Rajasthan H.C : Whether, on the facts and in the circumstances of the case, the Tribunal is legally justified in holding that the hotel business is an industrial undertaking and therefore the assessee is entitled to investment allowance under s. 32A of the IT Act ?

Counsel AppearedL.M. Lodha, for the Petitioner : R. Mehta, for the Respondent

JUDGMENT

RAJESH BALIA, J. :

This is a reference under s. 256(1) of the IT Act, 1961 (hereinafter referred to as ‘the Act’), at the instance of the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (for short ‘the Tribunal’), whereby the Tribunal has referred the following common question of law to this Court in the case of assessee for the asst. yrs. 1986-87 and 1987-88 for answer : “Whether, on the facts and in the circumstances of the case, the Tribunal is legally justified in holding that the hotel business is an industrial undertaking and therefore the assessee is entitled to investment allowance under s. 32A of the IT Act ?”

2. The brief facts giving rise to this reference are : that the assessee is a company running hotels at Udaipur. The hotels of the assessee-company were being operated by the Indian Hotels Company Ltd. and 50 per cent of the net operating profits were paid as operation fee. The assessee-company claimed investment allowance on the hotel building treating the same as plant. However, the Dy. CIT (Asst.), Special Range, Udaipur vide his order, dt. 13th March, 1989, did not accept the claim of the assessee for investment allowance. An appeal was filed by the assessee before the CIT(A), Jodhpur, Camp at Udaipur against the order of the Dy. CIT (Asst), Special Range, Udaipur, dt. 13th March, 1989, disallowing assessee’s claim for investment allowance. In appeal, that order was confirmed by the CIT(A), Jodhpur, Camp at Udaipur vide judgment dt. 13th Feb., 1990. The assessee preferred second appeal before the Tribunal, Jaipur Bench, Jaipur against the judgment of the CIT(A), Jodhpur, Camp at Udaipur, dt. 13th Feb., 1990, and the Tribunal, after hearing both parties came to conclusion that assessee was an industrial undertaking and thus, was entitled to investment allowance on the hotel building as apparatus ofbusiness under s. 32A of the Act as it was running hotel business and thus, the order, dt. 13th March, 1989 passed by the Dy. CIT (Asst), Special Range, Udaipur and judgment, dt. 13th Feb., 1990, passed by the CIT(A), Jodhpur, Camp at Udaipur were set aside to that extent and the appeal was partly allowed by the Tribunal vide judgment, dt. 29th Sept., 1994. Thereafter, the Tribunal, Jaipur Bench, Jaipur was of the opinion that findings recorded by it give rise to a question of law fit for reference to the High Court and in these circumstances, the question of law, as quoted above, has been referred by the Tribunal on 15th Dec., 1995, for answer to this Court on an application under s. 256(1) of the IT Act at the instance of the CIT.

We have heard the learned counsel appearing for the parties and have carefully gone through the record of the case. It has been contended by the learned counsel for the assessee that though in CIT vs. Anand Theatres (2000) 160 CTR (SC) 492 : AIR 2000 SCWR 2487, the Supreme Court has held hotel building not to be a ‘plant’ within the meaning of s. 32 of the Act, which separately identifies ‘buildings’ as depreciable asset, distinct and independent of plant and machinery and prescribes separate rate at which deduction for depreciation on written down value of a building is to be allowed, s. 32A which governs the case of ‘investment allowance’ on investment made in ‘plant and machinery’ is in addition to and independent of deduction for depreciation. In Anand Theatre’s case (supra), the Supreme Court was dealing with the depreciation and interpreted the word ‘depreciation’ in the context of independent description of building as depreciable asset. This is apparent from the following statement of law while interpreting s. 32 of the Act : “42. Further for running almost all industries or for carrying on any trade or business, building is required. On occasions, building may be designed and constructed to suit the requirement of a particular industry, trade or business. But that would not make such building a plant. It only shelters running of such business. For each and every business, trade or industry, building is required to carry on such activity. That means building plays some role and in other words, its function is to shelter the business, but it has no other function except in some rare cases such as dry dock where it plays an essential part in the operations which take place in getting a ship into the dock, holding it squarely and then returning it to the river. Building is more durable. If contention of the assessee is accepted, virtually all such building would be considered to be plant and distinction which the legislature has made between the ‘building’ and ‘machinery’ or ‘plant’ would be obliterated.

