M/S SIRMOUR HOTELS PVT. LTD.,SIRMOUR vs. ITO, NAHAN

Per Sanjay Garg, Judicial Member:

The above captioned appeals relating to the different assessment

years have been preferred by the assessee against the separate orders

of Commissioner of Income Tax (Appeals), [hereinafter referred to as

‘CIT(A)’] Shimla dated 30.12.2016.

who is engaged in running of a hotel is entitled to deduction u/s 80IC of

the Income-tax Act, 1961 (in short 'the Act') on account of substantial

expansion of the unit. For the sake of convenience, ITA No. 374/Chd/2017

for assessment year 2007-08 is taken, as the lead case for discussion of facts.

company is running a hotel at Kala Amb under the name of ‘Black Mango

Hotel’ in District Simour in the State of Himachal Pradesh. During the year

under consideration, the assessee company claimed deduction @ 100% of

the net profits u/s 80IC of the Act on account of substantial expansion of the

unit claimed to be carried out in financial year 2005-06. The assessee

claimed that it was running an Eco-tourism project as mentioned in XIV

schedule, Part C of the Income-tax Act, 1961. For the sake of clarity, at this

stage, we deem it fit to reproduce the relevant provisions of section 80IC

and Schedule XIV of the Act :-

“Section 80IC Special provisions in respect of certain undertakings or enterprises in certain special category States. 80-IC. (1) ……….

ITA No. 374 to 376-Chd/2017 Sirmour Hotels Pvt Ltd. 3

(b) which has begun or begins to manufacture or produce any article or thing, specified in the Fourteenth Schedule or commences any operation specified in that Schedule, or which manufactures or produces any article or thing, specified in the Fourteenth Schedule or commences any operation specified in that Schedule and undertakes substantial expansion during the period beginning— ……. (ii) on the 7th day of January, 2003 and ending before the 1st day of April, 2012, in the State of Himachal Pradesh or the State of Uttaranchal; or …… (8) For the purposes of this section,— (i)…… (ix) "Substantial expansion" means increase in the investment in the plant and machinery by at least fifty per cent of the book value of plant and machinery (before taking depreciation in any year), as on the first day of the previous year in which the substantial expansion is undertaken; …..” SCH XIV – LIST OF ARTICLES OR THINGS OR OPERATIONS

. “PART C FOR THE STATE OF HIMACHAL PRADESH AND THE STATE OF UTTARANCHAL S.No. Activity or article 4/6 digit Sub-class ITC (HS) or thing or excise under NIC Classification operation classification classification 4/6 digit on1998 1. …………. 15 Eco-tourism - 55101 including hotels, resorts, spa, entertainment / amusement parts and ropeways ………

ITA No. 374 to 376-Chd/2017 Sirmour Hotels Pvt Ltd. 4

provisions for promotion of certain class of industry in the specific states of

Himachal Pradesh and Uttaranchal. The deductions under the provisions of

section 80IC of the Act is admissible to an undertaking who has begun or

begins to manufacture or produce any article or thing, as specified in XIV

schedule or commences any operation as specified in the Schedule and even

the benefit of deduction is also available to the Industries who are already

in operation and undertakes substantial expansion during the period as

mentioned in sub clause (2) to Section 80IC (2)(b)(ii) of the Act. In the XIV

schedule, one of the activity is mentioned as ‘Eco-tourism including hotels,

resorts, spa, entertainment / amusement parts and ropeways’.

The claim of the assessee was that it had made substantial expansion

in its hotel which was included in the definition of ‘Eco-tourism’ as provided

in the XIV Schedule.

