Full Judgment Text
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PETITIONER:
THE INDIAN HOTELS COMPANY LTD. & OTHERS
Vs.
RESPONDENT:
THE INCOME TAX OFFICER, MUMBAI & OTHERS
DATE OF JUDGMENT: 08/08/2000
BENCH:
M.B.Shah, S.P.Bharucha, Ruma Pal
JUDGMENT:
Shah, J.
T.C.Nos. 20 to 24 of 1989:
Under Article 139A of the Constitution, the appeals
which were pending before the Income Tax Appellate Tribunal
were transferred to this Court and numbered as Transferred
Cases No.20-24 of 1989. Transferred Cases No.20-21 and 24
of 1989 are filed by assessee - the Indian Hotels Co. Ltd.
and others, which pertain to the Assessment Years 1977-78,
1978-79 and 1976-77 respectively. Transferred Cases No.22
and 23 of 1989 are filed by the Revenue and pertain to
Assessment Years 1977-78 and 1978-79. At the outset, we may
point out that at the time of hearing of these cases,
learned counsel for the parties confined their submissions
to the Flight Kitchen operated by the assessee - Indian
Hotels. Hence, other contentions raised in these cases are
not required to be dealt with.
In the appeals, the Commissioner of Income Tax
(Appeals) accepted the contention of the assessee that Taj
Flight Kitchen cannot be considered as a hotel as it is a
separate industrial undertaking which is engaged in the
production of food packages on a large organized and
mechanized basis for the use of various international
airlines. After considering the contention, he arrived at
the conclusion that the Flight Kitchen of the appellant was
engaged in the manufacture or production of articles within
the meaning of Section 80J(4)(iii) of the Income Tax Act,
1961 (hereinafter referred to as the Act) and it was not
part of the hotel activity of the assessee. Hence, it would
not come within the purview of section 80J(6) which provides
for approval by the Central Government. He, therefore,
directed the ITO to allow deductions under section 80J in
respect of the capital employed in the Flight Kitchen.
It is the contention of Dr. Gouri Shanker, learned
Senior Counsel for the assessee that the activity pertaining
to the Flight Kitchen is not a hotel activity. The Flight
Kitchen is a separate industrial undertaking which is
engaged in manufacture or production of food packages on a
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large organised and mechanized basis for the use of various
international airlines and, therefore, is entitled to get
the benefit of Section 80J of the Act. As against this,
learned Solicitor General Mr. Salve, on behalf of the
revenue submitted that the activity of Flight Kitchen
carried on by the assessee is part of the hotel business and
for getting the benefit of Section 80J(1), it is required to
obtain approval as provided under Section 80J (6)(d) of the
Act.
CIVIL APPEAL No.1774 of 1992
In this appeal, M/s Hotel & Allied Traders Pvt.
Ltd.-the assessee sought benefit of investment allowance
under Section 32A of the Act for the assessment year 1978-79
by contending that assessee-company was an industrial
undertaking engaged in manufacturing activity. That claim
was finally rejected by the Tribunal by holding that
assessee cannot be considered to be an industrial company
engaged in manufacturing or processing of articles and hence
was not entitled to get benefit under Section 32A of the
Act. Further the Tribunal relied upon the decision in
C.I.T., Kerala v. Casino Pvt. Ltd. [1973 (91) ITR 289] of
the High Court. Against that order petition under section
256(2) of the Act was filed before the High Court of Kerala
which was rejected by order dated 7.1.1985. That order is
challenged in this appeal.
S.L.P.(C) No. 324/1997
Leave granted.
In this appeal also, the assessee Hotel Shashi
Private Ltd., a company engaged in the business of running a
hotel named the Valley View Resort situated at Mahableshwar,
claimed the benefit of investment allowance under Section
32A of the Act. Finally, that claim was rejected by the
Tribunal. The application for reference by the Tribunal was
also rejected as the issue involved was covered by the
decision of the Bombay High Court in Fariyas Hotels Pvt.
Ltd. v. Commissioner of Income Tax, [1995 (211) ITR 390].
For the said reason, the Bombay High Court also rejected the
reference application vide its order dated 3.9.1997. That
order is challenged in this appeal.
Relevant parts of the provisions that are required to
be considered:
For appreciating the contentions raised by the learned
counsel for the parties, we would first refer to the
relevant provisions of the Act.
Section 80: Deductions to be made in computing total
income. Section 80J: Deduction in respect of profits and
gains from newly established industrial undertakings or
ships or hotel business in certain cases.
80J.(1) Where the gross total income of an assessee
includes any profits and gains derived from an industrial
undertaking or a ship or the business of a hotel, to which
this section applies, there shall, in accordance with and
subject to the provisions of this section, be allowed, in
computing the total income of the assessee, a deduction from
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such profits and gains reduced by the deduction, if any,
admissible to the assessee under section 80HH or section
80HHA of so much of the amount thereof as does not exceed
the amount calculated at the rate of six per cent per annum
on the capital employed in the industrial undertaking or
ship or business of the hotel, as the case may be, computed
in the prescribed manner in respect of the previous year
relevant to the assessment year (the amount calculated as
aforesaid being hereafter, in this section, referred to as
the relevant amount of capital employed during the previous
year) :
Provided that in relation to the profits and gains
derived by an assessee, being a company, from an
industrial undertaking which begins to manufacture or
produce articles or to operate its cold storage plant or
plants after the 31st day of March, 1976, or from a ship
which is first brought into use after that date, or from the
business of a hotel which starts functioning after that
date, the provisions of this sub-section shall have effect
as if for the words six per cent, the words seven and a
half per cent had been substituted.
80J(4) : This section applies to any industrial
undertaking which fulfils all the following conditions,
namely:
(i) . (ii) . (iii) It manufactures or produces
articles, or operates one or more cold storage plant or
plants, in any part of India, and has begun or begins to
manufacture or produce articles or to operate such plant or
plants, at any time within the period of thirty-three years
next following the Ist day of April, 1948, or such further
period as the Central Government may, by notification in the
Official Gazette, specify with reference to any particular
industrial undertaking;
80J(6) : This section applies to the business of any
hotel, where all the following conditions are fulfilled,
namely:
(a) . (b) . (c) . (d) The hotel is for the time
being approved for the purposes of this sub-section by the
Central Government;"
The relevant part of Section 32A of the Act which
grants investment allowance reads thus: - 32A. (1). In
respect of a ship or an aircraft or machinery or plant
specified in sub-section (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 that no deduction shall be allowed under this
Section in respect of
(a) any machinery or plant installed in any office
premises or any residential accommodation, including any
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accommodation in the nature of a guest house;
(b) any office appliances or road transport vehicles;
(c) any ship, machinery or plant in respect of which
the deduction by way of development rebate is allowable
under section 33; and
(d) any machinery or plant, the whole of the actual
cost of which is allowed as a 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.
(2) The ship or aircraft or machinery or plant
referred to in sub-section (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
operation of ships or aircraft;
(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 form of power; or
(ii) in a small-scale industrial undertaking for the
purposes of business of manufacture or production of any
article or thing; or
(iii) 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.
(Emphasis supplied)
Chapter II of the Finance Act, 1979 provides for rates
of income tax. Relevant part dealing with the Company is as
under: - 2(7) For the purposes of this section and the
First Schedule. (a) (b) (c) industrial company means
a company which is mainly engaged in the business of
generation or distribution of electricity or any other form
of power or in the construction of ships or in the
manufacture or processing of goods or in mining.
The aforesaid definition covers four categories of the
activities carried on by a company and it must be mainly
engaged: -
(i) in the business of generation or distribution of
electricity or in other form of power;
(ii) in the construction of ships; (iii) in
manufacturing or processing of goods; and (iv) in mining.
The explanation further provides that a company shall
be deemed to be mainly engaged in the aforesaid activities
if the income attributed to any one or more of the aforesaid
activities in its total income of previous year is not less
than fifty-one percent of such total income.
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Section 80J quoted above provides for grant of
deductions to an assessee who derives income from an
industrial undertaking or a ship or the business of a hotel
to which the Section applies and the Section applies to any
industrial undertaking, any ship or business of any hotel if
conditions prescribed under sub-section (4), (5) and (6)
respectively are satisfied. The question would bewhether
the assessee has derived profits and gains from an
industrial undertaking or from the business of a hotel.
Industrial undertaking is not given any meaning under the
Act, hence it is to be understood as per common parlance
language. Taking this into account, apparently, the
business of the assessee is that of a hotel, which is a
trading activity and not that of an industrial undertaking.
