The Judgment of the Court was delivered by

Ajit K. Sengupta, J.:— In this reference under section 256(1) of the Income-tax Act, 1961, the following question of law has been referred to this court for the assessment year 1981-82:

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that preparation of food in the hotel constituted manufacture or production of any article or thing within the meaning of section 32A of the Income-tax Act, 1961, and, in that view, the assessee was entitled to get investment allowance under that section?”

2. Shortly stated, the facts are that the assessee-company runs a five star hotel in Calcutta under, the name and style of Hotel Hindusthan International. Before the Income-tax Officer, the assessee-company claimed investment allowance under section 32A of the Income-tax Act, 1961, amounting to Rs. 5,78,500 on plant and machinery installed during the accounting year. A reserve of Rs. 3,75,000 was created for this purpose. The Income-tax Officer was of the view that the hotel was not entitled to investment allowance and, for the reasons discussed in the last year's assessment order, the Income-tax Officer disallowed the assessee's claim for investment allowance.

3. Being aggrieved, the assessee appealed to the Commissioner of Income-tax (Appeals) who confirmed the action of the Income-tax Officer on the point. The matter then went to the Tribunal. The Tribunal, following the assessee's own case for the earlier year set aside the order of Commissioner of Income-tax (Appeals) remanded the matter to the Income-tax Officer with a direction to reconsider the assessee's claim for investment allowance in accordance with the earlier direction given by the Tribunal. In respect of the earlier assessment order, the Tribunal directed the Income-tax Officer to examine the claim of the assessee and to allow investment allowance only on such machinery and plant as are required for manufacturing or processing of goods.

4. Before us, the same contentions have been reiterated.

5. Under section 32A, investment allowance will be allowed to an assessee if the machinery or plant is installed in an industrial undertaking for the purpose of business of manufacturing or production of any article or thing not being an article or thing specified in the Eleventh Schedule to the Act. The question, therefore, is whether the assessee in the instant case is an industrial undertaking engaged in the production of any article or thing.

6. Our attention has been drawn to an unreported decision of this court in I.T Ref. No. 114 of 1981 (Commissioner Of Income-Tax v. Sky Room Pvt. