COMMISSIONER OF INCOME-TAX VS LAWLY ENTERPRISES (P.) LTD.
1999 PTD 215
[225 I T R 154]
[Patna High Court (India)]
Before D.P. Wadhwa, C. J. and Aftab Alam, J
COMMISSIONER OF INCOME-TAX
Versus
LAWLY ENTERPRISES (P.) LTD.
Tax Cases Nos.9 of 1990, 1 of 1991, 3, 9, 10, 11, 39 and 40 of 1994, decided on 23/08/1996.
(a) Income-tax--
----Depreciation---Plant---Meaning of -"plant" ---Hotel building whether constitutes plant---Determination of question depends on "functional test"-- Whether building is specifically designed or has special features needed for a hotel, whether the hotel building is the "means" or simply provided the "setting" and the necessary space for carrying on the business---Matter remanded---Indian Income Tax Act, 1961, Ss.32 & 43.
The principle applicable with regard to "plant" are:
(1) The definition of "plant" in section 43(3) of the Income Tax Act, 1961, should be given a wide meaning, as it is an inclusive definition.
(2) All buildings are not "plant" despite the dictionary meaning which includes building; but a building or structure is not per se to be excluded from the ambit of the expression "plant".
(3) If the concrete construction or building is used as the premises or setting, in which the business is carried on, in contradistinction to the fulfilling of the function of a plant, the building or construction or part thereof is not considered a plant. The true test is whether it is the means of "carrying on the business" or the location for so doing.
(4) In order for a building or concrete structure, to qualify for inclusion in the term "plant", it must be established, that it is impossible for the equipment to function without the particular type of structure.
(5) The particular apparatus or item must be used for carrying on the assessee's business and must not be his stock-in-trade. The matter has to be considered in the context of the particular business of the assessee, e.g., books are a lawyer's plant but a book seller's stock-in-trade.
The question whether a building can be viewed as plant is to be answered on the basis of the "functional test". In other words, it has to be seen whether the building serves as the "means" or merely as a "setting" for carrying on the business. It must, however, be realised that by applying this test, one would not get the same answer in cases of all kinds of hotels. This is because the expression "running a hotel business" is so wide and el, that it may take into its fold vastly different undertakings. The word "hotel" brings to mind very disparate images, There are hotels of all kinds. A building intended to be used or in fact used earlier as a residential accommodation ca$ be converted at any time into a lodge and used for running a hotel business. One finds a plethora of such hotels mushrooming in the vicinity of railway stations and bus stands, etc., in any city or a big town. On the other hand, there are hotels, self-contained in many ways and having a small world of their own. A large, modern hotel is not a place where people merely eat and sleep; it offers manifold other services and facilities and functions as a composite organic structure. It naturally requires vast infrastructural support in the form of equipment, machinery, buildings, etc. And it is possible that the building(s) housing such hotels may have certain special design and features and those building(s) may be said to form an integral part of the business of running that hotel and it may not be possible to run the hotel in question in any ordinary building, constructed without any consideration for the needs and requirements of the hotels. In those cases, the buildings may qualify as plant, but that would depend upon the facts of the case.
CIT v. Kanodia Cold Storage (1975) 100 ITR 155 (All.); CIT v. Kanodia Warehousing Corporation (1980) 121 ITR 996 (All.); CIT v. Taj Mahal Hotel (1971) 82 ITR 44 (SC); CIT v. Venkata Rao (B.) (Dr.) (1993) 202 ITR 303 Mar.); Hotel Banjara Ltd. v. CIT (1996) 218 ITR 590 (AP); R.C. Chemical Industries v. CIT (1982) 134 ITR 330 (Delhi). Santosh Enterprises v. CIT (1993) 200 ITR 353 (Kar.); S.K. Tulsi & Sons v. CIT (1991) 187 ITR 685 (All.) and S.P. Jaiswal Estates (Pvt.) Ltd. v. CIT (No.2) (1994) 209 ITR 307 (Cal.) ref.
(b) Words and phrases---
----"Plant"---meaning.
K.K. Viyarthi and S.K. Sharan, for the Commissioner.
L.N. Rastogi, Senior Advocate, A.K. Rastogi and Shailendra Kumar for the Assessee.
JUDGMENT
These eight tax cases constituting one batch have come to this Court on reference made by the Income-tax Appellate Tribunal, Patna Bench, Patna, under section 256(1) of the Income Tax Act, 1961. These references cases arise from assessment proceedings concerning the same assessee but relating to different assessment years from 1979-80 (T.C. No.9 of 1990) to assessment year 1987-88 (T.C. No.40 of 1994). There appears to be some confusion in mentioning the assessment years in these cases, for example, T.C. No.9 of the 1994 is shown to arise from the assessment years 1982-83, 1983-84 and 1984-85 while No. l of 1991 and T.C. No.3 of 1994 are also shown to arise from the assessment years 1982-83 and 1984-85, respectively; similarly, the assessment year 1986-87 is mentioned in three cases being T.C. Nos. l l of 1994, 39 of 1994 and 40 of 1994. We have not tried to find out whether this confusion is the result of typing mistake or some other mistakes. We propose to confine ourselves to the question of law referred for our opinion and we have merely indicated the anomaly so that it may be sorted out in the Tribunal.