Learned counsel for the assessee submitted that the words ‘plant’ and ‘building’ are not mutually exclusive.‘Plant’ may include building in certain set of circumstances and therefore, applying the functional tests, assessee would be entitled to depreciation under the head “it is more beneficial to it”. He submitted that in the modern era, theatre building and hotel building are integral part of operation for carrying out such business and, therefore, such building should be considered as a ‘plant’. As discussed above, the aforesaid contention cannot be accepted. Firstly, it would be difficult to draw a line between a building which is specifically constructed for the aforesaid purposes and building which are used for the aforesaid purposes by converting a residential accommodation or industrial premises for such purposes. Secondly, the depreciation as a general principle represents the diminution in value of capital asset when applied to the purpose of making profit or gain. The object is to get true picture of real income of the business. Hence, it can be inferred that the legislature never intended to give such benefit of depreciation to a ‘building’ which is usually more durable than ‘machinery’ or ‘plant’. In CIT vs. Alps Theatre AIR 1967 SC 1437 Court considered the question whether the cost of land is entitled to depreciation under the Schedule to the IT Act along with the cost of the building standing thereon ? The Court observed (in para 6) thus :

‘It would be noticed that the word used is ‘depreciation’ and ‘depreciation’ means : ‘a decrease in value of property through wear, deterioration, or obsolescence; the allowance made for this is book-keeping account, etc.’ [Webster’s New Word Dictionary].

In that sense, land cannot depreciate. The other words to notice are “such buildings.” We have noticed that in sub- cls. (iv) and (v), ‘building’ clearly means structures and does not include site.’ The Court also held in paras 7 and 8 that : “One other consideration is important. The whole object of s. 10 is to arrive at the assessable income of a business after allowing necessary expenditure and deductions. Depreciation is allowable as a deduction both according to accountancy principles and according to the Indian IT Act. Why ? Because otherwise one would not have a true picture of the real income of the business. But land does not depreciate, and if depreciation was allowed it would give a wrong picture of the true income.” Under the new Act also for the building and machinery or plant depreciation is allowed probably after taking into consideration its life and decrease in the value of the property through wear and tear.

5. It was contended that scheme of s. 32A of the Act being different, the ratio of Anand Theatres case (supra) shall not be applicable while interpreting s. 32A. Learned counsel urged that in the context of object and intent of s.32A ‘functional test’ has been applied by various Courts and approved by Supreme Court. Learned counsel placed reliance on the principle enunciated by Supreme Court in CIT vs. Taj Mahal Hotel 1973 CTR (SC) 480 : (1971) 82 ITR 44 (SC) : TC 29R.490 wherein while considering the provisions of s. 33 relating to ‘development rebate’, the forerunner of scheme of ‘investment allowance’ under s. 32A and couched in same words wherein the Court laid the functional test for holding whether any business asset is a plant or not for the purpose of claimin development rebate in which sanitary amenities provided by a hotel were considered to be plant for the purpose of claiming development rebate. He also relied on a recent decision of Supreme Court in CIT vs. Dr. B. Venkata Rao (2000) 160 CTR (SC) 489 : (2000) 243 ITR 81 (SC) holding a building in which nursing home was running as a plant because the nursing home building was specially equipped as a plant for the assessee’s business. The Court has observed : “……………… What is to be determined is whether the particular nursing home building wasequipped as to enable the assessee to carry on the business of nursing home therein or whether it is just any premisesutilised for the object.” He also placed reliance on a later decision of Supreme Court rendered after Anand Theatre’s case (supra) holding a building where power generator set was installed was held to be a plant in CIT vs. Karnataka Power Corporation (2000) 162 CTR (SC) 249 following its earlier decision in B. Venkatarao’s case (supra) in which nursing home building was held to be plant and on that basis, the building wherein power generating plant was installed was held to be a plant eligible to claim investment allowance under s. 32A. Reference was also made to a deduction of Gujarat High Court in CIT vs. Gujarat Fertilizer (1996) 132 CTR (Guj) 404 : (1996) 219 ITR 550 (Guj) :TC S28.2912 wherein roads of a factory were held to be part of building and not of plant for the purposes of s. 32 for the very same reason of difference in language in ss. 32 and 32A.