not qualify as an Eco-tourism unit. He was of the view that mere establishing

of a hotel does not itself constitutes an Eco-tourism unit. He observed that

the hotel was not located in the area of operation of the Eco-tourism policy

of the State Government of Himachal Pradesh, rather the same was situated

in the most urbanized, industrialized and polluted zone of district Sirmour

of Himachal Pradesh. That the hotel was not involved in conversation of

ecology while carrying out its business operation. He, therefore, held that

the hotel of the assessee did not qualify for deduction u/s 80-IC of the Act

ITA No. 374 to 376-Chd/2017 Sirmour Hotels Pvt Ltd. 5

being not an Eco-tourism unit. The Assessing officer further observed that

even as per the meaning of section 80IC(8) of the Act, ‘substantial

expansion’ means increase in investment in the plant and machinery by at

least 50% of the book value. He observed that the expansion in the hotel

building, furniture and equipment did not constitute expansion in the plant

and machinery. He referring to the definition of ‘plant’ given u/s 43(3) of

the Act, observed that plant excluded building, furniture and fittings. He

also referred to the decision of the Hon'ble Supreme Court in the case of

‘CIT Vs. Anand Theatres’ (2000) 244 ITR 192 (SC) and ‘CIT Vs. Abad

Hotels India Pvt Ltd’ (2000) 119 Taxman 429 (SC) and held that building

could not be considered as plant and, therefore, the same would not be a

part of the substantial expansion as defined in sub section (8) of section

80IC of the Act. He, therefore, denied the benefit of deduction under the

provisions of section 80IC of the Act to the assessee.

assessee preferred appeal before CIT(A). The Ld. CIT(A) relying upon the

decision of the ITAT in the case of ‘Raghunath Singh Thakur’ in ITA No.

152 & 469/Chd/2010 held that the assessee would qualify as an Eco-tourism

project within the meaning of item 15 in Schedule XIV of the I.T. Act. He,

however, upheld the findings of the Assessing officer that the substantial

expansion had to be looked into only after excluding the building, furniture

and fittings. He, therefore, held that the assessee was not entitled to benefit

of deduction under section 80IC of the Act.

CIT(A) holding the assessee as an Eco-tourism project as provided at item

ITA No. 374 to 376-Chd/2017 Sirmour Hotels Pvt Ltd. 6

No.15 in Schedule XIV of the I.T. Act. However, the assessee has come in

present appeal agitating the action of the CIT(A) holding that the expansion

in the hotel unit which mainly consisted of investment in building, furniture

and fixtures did not constitute involvement of plant and machinery.

CIT(A) holding that the assessee was an eco-tourism project, hence, the sole

question left for adjudication before us is, as to whether in a hotel business

the investment made in building, furniture and fixture can be said to

constitute substantial expansion as per the provisions of section 80IC of the

Act?.

Hon'ble Supreme court in the case of ‘CIT Vs. Anand Theatres’ (supra)

wherein the question before the Hon'ble Supreme Court was whether

building which was used as a hotel or a cinema theatre could be given

depreciation as ‘plant’. The Hon'ble Supreme Court referred to the definition

of ‘plant’ as provided u/s 43(3) of the I.T. Act and held that as per the

scheme of section 32, separate rate of depreciation for building, machinery

and plant, furniture and fittings etc. was provided. The definition of plant

was provided u/s 43(3) which nowhere included buildings. That there was

different rate of depreciation for each asset and further that for a building

used for a hotel, specific provisions was made granting additional

depreciation u/s 32(1)(v) of the Act. The Hon'ble Supreme Court, therefore,

held that even the building used for a hotel or theatre could not be given

depreciation as a plant as the term ‘plant’ and ‘building’ had been defined

ITA No. 374 to 376-Chd/2017 Sirmour Hotels Pvt Ltd. 7

separately and different rate of depreciation were available on different

items.