In all these cases, the Tribunal has referred the same question of law for the opinion of this Court; for some assessment years the question of law has been split up into two questions. (see T.C. No.9 of 1990; assessment year 1979-80) as under:
"(i)Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified in directing to allow the assessee's claim in regard to depreciation of the hotel building?
(ii)Whether, on the facts and in the circumstances of the case, the hotel is a plant within the meaning of section 43(3) of the Income Tax Act, 1961?"
For the other assessment years, however, the same question of law was formulated into a single unified question (see T.C. No. l of 1991;
"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in holding that the hotel building was plant and depreciation at the rate of 15 per cent was admissible to it?"
It is further interesting to note that in six cases out of the eight of this batch, that is to say, up to the assessment year 1986-87, the Income-tax Appellate Tribunal had been taking the view in favour of the assessee and was issuing directions to allow the assessee's claim for depreciation of the hotel building accepting the assessee's plea, that the hotel building was a plant and, therefore, it lawfully attracted depreciation at the rate of 15 per the "functional test" in order to answer the question. The test lay in the examination as to whether the nature of the building or structures was such as to constitute an apparatus or a tool by means of which the assessee carried an his business. In such a case the building or structures would be covered by the definition of plant. On the other hand, having regard to the type of business, if the building or the structures were of such a nature as to play no part in the carrying on of the business activities but merely provided the assessee with a place or accommodation from where he could carry on the business, the building could not be regarded as plant. Applying the aforesaid test it was held that the building constructed and used as a cinema hall where the assessee carried on his business of exhibiting cinematograph films, did constitute a plant alongwith its fittings and fixtures.
In Santosh Enterprises v. CIT (1993) 200 ITR 353, he Karnataka High Court too adopted the same view and came to the conclusion that the cinema building was a plant.
In CIT v. Dr. B. Venkata Rao (1993) 202 ITR 303, the Karnataka High Court had the occasion to consider the question whether, a nursing home was a plant within the meaning of section 32 of the Act. The Court observed. that having regard to the kind of activities carried on there, the nursing home was not an ordinary building; it was used not only to house the patients and nurse them, but also to treat them for which various equipments and instruments were installed. It had an operation theatre, a pathological laboratory, an X-Ray room, a plant for sterilisation of clothes and for sterilisation of other surgical instrument, an air-conditioning room, etc. It those facts and circumstances, applying the same "functional test", it was held that the nursing home building was a plant.
In R.C. Chemical Industries v. CIT (1982) 134 ITR 330, the Delhi High Court considered this question in respect of a building where the assessee had "installed machinery and plant for the manufacture of saccharine and other chemicals". According to the assessee's case "certain atmospheric control, e.g., moisture, temperature and provisions for filtered air were required for the manufacture of saccharine" and he accordingly constructed the building with particular specification and standards to install the machinery and plant. The Court held that the particular features incorporates in the building in question were not essential to the manufacturing process and the functioning of the equipment. The mere fact that the manufacture of saccharine could be better carried on in the building in question would not convert the building from the "setting" to the "means" for carrying on the business. The Court accordingly answered the question referred to it in favour of the Revenue. In this regard, it would be worthwhile to note the following observations made in the judgment (at page 337):
"Counsel conceded, when pressed, that there were other companies and concerns which were carrying on the business of manufacture of saccharine in normal buildings which had not been constructed to incorporate special temperature controls. As such, it is clear that the machinery or equipment for the manufacture of saccharine could function without this type of building
It appears to us that the mere fact tat the manufacture of saccharine would be better carried on in this type of building would not convert the building from 'the setting' to 'the means' for carrying on the business. For; if this was the test, then every air-conditioned factory building would qualify to be included in the expression 'plant', as there is no doubt that in a hot country like ours, it would result in better performance by the workers.
It may also be noted that on a consideration of a number of earlier judgments on the point, the Delhi High Court also arrived at the conclusion that the key to the answer to the question lay in the "functional test" but it elucidated the law in its own way as follows (at page 336):
"From. a perusal of the above decisions and the provisions of the 1961 ct, certain principles emerge:
(1) The definition of 'plant' in section 43(3) should be given a wide meaning as it is an inclusive definition.
(2) All buildings are not 'plant' despite the dictionary meaning which; includes buildings; but a building or structure is not per se to be excluded from the ambit of the expression 'plant'.
(3) If the concrete construction or building is used as the premises or setting in which the business is carried on in contradistinction to the fulfilling of the function of a plant, the building or construction or part thereof is not considered a plant. The true test is whether it is the means of 'carrying on the business' or the location for so doing.