Learned counsel appearing for the Revenue urged that ‘hotel building’ is not a plant and depreciation is not allowable to hotel building as a plant but only as a building under s. 32 of the Act. In support of this contention, the principle laid down in Anand Theatres case (supra) was pressed into service. It was contended by the learned counsel that what is not a plant under s. 32 of the Act cannot also be a plant under s. 32A of the Act. He also relied on the definition of ‘plant’ given in s. 43(3) of the Act and the interpretation of that provision by the Supreme Court in Anand Theatre’s case (supra).

8. Having given our thoughtful consideration, we are of the opinion that it is true that provisions of ss. 32 and 32A of the Act operate in different fields and the intended object of both the provisions are also different. Learned counsel for the assessee is also right in his submission that in Anand Theatre’s case (supra), the Supreme Court was considering the case of ‘hotel building’ for the purpose of allowing depreciation under s. 32 only and the question of treatment of building under s. 32A of the Act was not before it and the decision in Anand Theatre’s case (supra) has been distinguished by the Supreme Court in CIT vs. Karnataka Power Corporation (supra) wherein while considering the case of allowing ‘investment allowance in respect of a building, it was held to be an integral part of its generating system.

9. Yet we are of the opinion that the very scheme of s. 32A itself which houses the provision of allowing investment allowance on the investment made in plant and machinery does not carry the case of the petitioner any further even assuming without holding it to be so, hotel building to be a plant in generic sense as defined in the dictionary. Sec. 32A of the Act to the extent relevant for present purposes reads as under : “Sec. 32A. Investment allowance.—(1) In respect of a ship or an aircraft or machinery or plant specified in sub-s. (2), which is owned by the assessee and is wholly used for the purposes of the business carried on by him, there shall, in accordance with and subject to the provisions of this section, be allowed a deduction, in respect of the previous year in which the ship or aircraft was acquired or the machinery or plant was installed or, if the ship, aircraft, machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year, of a sum by way of investment allowance equal to twenty-five per cent, of the actual cost of the ship, aircraft, machinery or plant to the assessee : Provided further that in respect of a ship or an aircraft or machinery or plant specified in sub-s. (8B), this sub-section shall have effect as if for the words “twenty-five per cent”, the words “twenty per cent,” had been substituted : Provided further that no deduction shall be allowed under this section in respect of : (a) ………….. (b) ………….. (c) any ship, machinery or plant in respect of which the deduction by way of development rebate is allowable under s. 33; and (d) ………….. Explanation : …………… (2) The ship or aircraft or machinery or plant referred to in sub-s. (1) shall be the following namely : (a) a new ship or new aircraft acquired after the 31st day of March, 1976 by an assessee engaged in the business of Coperation of ships or aircrafts; (b) any new machinery or plant installed after the 31st day of March, 1976 : (i) for the purposes of business of generation or distribution of electricity or any other forms of power; or (ii) in a small scale industrial undertaking for the purpose of business of manufacture or production of any article or thing; or (iii) in any other industrial undertaking for the purpose of business of construction, manufacture or production of any article or thing, not being an article or thing specified in the list in the Eleventh Schedule: Provided that nothing contained in cls. (a) and (b) shall apply in relation : (i) ……………… (ii) …………….. (c) …………….. Explanation : ……………. (2A) The deduction under sub-s. (1) shall not be denied in respect of any machinery or plant installed and used mainly for the purposes of business of construction, manufacture or production of any article or thing, not being an article or thing specified in the list in the Eleventh Schedule, by reason only that such machinery or plant is also used for the purposes of business of construction, manufacture or production of any article or thing specified in the said list. (2B) …………… Explanation : ……………..”

