COMMISSIONER OF INCPME TAX vs. M/S. S.B.PROPERTIES

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ITR/70/1995HC RajasthanRJHC02001954199503 January 2014Author: AJAY RASTOGI,JAINENDRA KUMAR RANKA7 pages
AI SummaryAllowed

What did the High Court hold?

The High Court answered the question in the negative, in favour of the Revenue and against the assessee. The Court held that the Tribunal erred in treating the hotel building as a plant. Citing the Supreme Court's decisions in Commissioner of Income Tax vs. Anand Theatres and Indian Hotels Co. Ltd. & Ors. vs. Income Tax Officer & Ors., the Court emphasized that a hotel building, even if specially designed, remains premises where business is carried on and is not 'plant' in the context of Section 32 of the Act. The preparation of food articles in a hotel was also held not to constitute manufacturing or production of goods, but rather a trading activity. The Court noted that its own decision in CIT vs. Lake Palace Hotels & Motels P. Ltd. was approved by the Apex Court in Anand Theatres. The reference application was disposed of accordingly.

What were the facts?

This income tax reference, arising from R.A. No.200/JP/93, concerns the order of the Income Tax Appellate Tribunal, Jaipur Bench, dated 28.1.1994, for the assessment year 1986-87. The assessee, M/s SB Properties & Enterprises Ltd., runs Hotel Mansingh. The dispute centers on whether the preparation of food articles in a hotel constitutes manufacturing of goods, thereby entitling the assessee to investment allowance under Section 32A of the Income Tax Act. The Assessing Officer and CIT(A) disallowed the claim, viewing food preparation as non-manufacturing. The Tribunal, however, allowed the claim, relying on a Bangalore Bench ITAT decision. The revenue has appealed this decision.

What were the issues?

1. Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in allowing the claim for investment allowance u/s 32A on the ground that the preparation of food articles in a hotel may be treated as manufacturing of goods? (Question of law) Assessee's Contention: The preparation of food articles and serving them to hotel guests and others is manufacturing, entitling the assessee to investment allowance under Section 32A. Revenue's Contention: The preparation of food articles does not constitute manufacturing activity for the purpose of Section 32A. The revenue relies on Supreme Court judgments in CIT vs. Anand Theatres and Indian Hotels Co. Ltd. & Ors. vs. Income Tax Officer & Ors., and its own High Court decisions in CIT vs. SB Properties & Enterprises Ltd. and CIT vs. Indo Continental Hotel & Resorts and Hotel Man Singh, arguing that a hotel building cannot be considered a plant and that hotel activities are essentially trading, not manufacturing.

Which sections of the Income-tax Act were involved?

Section 32A,Section 256(1),Section 32

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances
1 IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN AT JAIPUR BENCH, JAIPUR

D.B. INCOME TAX REFERENCE NO.70/1995 The Commissioner of Income Tax, Jaipur Vs. M/s SB Properties& Enterprises Ltd., Jaipur DATE OF ORDER : 03/01/2014 HON'BLE MR. JUSTICE AJAY RASTOGI HON'BLE MR. JUSTICE J.K. RANKA Mr. Anuroop Singhi, for the revenue Mr. Vivek Singhal, for the respondent BY THE COURT: (Per Hon'ble Ranka J.) This income tax reference arising out of R.A. No.200/JP/93 is directed against the order of Income Tax Appellate Tribunal, Jaipur Bench, Jaipur dated 28.1.1994 for relevant assessment year is 1986-

87.2.

The following questions of law under Section 256(1) of the I.T. Act has been referred to by the Tribunal for consideration of this Court:- “Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in allowing the claim for investment allowance u/s 32A on the ground that the preparation of food articles in a hotel may be treated as manufacturing of goods?”

3.

The brief facts as emerging on the face of record are that the respondent assessee is running a hotel at Jaipur in the name of Hotel Mansingh and at the relevant point of time, the hotel operation was managed by the ITC Ltd. in terms of the agreement,

2 which was renewed from time to time. The short controversy is as to whether preparation of food articles in the hotel can be said to be manufacturing of goods and consequently as to whether the assessee is entitled for investment allowance under Section 32A of the Act; while the claim of the assessee was that it enures for investment allowance under Section 32A of the Act as preparation of food articles and serving the same to the hotel guests and others is definitely manufacturing and in terms of Section 32A the assessee is entitled to claim the investment allowance on the said articles.

4.

However, the Assessing Officer was of the view that preparation of food articles does not justify that it is a manufacturing activity so as to enure for deduction under Section 32A of the Act and accordingly disallowed the claim.

5.

Dis-satisfied with the said disallowance, an also the Hon'ble Apex Court has held that a hotel cannot be held to be a plant. He relied upon the judgments of Hon'ble Apex Court in the case of Co. Ltd. & Ors. vs. Income Tax Officer & Ors. reported in (2000) ITR 245 Page 538, Commissioner of Income Tax Vs. SB Properties & Enterprises Ltd (assessee) reported in (2004) 190 CTR (Raj.) 516 and Hotel & Resorts and Hotel Man Singh (assessee) reported in (2002) 125 TAXMAN 58 (RAJ.) and, therefore, submitted that the reference deserves to be allowed in favour of the revenue and against the assessee.

9.

Shri Vivek Singhal, learned counsel for the respondent assessee was unable to controvert the said authorities.

10.