The assessee - Indian Hotels Company Ltd. is having
business of a hotel or chain of hotels and is not an
industrial undertaking as understood in common parlance
language. Even before the Commissioner of Appeals, it was
contended by the assessee that Flight Kitchen is essentially
ancillary unit. This would mean that operation of flight
kitchen was ancillary to its business of hotel. Hence,
result would be it is a company engaged in the business of
hotel and not of industrial undertaking. Hence, for getting
the benefit of Section 80J(1) it must fulfil the conditions
laid down in sub-section (6).
The next question would beWhether under the aforesaid
provisions it can be held that assessees hotels manufacture
or produce foodstuffs?
From the reasoning of the Appellate Commissioner, it
appears that he arrived at the conclusion that Taj Flight
Kitchen was an industrial undertaking which is engaged in
the production of food packages and in manufacture of food
packages on a large scale in an organized and mechanized
manner with sophisticated and modern techniques. Its
dominant purpose is manufacture of food cover for sale to
the airlines and no retail sale in the premises of the
flight kitchen is involved. He, therefore, held that the
Flight Kitchen of the assessee is engaged in the manufacture
or production of articles within the meaning of section
80J(4)(iii) of the Act.
In the Civil appeals filed by M/s Hotel & Allied
Products (P) Ltd. and Hotel Shashi Pvt. Ltd., learned
counsel Mr. Choudhary submitted that manufacturing and
processing of goods includes the activity of preparing
articles of food from raw materials entitling the Company to
get deduction of investment allowance as provided under
section 32A of the Act. It has been contended that the
appellant-assessee satisfies the requirement of industrial
Company as defined under section 2(7)(c) of the Finance Act,
1979. He submitted that hotel which inter alia converts raw
materials into food stuffs is an industrial Company within
the meaning of Section 2(7)(c) of the Finance Act and,
therefore, it is entitled to get the benefit of section 32A.
From the Sections quoted above, i.e. Sections 80J(1)
proviso, 80(J)(4), 80(J)(6), and Section 32A, for getting
benefit of deduction or investment allowance, the
requirement is assesseecompany must be engaged in the
business of manufacture or production of any article or
thing. In case of preparing food packages or selling the
same or preparing foodstuffs for serving in the hotel there
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is no question of manufacture or production. The raw
material is at the most processed so as to make it eatable.
The word manufacture has various shades of meaning but
unless defined under the Act it is to be interpreted in the
context of the object and the language used in the Sections.
In the context of the provisions which deal with grant of
investment rebate or deduction under section 80J it is
apparent that it is used to mean production of a new article
or bringing into existence some new commodity by an
industrial undertaking. It would not be applicable in cases
where only processing activity is carried out. Further,
such production activity must be by an industrial
undertaking and not by the assessee having mainly trading
activity. In C.I.T. Orissa and Others v. M/s N.C.
Budharaja and Company and Others [1994 Supp (1) SCC 280],
this Court considered the provisions of section 32A and
Section 80HH(2) of the Act and held that machinery or plant
for the purpose of business of construction, manufacture or
production of any article or thing would not cover
machinery employed in digging bore wells. The Court also
considered the IXth Schedule (applicable at the relevant
time) which contained item No.15 therein relating to ships
and observed that the appropriate word in the case of ships
is construction and in common parlance one speaks of
construction of ships and not manufacture of ships. The
Court held that, in this background, it is not possible or
permissible to read the word construction as referring to
construction of dams, bridges, buildings, roads or canals.
The Court also observed that the association of words in
former sub-clause (ii) and the present sub-clause (iii) is
also not without significance and a statute cannot always be
construed with the dictionary in one hand and the statute in
the other; regard must also be had to the scheme, context
and to the legislative history of the provision. Similarly,
in case of a hotel business there is no question of
manufacturing or producing pulses, wheat, rice, meat or such
other items but what is done isfrom such raw materials
eatable food stuff is prepared.
