot be added by the court while interpreting the provision. He has argued that where the Legislature intends to use the word "new" it does so deliberately and specifically. In order to demonstrate this, he has cited the provisions of Section 5(1)(xxi) of the Wealth-tax Act, which is reproduced below:
(xxi) that portion of the net wealth of a company established with the object of carrying on an industrial undertaking in India within the meaning of the Explanation to Clause (d) of Section 45, as is employed by it in a new and separate unit set up after the commencement of this Act by way of substantial expansion of its undertaking:
Provided that:
(a) separate accounts are maintained in respect of such unit; and
(b) the conditions specified in Clause (d) of Section 45 are complied with in relation to the establishment of such unit:
Provided further that this exemption shall apply to any such company only for a period of five successive assessment years commencing with the assessment year next following the date on which the company commences operations for the establishment of such unit.
28. Therefore, he argues that unless the word "new" is used specifically or mentioned in the statute, it cannot be read into by way of inference. In order to further demonstrate his argument, learned Counsel for the assessee has relied on the Budget Speech of the Finance Minister for the Finance Act, 1978, reported in [1978] 7 CTR (SC), page 101 (J. S), para 83, [1978] 111 ITR (St.) 85, 89, Part B) Extravagant and socially wasteful expenditure is often incurred on advertisement, publicity and sales promotion. In order to put a curb on such expenditure at the cost of the exchequer, I propose to provide for the disallowance of a part of such expenditure in the computation of taxable profits.... Newly established industrial concerns will also be exempted from this provision for an initial period of three years.
29. He argued that the word "also" signifies that existing set up is already covered and benefit to new set up is in addition to the already existing set up.
30. To support this argument, learned Counsel for the assessee has relied upon the decision rendered in the case of Karnataka Small Scale Industries Development Corporation Ltd. v. CIT , in which the hon'ble apex court has held that the Budget Speech of the Finance Minister can be relied upon for the purpose of interpretation of section.
31. Learned counsel for the assessee has also placed reliance on a decision of the Andhra Pradesh High Court in the case of CIT v. Hyderabad Bottling Co. P. Ltd. , wherein the Andhra Pradesh High Court came to the conclusion that on similar facts where the assessee was legitimately eligible to invoke the benefit of Section 37(3D) in so far as the advertisement as well as promotion expenses on the launch of new product Thums-up was concerned. In that case also, the assessee was an established industrial undertaking, which undertook a new product, namely, Thums-up and expended money on its sale promotion and thereafter had claimed the benefit of Section 37(3D).
32. In reply to the argument made by learned Counsel for the Department, Sri Shubham Agrawal argued that the case relied on by the Department mainly Bangalore Soft Drinks P. Ltd. v. CIT , did not lay down any ratio on the reference arising out of the second question and has simply dismissed the case of the assessee by observing that it is a question of fact and no question of law is involved.
33. Learned counsel for the assessee finally argued that where the statute does not provide a specific word. It is not open to the court to provide the "casus omissus" to the statute as that is not the function of the court but that of the Legislature. The court cannot read into the statute by way of inference when the statute is by itself plain and unambiguous. It is not open to the court to add words by way of judicial interpretative process. For this purpose, learned Counsel for the assessee has placed reliance on a decision of the hon'ble Supreme Court in the case of Prakash Nath Khanna v. CIT .
34. We have heard learned Counsel for the assessee and the Department at length.
35. Before we discuss the words "has set up an industrial undertaking", let us have the provisions of Sub-section (3D) which is quoted below:
(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.
36. From the above, it is apparent that the words used in the statute are "has set up an industrial undertaking". On a plain reading of these words show requirement that an industrial undertaking must be "set up". The words "set up" as defined in various dictionaries means "established and organised". The meaning of the words "set up" as given in Concise Oxford Dictionary is reproduced below:
Set up - to organise or start a business ; establish in some capacity.
37. In view of the above, the phrase "set up" used in the section does not qualify the words "set up" by adding before it the word "new" and such being the case, the word "new" cannot be read into the expression by the court, as a result of which, the obvious answer to the question raised by the assessee is that the benefit of Section 37(3D) would also be available to the assessee, which was an industrial establishment already set up but had launched a new product. The requirement of the section was not that of setting up of a new undertaking but would be satisfied where the industry has undertaken the production of a new article.
We are of the opinion that the argument of learned Counsel for the assessee is well founded and the assessee is entitled to deduction under Section 37(3D) in respect of the expenditure on advertisement and publicity incurred on launch of its new product. The order of the Tribunal holding otherwise cannot be sustained. There is no infirmity in the order of the learned Commissioner of Income-tax, the same deserves to be sustained.
38. We answer both the questions in favour of the assessee and against the Revenue. There will be no order as to costs.