The Hon'ble Apex Court in the case of Anand Theatres (supra) has held as under:- “Hence, to relay upon Barclay, Curle and Co.'s case, (1970) ITR 62 (HL) (dealing with dry dock yard) and to hold that a hotel building or theatre would be plant on the functional test would be unjustified and unreasonable in the context of Section 32 of the Act which deals with grant of depreciation

allowance

on building,

4 machinery, plant or furniture and also for extra allowance in the case of new machinery or plant installed in premises other than the premises used as office or any residential accommodation and also for new building erected and used as a hotel. As against that, the aforesaid decisions by Courts in England are based upon Section 41 of the Finance Act, 1971, which provide for allowance for capital expenditure incurred on the provisions of machinery or plant for the purposes of the trade and the Court were only dealing with general meaning of the word “plant”. Even there, as quoted above, Courts have specifically held that creation of atmosphere in a hotel by beautiful buildings and gardens would not make such buildings as plants. The suitability of such building is simply the reason why the business is carried on there which may flourish, but the premises remain premises where business is carried on and are not some thing with which business is carried on. In Carr v. Sayer (65 TC 15 (Chd), the Court observed that a hotel building remains a building even when constructed to a luxury specification and also a hospital building for infectious diseases which might require special lay-out and other features was not held to be a plant by observing that a purpose-built building is no more than the premises in which the business is conducted. Further, there are hotels of all kinds and hotel business can be carried on in all kinds of buildings, may be pucca or kacha constructions. A building intended to be used or in fact used earlier either as a residential accommodation or business purpose can be converted for running hotel business. Section 32 itself contemplates, a hotel business being carried on in a residential

accommodation

including accommodation which is in the nature of a guest house. On occasions hotel buildings may be constructed with a special design and features so as to attract and accommodate a certain class of tourist. Similarly with regard to cinema business, it can be carried on in a specially designed and constructed building and also in other buildings. Still, however, it would be difficult to draw a distinction and differentiate by holding that a building which is specially designed and constructed for running a hotel or cinema would be covered by “plant” and other buildings used for the same purpose would not get depreciation as “plant”, even though such business is carried on in such 5 premises. In our view, the Delhi High Court has in the case of R.C. Chemical Industry, (1982) 134 ITR 330 rightly observed that mere fact that manufacture of saccharine would be better carried on in a building having atmospheric controls would not convert the building from “the setting” to “the means” for carrying the business. Similarly, the Rajasthan High Court also in Lake Palace Hotels and Motels's case, 1997 226 ITR 561 rightly observed that simply because some special fittings or controlling equipments is attached for the purpose of carrying on hotel business, it will not take it out of the category of building and make it plant. In our view special fittings or equipments to control atmospheric effects would be plant, but not the building which house such equipments. Further for running almost all industries or for carrying on any trade or business building is required. On occasions a building may be designed and constructed to suite the requirement of a particular Industry, trade or business. But that would not make such building plant. It only shelters running of such business. For each and every business, trade or industry, a building is required to carry on such activity. That means the 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 securely and then returning it to the river. Building is more durable. If the contention of the assessee is accepted, virtually all such buildings would be considered to be a plant and distinction which the legislature has made between the "building" and "machinery" or "plant" would be obliterated.”

11.

The Hon'ble Apex Court in the case of Indian Hotels Co. Ltd. (supra) has held as under:- “As against the aforesaid decisions, it has been pointed out that some other High Courts have taken the view that (i) a hotel is merely a trading concern; and (ii) the activity carried on for preparing food articles from raw materials in a hotel would not constitute manufacture or production of goods. In CIT v. Casino (Pvt.) Ltd. (1973) 91 ITR 289 the Division Bench of the Kerala High Court referred to Section 2(6)(d) of 6 the Finance Act, 1968, which defines an 'industrial company' and held that the activity carried on by the assessee in preparing articles of food from raw materials would not constitute 'manufacture or processing of goods' within the meaning of said Section. Foodstuffs prepared in the hotels using raw materials such as pulses, wheat, vegetables or meat and the like cannot be said to be manufacturing activity and such activity was trading activity. The Bombay High Court also took a similar view in CIT v. Berry's Hotels Pvt. Ltd. (1994) 207 ITR 615 and held that benefit of Section 2(7)(c) of the Finance Act, 1973 can be given to manufacturing concerns and not to trading concerns. In Fariyas Hotels Pvt. Ltd. v. CIT (1995) 211 ITR 390 (Bom), it held that investment allowance under Section 32A is not available in respect of machinery installed for the purpose of business of the assessee which is engaged in the business of running a hotel as it is essentially a trading activity. Similarly the Calcutta High Court in C.I.T. v. S.P. Jaiswal Estates (P) Ltd. (1992) 196 ITR 179 held that an assessee who claims investment allowance under Section 32A of the Act has to be (1) an industrial undertaking carrying on the business of manufacturing or producing any article or thing, therefore, the business itself has to be that of manufacture or production; (2) the processing of an article or thing is outside the scope of this provision; and (3) the business of a hotel is essentially a non-manufacturing or non- producing or even non-processing concern and is a trading concern. The Court observed 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. It cannot be held to be a business of manufacture or production of any article or thing.”

12.

The decision of this Court as aforesaid in the case of CIT vs. Lake Palace Hotels & Motels P. Ltd reported in 1996) 217 ITR 561 was approved by the Hon'ble Apex Court in the case Anand Theatres (supra).

7

13.

Consequently, in the light of the above authorities and in the case of assessee itself, in our view, the Tribunal committed error in treating the hotel building as a plant and accordingly we answer the question in negative i.e. in favour of the Revenue and against the assessee. The reference application stands disposed of accordingly. No cost.

[J.K. RANKA],J. [AJAY RASTOGI], J. BKS/- “All corrections made in the judgment/order have been incorporated in the judgment/order being emailed.” B.K. SHRIVASTAVA PRIVATE SECRETARY

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