Hon'ble Supreme Court in relation to the claim of depreciation on hotel or

building cannot be imported while deciding the claim of an assessee for

deduction on account of substantial expansion in ‘hotel’, if such hotel

undertaking is otherwise falls in the list of eligible undertakings for

deduction under the provisions of section 80IC of the Act. The deduction u/s

80IC of the Act is not only allowable on the commencement / start of

operation of such units as are listed in the XIV schedule but also on the

substantial expansion of such units. Admittedly, carrying of hotel business

does not involve the setting up or installation of plant and machinery as is

usually done in case of an industrial undertaking involved in manufacturing

/ production of things or articles. Despite the fact that in the project of a

hotel, the setting up / installation of plant and machinery is not required, the

benefit of deduction u/s 80IC of the Act has been given to such units

provided they start / commence their operation within the stipulated dates or

undertake substantial expansion during the said stipulated period if set up in

the special category of States including state of Himachal Pradesh. In our

humble view, when a unit like a hotel is established in the special category

of states whose main investment is on building, which has been so planned

and constructed to serve the assessee’s special technical requirements of

hotel/ hospitality services including the investment on furniture and fixtures,

so specially required for carrying out such activity, and is eligible for

deduction on its commencement of activity u/s 80IC of

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the Act, then under such circumstances, for the purpose of the meaning of

‘substantial expansion’ the expansion in such building, furniture and fixtures

would constitute an investment in plant and machinery for the purpose of

claim of deduction u/s 80IC of the Act. The term ‘plant and machinery’ in

view of the special provisions of section 80IC of the Act, specifically

enacted for promotion of certain industrial undertaking or enterprise in the

special category of states of Himachal Pradesh and Uttaranchal will include

the technically designed building and furniture, fittings and fixtures therein

in case of hotel wherein otherwise no plant and machinery is required. We

find support, in our view, from the decision of the Hon'ble Supreme court

in the case of ‘CIT Vs. Karnataka Power Corporation’ (2001) 247 ITR 268

(SC) wherein the Hon'ble Supreme Court has held that the question whether

a building can be treated as plant, basically, is a question of fact and where

it is found as a fact that a building has been so planned and constructed as

to serve as assessee’s special technical requirements, it will qualify to be

treated as a plant for the purpose of investment allowance. The dispute

involved in the present case before us is relating to the benefit of deduction

on account of investment. The special provisions of section 80IC of the Act

are enacted for promoting investment activity in certain undertaking or

enterprises in the special category of states including state of Himachal

Pradesh. The Eco-tourism unit including the hotel has been specifically

allowed in the list eligible for deduction as per special provisions which

otherwise does not involve installation of plant and machinery. If the

original investment made for setting up of such unit is eligible for deduction

u/s 80IC of the Act, then certainly the further investment in the same

infrastructure for the purpose of expansion cannot be denied, merely because

ITA No. 374 to 376-Chd/2017 Sirmour Hotels Pvt Ltd. 9

the investment does not involve setting up / installment of plant and

machinery. Any other or strict definition of word ‘substantial expansion’ in

our view, would defeat purpose for which the special provisions under the

section 80IC of the Act have been made. We, therefore, hold that the

restrictive meaning given by the lower authorities to deny the deduction u/s

80IC of the Act to the assessee on account of substantial expansion cannot

be held to be justified. We, accordingly set aside the order of the lower

authorities on this issue and hold that the investment in building, furniture,

fixture in the case of a hotel will qualify to be treated as investment in plant

and machinery for the purpose of section 80IC of the Act and, therefore,

hold that the assessee will be entitled to deduction u/s 80IC of the Act on

account of substantial expansion of the unit.

not addressed the question as to whether the assessee hotel qualifies to be

an Eco-tourism unit, as the said issue has not been raised before us.

of ITA No. 375/Chd/2017, this appeal of the assessee, therefore, stands

allowed.

However, in ITA No 375/Chd/2017 for assessment year 2007-08, 13.

besides the above identical issue, the assessee has also raised another issue

relating to reopening of the assessment u/s 147 of the Act. However, no

arguments have been addressed on this issue. Neither the said ground has

been pressed nor have any arguments been advanced by the counsel of the

assessee on this issue. This ground is, therefore, dismissed as not pressed.

However, the assessee succeeds on the issue of eligibility of deduction on

ITA No. 374 to 376-Chd/2017 Sirmour Hotels Pvt Ltd.

account of substantial expansion of the undertaking. This appeal of the

assessee is partly allowed.

Order pronounced in the Open Court on 19.03.2018.

Sd/- Sd/- (ANNAPURNA GUPTA) (SANJAY GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated : 19.03.2018

Rkk Copy to: 1. The Appellant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR