COMMISSIONER OF INCOME-TAX VS HOTEL BELLE VUE (P.) LTD., 1998 PTD-GAUHATI-HIGH-COURT-INDIA 3240 (1996)

(a) Income-tax---

----Investment allowance---Hotel---Condition precedent for claiming investment allowance---Machinery must be used in manufacture or processing of goods---Meaning of "manufacture "---Machinery used in hotel for preparation of food---Entitled to investment allowance---Indian Income Tax Act, 1961, S.32-A.

(b) Income-tax---

----Industrial undertaking ---Concessional rate of tax ---Assessee running hotel---Entitled to concessional rate of tax.

(c) Words and phrases---

---"Manufacture"---Connotation---[CIT v. S.P. Jaiswal Estates (P.) Ltd. (1992) 196 ITR 179 (Cal.) dissented from.

On a plain reading of section 32-A of the Income Tax Act, 1961, it is clear that the business of manufacture or production of goods has to be carried on by the assessee for getting the benefit of section 32-A. If the plant and machinery referred to in subsection (2) of section 32-A are used in manufacture or processing of goods and such manufactured goods are used to the business of the assessee wholly owned by him, then the assessee shall be entitled to the benefit of section 32-A. In its ordinary meaning "manufacture" is a process by which an alteration or change takes place in the goods which are subjected to such manufacture. When food is prepared from raw materials, definitely a new product is prepared or made, which is known as a different item.

The assessee was running a hotel and for running the hotel the assessee was required to prepare foodstuffs and for that purpose the assessee installed machinery and plant in its hotel premises and claimed investment allowance in respect of it. It also claimed that it was entitled to a concessional rate of tax. The claims were rejected by the Assessing Officer but allowed by the Tribunal. On a reference:

Held, (i) that the assessee's hotel was an industrial under- taking within the meaning of sub-clauses (ii) and (iii) of subsection (2) of section 32-A. It was entitled to investment allowance;

CIT v. S.P. Jaiswal Estates (P.) Ltd. (1992) 196 ITR 1'79 (Cal.) dissented from.

CIT v. Casino (Pvt.) Ltd. (1973) 91 1TR 289 (Ker.) distinguished.

(ii) that on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee should be assessed to income- tax at the rate applicable to industrial undertakings and not at the rate applicable to a trading company.

CIT v. Sky Room (Pvt.) Ltd. (1992) 195 ITR 763 (Cal.) and Fariyas Hotels (Pvt.) Ltd. v. CIT (1995) 211 ITR 390 (Bom.) ref.

G.K. Joshi and U. Bhuyan for the Commissioner.

Dr. A.K. Saraf, K.K. Gupta and R.K. Agarwalla for the Assessee.

JUDGMENT

D. N. BARUAH, J.---At the instance of the Revenue, the following two questions have been referred by the Income Tax Appellate Tribunal under section 256(1) of the Income Tax Act, 1961 for short, "the Act"). For opinion of this Court:

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee is an industrial undertaking and was entitled to investment allowance under section 32-A of the Income Tax Act, 1961?

(2)Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee should be assessed to income-tax at the rate applicable to industrial undertaking and not at the rate applicable to a trading company?"

Question No. 1 is related to the assessment 'year 1982-83 and question No. 2 is related to the assessment year 1987-88.

The facts for the purpose of answering these questions are:

The assessee is running a hotel at Guwahati under the name and style "Hotel Belle Vue (P) Ltd." The assessee is a company incorporated under the Companies Act During the assessment years 1982-83 and 198 7 -88, the assessee claimed that running of a hotel is an industrial undertaking eligible for deduction of investment allowance under section 32-A of the Act, The Assessing Officer held that the assessee was not entitled to investment allowance and claim for such deduction was disallowed. Being aggrieved, the assessee preferred 'an appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) confirmed the order of the Assessing Officer. On further appeal by the assessee before the Income Tax Appellate Tribunal, the Tribunal allowed the appeal holding that the assessee was an industrial undertaking, and therefore, entitled to get investment allowance on the hotel run by the assessee. Accordingly, the Assessing Officer was directed to grant investment allowance to the assessee under section 32-A of the Act. At the request of the Revenue, the abovementioned two questions have been referred for opinion of this Court.

We have heard both sides.

The point involved in this case is whether a hotel is entitled to get investment allowance under section 32-A of the Act and also whether it is an industrial undertaking.

It is an admitted fact that the assessee is running a hotel where food articles are supplied. For preparation and supply of food articles, the hotel uses some machinery and plant. In the case of an industrial undertaking there must be either manufacture or processing of goods. What is business of manufacture or production of any article or thing is now well-settled in view of the decisions of various High Courts. The word "manufacture" has not been defined in the Finance Act. In its ordinary meaning "manufacture" is a process by which an alteration or change takes place in the goods which are subjected to such manufacture and brought about a commercially new article in market. Such production may be by manual force, mechanical force or even by nature's own process. When food is prepared from raw materials definitely a new product is prepared or made which is known as a different item. It is also an admitted fact that the said new item cannot be brought back to its original form. Therefore, when food is prepared from raw materials in a hotel, surely it is by way of manufacture or production of goods. Therefore when food is prepared or processed, it must be taken as manufacturing process. If that be so, we have no hesitation to say that a hotel is an industrial undertaking On this point, there is no dispute between the parties.

However, Mr. G. K. Joshi, learned counsel appearing for the Revenue, submits that in order to get the benefit of section 32-A of the Act, the assessee must carry on business of manufacturing or processing of any article or thing. According to Mr. Joshi, whatever food is prepared and used in the hotel cannot be said to be a business of manufacture or production of goods or things and in fact, hotel is a trading concern and preparation of food article is an incidental activity of the business. Therefore, the assessee is not entitled to get any investment allowance under section 32-A of the Act.

Mr. Joshi has relied on the following decisions:(i) CIT v Casino (Pvt.) Ltd. (1973) ITR 289 (Ker.); (ii) CIT v. S. P.Jaiswal Estates (P) Ltd. (1992) 196 ITR 179 (Cal.); and (iii) CIT v. Sky Room (Pvt.) Ltd. (1992) 195 ITR 763 (Cal.). Mr. Joshi has also drawn our attention to the provisions contained in sections 80-I, 90-J and 80-HH and tried to distinguish by saying that hotel business is a separate undertaking from manufacturing or producing articles or things, therefore, the assessee is not entitled to get investment allowance. Besides, Mr. Joshi submits that preparation of foodstuffs is not commonly known as manufacturing of foods.

Dr. A. K. Saraf, learned counsel appearing for the assessee, on the other hand, vehemently opposes the submissions of Mr. Joshi. According to him, if it is an industrial undertaking and engaged in the business of manufacture or production of articles or things which is used for his business then the assessee is entitled to get the investment allowance. Dr. Saraf further submits that the decision relied on by Mr. Joshi in CIT v. Casino (Pvt.) Ltd. (1973) 91 ITR 289 (Ker.) is not applicable in this case, inasmuch as, in the said case the Kerala High Court had the occasion to decide the question of industrial company in a different Act. Dr. Saraf has tried to distinguish the case by saying that the decision of the said case was based on the expression of "industrial company" in a different Act. But section 32-A does not say so. When the Legislature used a particular expression, according to Dr. Saraf, it should be understood in the plain meaning. In CIT v. Casino (Pvt.) Ltd. (1973) 91 ITR 289 (Ker.), the Kerala High Court held that in order to make a company as industrial company mainly it should carry out manufacturing process. The expression "mainly" is significant. But such expression is absent in section 32-A of the Act.

Regarding the decisions of the Calcutta High Court in CIT v. S.P. Jaiswal Estates (P) Ltd. (1992) 196 ITR 179 and CIT v. Sky Room (Pvt.) Ltd. (1992) 195 ITR 763 (Cal.), Dr. Saraf submits that he gets support from the said decision as the Calcutta High Court held that preparation of food is a manufacturing process, though it is an activity incidental or ancillary to main manufacturing of hotel keeping. Dr. Saraf further informs this Court that the Calcutta decision in CIT v. S. P. Jaiswal Estates (P) Ltd. (1992) 196 ITR 179 has been referred to a larger Bench, therefore, the decision rendered by the Division Bench cannot be said to be final.