10. A perusal of the scheme of s. 32A of the Act makes it abundantly clear that investment in anything which can be termed in generic sense as plant and machinery used for the purposes of business has not been made eligible to claim investment allowance and a deduction in respect of such investment, but only such plant and machinery used in business which fulfils further essential conditions and requirements required for laying claim to such deductions. Even if other conditions of the allowability of investment allowance are fulfilled namely creation of investment allowance reserve fund and making provision in the books of accounts as envisaged therein, it is only the plant and machinery specified in sub-s. (1) of s. 32A of the Act, that had been made eligible for laying claim to the investment allowance for deduction. Clause (a) of sub-s. 2 which deals with new ship or new aircraft does not hold good in the present case. Clause (b) of s. 32A(2) of the Act lays down a pre-condition before the plant and machinery can be considered eligible for laying claim to investment allowance. The criteria for makinginvestment in plant and machinery to become eligible for claiming deduction of any allowance, the first and foremost condition is that the activities by which the new plant and machinery comes into existence by installation and secondly such plant and machinery should be installed either for the purposes of business of generation or distribution of electricity or any other form of power or it should be plant and machinery installed in any other industrial undertaking for the purposes of business of construction or manufacture or production of any article or thing, not being an article or thing specified in list in the Eleventh Schedule. For the purposes of application of these provisions, the key words used in this section are ‘for the purpose of business of construction, manufacture or production of any article or thing’. A plain reading of the language of s. 32A of the Act would reveal that any plant or machinery which is not installed for any of the purposes mentioned in cl. (b) of sub-s. (2) of s. 32A of the Act shall not qualify as a plant, investment of which would be eligible for ‘investment allowance.’ It may be noticed here that there is distinction regarding meaning of ‘plant’ for the purposes of depreciation allowance under s. 32 and investment allowance under s. 32A of the Act. While s. 32 of the Act identifies depreciable assets distinctly as building, machinery or plant and furniture but is not inhabited by any other condition of having been installed for the purposes of business of construction, manufacture or production of any article or thing but it only suffices that such building, machinery or plant or furniture is owned and used for the purposes of business or profession. Therefore operative field of s. 32 of the Act is far wider than s. 32A in its applicability. In no sense of word, the hotel building can be considered to be a plant installed for the purposes of business of construction, manufacture or production of any ‘article’ or ‘thing’ much less for manufacture or production of any article or thing not specified in the list in the Eleventh Schedule, for which purpose also, s. 32A is not applicable. By no stretch of reasoning, the very requirement of ‘for the purposes of business of construction, manufacture or production of any article or thing’, for the purposes of application of s. 32A of the Act can be extended to a plant or machinery used for the purposes of hotel business.

11. ‘Article’ in its ordinary sense refers to an objective or perceivable thing and not to incohate rights or rendition of services in any form. ‘Article’ in its dictionary meaning in the context mean as per Webster’s Third New International Dictionary : “a material thing : item object” “a thing of a particular class or kind as distinct from a thing of another class or kind.” So also expression ‘a thing’ in the context of manufacture or production as part of regular activity of human endeavour known as business can apply corresponding to its meaning in Webster’s Third New International Dictionary as : “an entity that can be apprehended or known as having existence in space or time as distinguished from what is purely an objection of thought ; “an inanimate object as distinguished from living being” “possession : goods” “whatever may be possessed or owned.” In contrast, an activity of rendering service or service through an activity of human endeavour for feeding the needs of other cannot be termed to be engaged in business of manufacture or production of any article or thing will be clear from seeking through the meaning of term ‘Service’ from the very same dictionary which shall make the distinction clear : “Professional or other useful ministration, supply of needs, utility” “useful labour that does not produce a tangible commodity, debt service, facility or provision for maintenance and repair, the provision organisation or apparatus for conducting a public utility or meeting a general demand; “Providing services rather than tangible goods” In this context, it is to recall that requirement of provision is ‘investment in installing plant and machinery by the assessee in the business of manufacture or production of an article or thing’ and not merely engaging in activity of manufacture and production. Thus, word ‘production’ has to be related to production of any article or thing that it to say tangible commodity and not in its wide sense to include production of service.

12. Reference in this connection may be made to State of H.P. vs. Associated Hotels of India AIR 1972 SC 1131. It was a case arising under the sales tax laws concerning the nature of transaction of supply of food to itscustomers by a hotelier in the context of question whether it amounts to sale of goods. Commenting upon the essential nature of the business carried on by a hotelier, the apex Court said : “The transaction between a hotelier and a visitor to his hotel whereby the former receives the latter for lodging in his hotel is essentially a contract of service and wherein the performance of the service and as a part of the amenities incidental to that service, the hotelier serves meals at stated hours, the transaction is not ‘Sale’. This concept about hotel business was reiterated by the apex Court in Northern India Caterers vs. Union of India AIR 1978 SC 1591. From the above, it can be seen that a person engaged in the business as hotelier cannot be said to be a person engaged in the business of manufacture or production of an article or a thing, but is a person who is engaged in the business of providing service. The investment of capital in installing any plant or machinery for the purposes of a business of providing service cannot be considered as investment in an industrial undertaking engaged in manufacture or production of any article or thing. Hence, on its own provision of s. 32A are not attracted. The Tribunal has erred in extending the provisions of s. 32A to a hotel by treating it to be an industrial undertaking engaged in the business ofmanufacture or production of an article or thing.