(4) In order, for a building or concrete structure, to qualify for inclusion in the term 'plant', it must be established that it is impossible for the equipment to function without the particular type of structure.
(5) The particular apparatus or item must be used for carrying on the business and must not be his stock-in-trade. The matter has to be considered in the context of the particular business of the assessee, e.g., books are a lawyer's plant but a book-seller's stock in-trade.
In S.P. Jaiswal Estate (Private) Ltd.. v. CIT (No.2) (1994) 209 ITR 307 one of the questions before a Bench of the Calcutta High Court was whether a hotel building could be regarded as plant. The Calcutta decision answered the question in the negative. In this judgment, their Lordship took note of the Delhi decision in R.C. Chemical Industries (1982) 134 ITR 330 but or some reason formed an impression that the Delhi High Court had held that the building for the manufacture of saccharine was plant and under this erroneous assumption the judgment takes considerable, though avoid able, pains to distinguish the Delhi decision on facts and to state that a hotel building was not the same as a building used for the manufacture of saccharine.
In Hotel Banjara Ltd. v. CIT (1996) 218 ITR 590, a Bench of the Andhra Pradesh High Court considered the same question as to whether the building for running a hotel should be treated as plant within the meaning of section 43(3) of the Act. On a consideration of several decisions on the point, it came to the view that the answer to. the question would depend upon the facts and circumstances of each case and the same answer may not be given in all cases relating to hotels. It accordingly found and held as follows (page 597):
"Yet another approach to the question would be as to whether the building was serving as the setting in which the business is carries on or is a thing with which the business is being carried on. If it is a mere setting, it would not be ' plant' but if it is a thing with which the business is carried on, then it would fall within the ambit of plant'. No general principle can be laid down as to whether a particular building is plant or not. The Court will have to examine various aspects to find out as to whether the building in a given case satisfies the requirements of that object with which the business is being carried on and without which that business cannot be carried on, if so, it would fall within the meaning of 'plant'.
So far as ' hotels' are concerned, the business of a hotel may be carried on in a building which is converted into hotel or it may be carried on in a building which is specifically designed with reference to the specifications to satisfy modern needs and the requirements of a hotel. As the Tribunal did not approach the question from this angle, the Tribunal has to examine the issue afresh on the material on record and decide as to whether the assessee satisfies the tests so as to fall within the meaning of 'plant' under section 43(3) of the Act and, if so, whether the assessee is entitled to investment allowance under section 32-A of the Act."
On a careful consideration of the decisions referred to above and the submissions advanced in behalf of the parties, we are unable to take the extreme view taken in the Calcutta decision in S.P. Jaiswal Estates (Private) Ltd.'s case (1994) 209 ITR 307 and we find ourselves in respectful agreement with the view taken by the Andhra Pradesh High Court in Hotel Benjara Ltd. v. CIT (1996) 218 ITR 590.
The judicial pronouncements of the different High Courts appear to be unanimous in so far as the correct legal position is concerned, according to which the question whether a building can be viewed as plant is to be answered on the basis of the "functional test". In other words, it has to be seen whether the building serves as the "means" or merely as a "setting" for carrying on the business. It must, however, be realised that by applying this test one would not get the same answer in cases of all kinds of hotels. This is because the expression "running a hotel business" is so wide and elastic, that it may take into its fold vastly different undertakings. The word "hotel" brings to mind very disparate images. There are hotels of all kinds. A building intended to be used or in fact used earlier as a residential accommodation can be converted any time into a lodge and used for running a hotel business. One finds a plethora of such hotels mushrooming in the vicinity of railway stations and bus stands, etc., in any city or a big town. On the other hand, there are hotel self-contained in many ways and having a small world of there own. A large, modern hotel is not a place where people merely eat and sleep; it offers manifold other services and facilities and functions as a composite organic structure. It naturally requires vast infrastructure support in the form of equipment, machinery, buildings, etc. And it is possible that the building(s) housing such hotels may have certain special design and features and those buildings so may be said to form an integral part of the business of running that hotel and it may not be possible to run the hotel in question in any ordinary building constructed without any consideration for the needs and requirements of the hotel. In those cases, the buildings may qualify as plant but that would depend upon the facts of each case. We are conscious that such cases would be few and far between, but in order to answer the question definitely it would be necessary to examine the facts from this angle.
We find that the Tribunal has not approached the question from this angle and, in our opinion, the matter requires to be reconsidered by the Tribunal in the light of the material facts as indicated in this judgment. As repeatedly observed hereinabove, the test would be whether the hotel building of the assessee is such that it formed the "means" for the carrying on of the hotel business or it simply provided the "setting" and the necessary space for the carrying on of the business.
The reference is answered accordingly. Let a copy of this order be sent down to the Tribunal.
M.B.A./1667/FCReference answered.