Mr. Joshi has also drawn our attention to a decision of the Bombay High Court in Fariyas Hotels (Pvt.) Ltd. v. CIT (1995) 211 ITR 390. In the said decision, the Bombay High Court observed thus:

'The uncontroverted factual position in the present case is that the assessee is engaged in the business of running a hotel. This activity is essentially a trading activity. No manufacture or r production of any goods or articles is involved in carrying out this activity. "

According to Dr. Saraf, this decision was rendered after the amendment of April, -1, 1978, and, therefore, in the present case, the said decision is not applicable. Further, Dr. Saraf submits that in the Bombay High Court decision, there was a specific finding that no manufacture or production of goods or article was involved in carrying out the activities. If the manufacturing process was not carried out then getting the benefit under section 32-A read with subsection (2)(iii) would not arise. He further submits that the language of the section being clear the decision of the Bombay High Court may not be relied on.

To appreciate the arguments of learned counsel for the parties it will be apposite on our part to look into the relevant provisions of section 32-A of the Act. Section 32-A of the Act deals with the investment allowance. This provision was inserted by the Finance Act, 1976, and it came into force with effect from April 1, 1976. This provision has been incorporated in the Act with the sole view to give benefit to certain industries in respect of investment allowance, however, there is a proviso to this section. As per the proviso certain investments are totally excluded, such as, any machinery or plant installed in any office premises or any residential accommodation, including any accommodation in the nature of a guest house; any office appliances or road transport vehicles; any ship, machinery or plant in respect of which the deduction by way of development rebate is allowable under section 33 and any machinery or plant, the whole of the actual cost of which is allowed as deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head "Profits and gains of business or profession" of any one previous year, etc. Therefore, looking into the section of the Act all investment other than the investment mentioned in the proviso are taken into consideration, where investment allowance is entitled. As per section 32-A, in respect of a ship or an aircraft or machinery or plant specified in subsection (2), which is owned and used for the purposes of the business carried on by the assessee, allowance should be given. Therefore, whatever is mentioned in subsection (2) in respect of the machinery or plant, etc., if these are wholly used for the purpose of business in that case, the assessee would be entitled to get the investment allowance.

In the case in hand, the assessee is running a hotel and for running the hotel the assessee is required to prepare foodstuffs and for that purpose the assessee installed machinery and plant in its hotel premises and for that investment allowance can be given under section 32-A of the Act. A close reading of section 32-A of the Act shows that any machinery or plant specified in subsection (2) which is owned by the assessee and wholly used for the purpose of the business carried on by the assessee, allowance will have to be given. Clause (b)(iii) of subsection (2) of section 32-A says that for any new machinery or plant installed in any other industrial undertaking 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 shall be entitled to investment allowance. Now the question is whether the plant and machinery have been used for the preparation of foodstuffs for the business. According to Mr. Joshi, sub clause (ii) of clause (b) of subsection (2) of section 32-A is also relevant. Under the said sub-clause, in a small scale industrial undertaking for the purposes of business of manufacture or production of any article or thing and if it can be termed to be a small scale industrial undertaking having ten lakh rupees aggregate value of the machinery and plant investment allowance can be given. We find in both the clauses the expression of "manufacture", of "production" have been used.

In the decision of the Calcutta High Court in CIT v. S. P. Jaiswal Estates (P) Ltd. (1992) 195 ITR 79, the Court held that preparation of food is a manufacturing or processing of articles or things. In CIT v. Sky Room (Pvt.) Ltd. (1992) 195 ITR 763, the Calcutta High Court held that processing of food articles and selling them in its restaurant as foodstuffs and eatables, amounts to processing of goods and accordingly benefit was given to the restaurant.

It is well-established principle of law that when a raw material is converted to a finished product definitely a new product is prepared and it is known in a different name and it becomes a manufactured product. Therefore, in our opinion, under the sub-clauses (ii) and (iii) of clause (b) of subsection (2) of section 32-A the assessee's hotel is an industrial undertaking. Now the only question is whether under section 32-A the assessee is entitled to get investment allowance.

Various activities are carried on in a hotel. Composite activities of a hotel makes a hotel business. It is not the bed alone which is the part of the main business of a hotel. All other benefits a guest normally requires should also be made available. As per Black's Law Dictionary, Fifth Edition, "hotel" means "a building held out to the public as a place where all transient persons who come will be received and entertained as guests for compensation and it opens its facilities to the public as a whole rather than limited accessibility to a well-defined private group". As per the Webster's New Twentieth Century Dictionary, "hotel" means "an establishment or building providing a number of bed rooms, baths, etc, and usually food, for the accommodation of travellers, semi-permanent residents, etc." From these two dictionary meanings "hotel" means where in a building public will be entitled to enter and they would be received and entertained and avail of its facilities necessary for a decent life. It can be done only on payment of price.

From the dictionary meanings, it is abundantly clear that the "hotel" business is composite in nature providing facilities, which a guest may normally require and food is an integral part of a hotel. Lodging house is different from the hotel. As per the Webster's Dictionary (New 20th Century) "lodging house" means "a house in which lodgings are let; a rooming house". So, from this it is clear that in hotel accommodation food has to be provided. Therefore, preparation of food is an integral of the hotel business.

As per section 32-A the assessee must own machinery or plant as referred in subsection (2) and he must use the machinery or plant for the purpose of business carried on by him. Section 32-A of subsection (1) does not indicate that there must be manufacture or production of goods or articles. However, subsection (2)(b), sub-clauses (ii) and (iii) refer to manufacture or production of articles or goods. The condition necessary to get the benefit of section 32-A is that such machinery and plant owned by the assessee is wholly used for the purpose of carrying on business by him. The expression "business carried on by him" (emphasis added) is very relevant in deciding the point involved in this case.

As per section 32-A when a plant or machinery specified in subsection (2) which is owned and wholly used for the purposes of the business carried on by the assessee, he is entitled to get investment allowance. Moreover, for carrying on his business if. the assessee has to use his machinery for production of foodstuffs, in our opinion, the provision of section 32-A is attracted. This will be more clear if we look to the proviso to section 32-A. As per the proviso if any machinery or plant installed in any office premises or any residential accommodation, including any accommodation in the nature of a guest-house is used by the assessee he is not entitled to get investment allowance. The Legislature thought it expedient that unless the proviso is included even the. machinery used for the purpose mentioned therein, would come within the ambit of section 32-A(t) of the Act. Therefore, this proviso makes the position very clear that whatever may be the business, for manufacture or production, if a machinery is wholly used for the purposes of the business carried on by him as required under subsection (2) of section 32-A of the Act, investment allowance will be given to him. On a plain reading of section 32-A, it is now clear that the business of manufacture or production of goods has to be carried on by the assessee for getting the benefit of section 32-A of the Act. The plant and machinery referred to in subsection (2) of section 32-A are used in manufacture or processing of goods and such manufactured goods are used in the business of the assessee wholly owned by him, then the assessee shall be entitled to benefit of section 32-A of the Act. A reading of section 32-A(1) and (2) at least indicates the same. However, if the manufactured goods or articles are partly used for running the business then the assessee is not entitled to get the benefit. That is what we understand from section 32-A of the Act. Therefore, we respectfully disagree with the decision of the Calcutta High Court in CIT v. S. P. Jaiswal Estates (P) Ltd. (1992) 196 ITR 179 that preparation of food in hotel and providing entertainment and various personal services are activities incidental or ancillary to main business of hotel keeping and such activities do not amount to manufacturing or processing of articles or things.

Regarding the decision of the Kerala High Court in CIT v. Casino (Pvt.) Ltd. (1973) 91 ITR 289, we are in agreement with the submission of Dr. Saraf that this decision is not applicable in the present case inasmuch as, the expression used regarding "industrial company" is somewhat different from the present case. However, we do not agree with the submission of Dr. Saraf that since the Bombay High Court in Fariyas Hotels (Pvt.) Ltd. v. CIT (1995) 211 ITR 390 was dealing with the pre-amended section, the said decision is not applicable. However, in the said decision, there was a categorical finding that no manufacture or production of goods or articles involved in carrying out such activity and as such investment allowance could not be claimed in respect of machinery or plant installed in hotel business. As such the aforesaid decision is not applicable in the facts of the present case.

Considering all these aspects, we hold that the assessee-company being a hotel who prepares foodstuffs or articles for the guests is entitled to get investment allowance under section 32-A(1) of the Act.

In view of the above, we answer the questions in the affirmative, i.e., in favour of the assessee and against the Revenue.

A copy of this judgment under the signature of the Registrar and the seal of the High Court shall be transmitted to the Income Tax Appellate Tribunal.

In the facts and circumstances of the case, we make no order as to costs.

M.B.A/1634/FCReference answered.