13. The decision in Karnataka High Court in CIT vs. Woodland Hotel (P) Ltd. (1995) 151 CTR (Kar) 576 : (1998) 233 ITR 224 (Kar) : TC S27.2781 fortifies us in our aforesaid conclusion as to scope of s. 32A in relation to a hotel building. The further conclusion that for the purposes of s. 32 for computing depreciation, it is a plant, must be considered to be impliedly covered by the decision of the Supreme Court in Anand Theatres case (supra). The decision in CIT vs. Karnataka Power Corporation (supra) is clearly distinguishable inasmuch as installation of plant for the purposes of business of generation or distribution of electricity or any other form or power has been specifically envisaged as one of the business in which investment in installing plant or machinery to become eligible to claim deduction on account of investment allowance subject to fulfilment of other conditions. The Supreme Court in Karnataka Power Corporation’s case (supra) while applying the test that where a building is so planned or constructed as to serve an assessee’s special technical requirement, it will qualify to be treated as a plant for the purposes of investment allowance, held that the assessee’s generating station building was an integral part of the its generation system and, therefore, it is a plant and is entitled to investment allowance. Thus, the decision in Karnataka Power Corporation’s case (supra) is distinguishable on facts inasmuch there the investment in building was held to be a business apparatus of a business of generating electricity to which provisions of s. 32A were made applicable. Further inhibition is to be found against allowability of investment allowance under the scheme of the provisions of the Act. While claim for depreciation and investment allowance are not mutually exclusive but the claim for investment allowance and development rebate are mutually exclusive, that is to say that where the assessee is entitled to claim deduction as a development rebate on certain investments made unders. 33 of the Act, he is not entitled to claim investment allowance under s. 32A of the Act. Clause (c) of second proviso to s. 32A(1) of the Act clearly postulates that no deduction shall be allowed under this section in respect of any ship, machinery or plant in respect of which the deduction by way of development rebate is allowable under s. 33. That being the position, the allowability of investment allowance in respect of hotel premises in respect of installation of any plant and machinery in a hotel in other way is excluded.

Attention of us was invited to provisions of s. 33(1)(B)(ii), which deals with allowance of development rebate to any plant or machinery installed in a premises used by an Indian company as a hotel. Therefore, the cases in which the Courts have considered cinema premises as a plant and eligible for development rebate in view of specific provision do not render any assistance to the assessee. This is the view expressed by the Supreme Court in CIT vs. Anand Theatres (supra), wherein the Court held that hotel building cannot be treated as plant and therefore, s. 32 of the Act is not attracted. We are also fortified in our conclusion in the context of s. 32A of the Act by a recent decision of the Supreme Court in Indian Hotels Co. Ltd. vs. ITO (2000) 162 CTR (SC) 310 : (2000) 245 ITR 538 (SC) wherein the Court has held that the assessee who is carrying on a trading activity of business of a hotel cannot claim the benefit granted to an industrial undertaking by contending that it also produces foodstuff or food packets. In coming to this conclusion, the Court has referred to the decisions in CIT vs. Casino (P) Ltd. (1973) 91 ITR 289 (Ker) : TC 24R.272, CIT vs. Berry’s Hotels (P) Ltd. (1994) 207 ITR 615 (Bom), Fariyas Hotels (P) Ltd. vs. CIT (1995) 126 CTR (Bom) 363 : (1995) 211 ITR 390 (Bom) : TC S28.2891 and CIT vs. S.P. Jaiswal Estates (P) Ltd. (1992) 196 ITR 179 (Cal) : TC 28R.227 and approved in principle that even if the incidental activity of processing food materials into edible products for service to clients in the restaurant is a necessary adjunct of the hotel business and is ultimate nature of the business of hotel-keeping, it is a trading activity and it cannot be held to be a business of manufacture or production of any article or thing.

17. In view of the aforesaid discussion, we hold that the Tribunal was not justified in holding that hotel business is an industrial undertaking to which s. 32A applies and the assessee is entitled to investment allowance by treating the hotel building itself as a plant. We, therefore, answer the question referred to this Court in negative that is to say in favour of the Revenue and against the assessee. No order as to costs.

[Citation : 251 ITR 644]