In support of his contention, learned Solicitor
General referred to the decision of this Court in M/s
Sterling Foods, A Partnership Firm v. State of Karnataka
and Another [(1986) 3 SCC 469]. The Court in that case
considered the question as to what happens when shrimps,
prawns and lobsters purchased by the assessee (under the
provisions of the Central Sales Tax Act, 1956) are subjected
to the process of cutting heads and tails, peeling,
deveining, cleaning and freezing before export. Do they
cease to be original commodity and become commercially a new
commodity or do they still retain their original identity as
shrimps, prawns and lobsters? The Court held that despite
such processing they continue to possess their original
character and identity and even though processing was
necessary for making them fit for the table. The Court
referred to the decision of the Supreme Court of the United
States in East Texas Motor Freight Lines v. Frozen Food
Express [100 L.Ed. 917] where the question was whether
dressed and frozen chicken was a commercially distinct
article from the original chicken. The Court relied upon
the following passage from the said judgment: there is
hardly less difference between cotton in the field and
cotton at the gin or in the bale or between cottonseed in
the field and cottonseed at the gin, than between a chicken
in the pen and one that is dressed. The ginned and baled
cotton and the cottonseed, as well as the dressed chicken,
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have gone through a processing stage. But neither has been
manufactured in the normal sense of the word.
In our view, same would be the position with regard to
the food stuff served or sold by the Hotels. The foodstuff
prepared by cooking or by any other process from raw
materials such as cereals, pulses, vegetables meat or the
like cannot be regarded as commercially distinct commodity
and it cannot be held that such foodstuff is manufactured or
produced.
Further, the Legislature has differentiated industrial
undertaking and trading activity of the assessee who deals
in business of hotel by making different provisions. The
business of hotel and that of industrial undertaking is
considered to be distinct and separate for the purpose of
grant of investment allowance under Section 32A or for grant
of deduction under Section 80J. Under proviso (c) to
Section 32A deduction of investment allowance is not to be
made if in respect of any ship, machinery or plant to which
the deduction of development rebate is allowable under
Section 33. For the machinery and plant installed by an
assessee being an Indian company in premises used by it as a
hotel, specific provision for grant of deduction of
development rebate is made under Section 33(1)(b)(B)(ii).
Similarly, under Section 80J for a business of hotel and
industrial undertaking separate provisions are prescribed
making Section applicable namely sub-sections (4) and (6).
Conditions which are required to be satisfied by such
assessees are different. Therefore, an 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 support of his contentions, learned counsel Mr.
Choudhary referred to the decision of the Gauhati High Court
in Commissioner of Income-Tax v. Hotel Belle Vue (P.) Ltd.,
[1997 (223) ITR 675]. In that case the assessee who was
running a hotel, installed machinery and plant in hotel
premises and claimed investment allowance in respect of it
by contending that food- stuff was produced by it. The
claim was rejected by the Assessing Officer but was allowed
by the Tribunal and on reference the High Court held that
assessees hotel was an industrial undertaking within the
meaning of sub- clauses (ii) and (iii) of sub-section (2) of
Section 32A and was entitled to investment allowance. The
Court held that the word manufacture has not been defined
in the Finance Act and 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 the market;
when food is prepared from raw materials, definitely a new
product is prepared or made, which is known as a different
item and the said item cannot be brought back to its
original form. The Court observed, therefore, when food is
prepared or processed, it must be taken as manufacturing
process. In our view, the aforesaid reasoning is on the
face of it, erroneous as discussed above. By processing of
raw food, it cannot be said that it results in manufacture
or production of new articles. What is done is raw food is
processed for the purpose of consumption. Further, it
appears that the High Court has mixed up the words
manufacture and process as section 32A of the Act
provides for business of manufacture or production of goods
and not for manufacture or processing of goods.
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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 C.I.T., Kerala v. Casino (Pvt.)
Ltd., [1973 (91) ITR 289], Division Bench of the Kerala High
Court referred to Section 2(6)(d) of 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 the
similar view in Commissioner of Income- Tax v. Berrys
Hotels Pvt. Ltd., [1994 (207) ITR 615] and held that
benefit of Section 2(7)(c) of Finance Act, 1973 can be given
to manufacturing concerns and not to trading concerns. In
Fariyas Hotels Pvt. Ltd. v. Commissioner of Income Tax,
[1995 (211) ITR 390], 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.
In the result, Transferred Cases No.22 and 23 of 1989
filed by the Revenue are allowed and it is held that the
Flight Kitchen operated by the assessee-Indian Hotels
Company Ltd. is not entitled to get the benefit of Section
80J. Transferred Cases No.20, 21 and 24 of 1989 filed by
the assessee-Indian Hotels Company Ltd. are dismissed.
Civil Appeal No.1774 of 1992 and Civil Appeal No.______of
2000 @ S.L.P.(c) No. 324 of 1997 filed by M/s Hotel &
Allied Traders Pvt. Ltd. and Hotel Shashi Private Ltd.
respectively are also dismissed. There shall be no order as
to costs.