Syed Shah Mohammed Quadri, J.:— In this reference case the assessee is carrying on “hotel business”. It claimed investment allowance under section 32A of the Income-tax Act, 1961 (for short, “the Act”). The Income-tax Officer negatived the claim of investment allowance on the ground that “hotel business” could not be treated as an “industrial concern” which was manufacturing an “article” or “thing”. The assessee carried the matter in appeal before the Commissioner of Income-tax (Appeals). The appellate authority took the view that the assessee was not entitled to investment allowance under section 32A of the Act. He also opined that there was no manufacturing or processing activity and accordingly dismissed the appeal. Against the order of the first appellate authority two appeals were filed, one by the assessee and the other by the assessing authority. Those two appeals were disposed of by a common order dated February 18, 1986. On the applications of the assessee as well as the Revenue, under section 256(1) of the Act, the following questions are referred to this court for opinion:
“(1) Whether, on the facts and in the circumstances of the case, the assessee is not entitled for investment allowance under section 32A of the Income-tax Act, 1961, in respect of plant and machinery installed for running hotel business?
(2) Whether, on the facts and in the circumstances of the case, the building for running the hotel should be treated as ‘plant’ under section 43(3) of the Income-tax Act, 1961?”
2. Mr. Y. Ratnakar, learned counsel for the assessee, contends that a “hotel” is “plant” so far as the business of the assessee is concerned both for the purposes of section 32A of the Act as well as section 43(3) of the Act; therefore, the Tribunal ought to have granted the relief under the said provisions. Learned standing counsel for the Income-tax Department has contended that a “hotel” is a mere building and it cannot be treated as “plant”, wherever Parliament intended to grant relief to a “hotel” it included the word “hotel” for the purposes of granting relief, so where the word “plant” is used, the assessee cannot bring in “hotels” within the concept of “plant”. He further contended that after the amendment of the Income-tax Act, 1961, with effect from April 2, 1987, a new classification has been introduced by Parliament classifying “hotels” under “buildings” and that would also give an indication that Parliament never intended “hotels” to be brought within the meaning of “plant”.
3. At the outset we may point out that with effect from April 2, 1987, Appendix I is amended for the purposes of granting depreciation and buildings are classified into three categories. Clause (i) of sub-item (3) of Item I of Appendix I is “buildings used as hotels”. But the question in this case relates to the assessment year 1980-81, so the amendment has no bearing on the answer to the said question.
4. Since we are concerned with the entitlement of the assessee under section 32A of the Act, it would be useful to read here section 32A(1) of the Act, which is relevant for our purpose and is in the following terms:
“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 in respect of a ship or an aircraft or machinery or plant specified in sub-section (8B), this sub-section shall have effect as if for the words ‘twenty-five per cent’, the words ‘twenty per cent.’ had been substituted:
Provided further 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 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.
Explanation.— For the purposes of this sub-section, ‘actual cost’ means the actual cost of the ship, aircraft, machinery or plant to the assessee as reduced by that part of such cost which has been met out of the amount released to the assessee under sub-section (6) of section 32AB.”
5. A plain reading of sub-section (1), extracted above, and sub-section (2) of section 32A, shows that if a ship or an aircraft or machinery or plant is owned by the assessee and is wholly used for the purpose of the business carried on by him, then in 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, a sum, by way of investment allowance, equal to twenty-five per cent, of the actual cost of the ship, aircraft, machinery or plant, is allowed as deduction in computing the profits and gains of the business. Since we are concerned with plant, we would refer to only “plant” for purposes of this provision. To qualify for the deduction, mentioned above, the plant should have been installed after the 31st day of March, 1976, 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. But in respect of the following no deduction is allowable:
(a) plant installed in any office premises or any residential accommodation, including any accommodation in the nature of a guest house;
(b) plant in the nature of any office appliances or road transport vehicle;
(c) 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.
6. It is a common case that food articles which are said to have been manufactured or produced do not fall within the prohibited articles specified in the Eleventh Schedule.
7. Section 43 of the Act defines expressions used in sections 28 to 41 of the Act. Sub-section (3) of section 43 defines “plant” as follows:
“‘Plant’ includes ships, vehicles, books, scientific apparatus and surgical equipment used for the purposes of the business or profession.”
8. Since the definition contained in the above sub-section is an inclusive definition and it includes ships, vehicles, books, scientific apparatus and surgical equipment used for the purposes of the business or profession, we have to discover what is the scope of the word “plant” because it is to that sense the abovementioned items are added for being included within the ambit of “plant”.
9. In CIT v. Taj Mahal Hotel, [1971] 82 ITR 44 (SC), the matter arose under the Indian Income-tax Act, 1922. The question before the Supreme Court was, whether sanitary and pipeline fittings installed by the assessee, Taj Mahal Hotel, would come within the meaning of “plant” for the purposes of section 10(2)(vib), (5) of the Indian Income-tax Act, 1922. After considering the definition of the term “plant” in section 10(5) of the said Act, the Supreme Court laid down that the sanitary and pipeline fittings fell within the definition of “plant” in section 10(5) and that the assessee was entitled to development rebate in respect thereof under section 10(2)(vib). Their Lordships observed that the intention of the Legislature was to give the word “plant” a wide meaning.
10. In Commissioner Of Income-Tax v. Sri Krishna Bottlers Pvt. Ltd., [1989] 175 ITR 154 (AP), a Division Bench of our High Court considered the question whether bottles and shells used by the assessee in the manufacturing and selling of soft drinks would be “plant” for the purpose of section 32(1)(ii) of the Income-tax Act, 1961. After an exhaustive consideration of the various judgments, both of English courts as well as of Indian courts, the Bench held that the word “plant” has to be understood in the popular sense, viz., in the sense which people conversant with the subject-matter with which the statute is dealing, would attribute to it and that it should be given a wide meaning. It has been held that in its ordinary sense it would include whatever apparatus is used for carrying on the business but would not include stock-in-trade which a tradesman would keep for permanent employment in his business and that the building or the “setting” in which the business is carried on cannot be “plant”. It was also clarified that the thing need not be part of the machine used in the manufacturing process but could be merely an apparatus used in carrying on the business but having a degree of durability; even the assets which have the object of function in carrying on the business would also fall within the ambit of “plant”. What is required is that the one which is to be treated as “plant” must have a function in the trader's operation and if it had, it would, prima facie, be “plant” unless there were good reasons to exclude it from that category. It might be a tool in the trade of the businessman but it is not necessary that it should have gross materiality or tangibility and that even intangible things like ideas and designs contained in a book could be “plant”. They are referred to as “intellectual storehouse”. On the question whether a structure could be treated as plant or premises, the test laid down is that one must look at the finished product and not at the bits and pieces as they arrive from the factory and that the fact that a building or part of a building holds the plant in position does not convert the building into plant and that the functional test is a decisive test. The functional test referred to in the Bench judgment was applied by the Allahabad High Court in S.K Tulsi and Sons v. CIT, [1991] 187 ITR 685. There the question was, whether a cinema building along with fittings and fixtures would constitute “plant”. Chief Justice B.P Jeevan Reddy (as he then was) speaking for the Division Bench laid down, following the judgment of the same High Court in Commissioner Of Income-Tax, Lucknow-Ii v. Kanodia Warehousing Corporation., [1980] 121 ITR 996, that to find out whether a building or structure or a part thereof constituted “plant”, the court must apply what is called the “functional test”. It was observed that if it were to be found that the building or structure constituted an apparatus or a tool of the taxpayer by means of which the business activities were carried on, it would amount to “plant” but where the structure played no part in the carrying on of those activities but merely constituted a place within which they were carried on, the building could not be regarded as “plant” and thus concluded that the building constructed and used as a cinema wherein the cinema business was being carried on by the assessee did cpnstitute “plant” along with its fittings and fixtures.
11. With regard to the cinema building the same view was taken by the Karnataka High Court in Santosh Enterprises v. Commissioner Of Income-Tax, [1993] 200 ITR 353.
12. In Commissioner Of Income-Tax v. Dr. B. Venkata Rao., [1993] 202 ITR 303 (Kar), the question before the Karnataka High Court was whether a “nursing home” was “plant” for purposes of section 32 of the Act. It was observed that the nursing home was not an ordinary building having regard to the number of persons using it and the manner of its use and the purpose for which it was used; the building was used not only to house the patients and nurse them, but also to treat them for which various equipment and instruments were installed; it had an operation theatre, a pathological laboratory, an X-ray room, a plant for sterilisation of clothes, a plant for sterilisation of other surgical instruments, an air-conditioning room, etc. Applying the functional test, it was held that the nursing home building was “plant”.
13. We may note here the view of the other High Courts on the construction of the expression of the term “plant”. In R.C Chemical Industries v. Commissioner Of Income-Tax, New Delhi., [1982] 134 ITR 330 (Delhi), the question before the Division Bench of the Delhi High Court was, whether the building in which the business of manufacture of saccharine and other allied chemicals and essences was being carried on, would be “plant” within the meaning of section 43(3) of the Act and whether development rebate under section 33 of the Act was allowable. The Bench applied the test whether the building was the means of “carrying on the business” or the location for so doing. It was held that the building in question in that case did not come within the expression “plant” and that it was merely a setting, albeit a convenient one, where the business of manufacturing saccharine was carried on.
14. In Commissioner Of Income-Tax v. Hotel Ayodya., [1993] 201 ITR 1002, a Division Bench of the Karnataka High Court took the view that section 80J(1) refers to an “industrial undertaking” and “the business of a hotel” separately, which is an indication that a hotel is not an “industrial undertaking” for purposes of the Act. It referred to the judgment of the Calcutta High Court in Commissioner Of Income-Tax v. S.P Jaiswal Estates (P.) Ltd., [1992] 196 ITR 179 holding that the business of hotel keeping is not an industrial undertaking. Further, the Karnataka High Court also held that the preparation of food articles in a hotel is also incidental to rendering of service at the hotel whether it is a restaurant or a lodging house.
15. In S.P Jaiswal Estates Pvt. Ltd. v. CIT (No. 2), [1994] 209 ITR 307, the Calcutta High Court had to consider whether a “hotel building” would qualify as “plant” for purposes of section 32 of the Income-tax Act, 1961. The learned judges held that the preparation of food in a hotel was not manufacture or production of an article as envisaged in section 32A. Though the learned judges referred to the principle that a building or a structure should not per se be excluded from the ambit of “plant”, yet applying the functional test they came to the conclusion that the “hotel building” was not “plant” within the meaning of section 32(1) of the Act. The judgment of the Delhi High Court in R.C Chemical Industries v. Commissioner Of Income-Tax, New Delhi., [1982] 134 ITR 330 was referred to; however, there is a wrong reference to the ratio of that case as holding that the building in R.C Chemical Industries' case, [1982] 134 ITR 330 (Delhi) was treated as “plant”.
16. From the above discussion, it follows that for the purposes of deciding as to whether a building would be a “plant” within the meaning of the expression in section 43(3) of the Act:
“(i) the term ‘plant’, as used, has to be given a wide meaning; and
(ii) whether a building is a ‘plant’ or not has to be determined with reference to the functional test.”
17. Yet another approach to the question would be as to whether the building was serving as the setting in which the business is carried 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 a hotel or it may be carried on in a building which is specifically designed with reference to 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 32A of the Act.
18. The reference is, accordingly answered, but in the circumstances of the case, there will be no order as to costs.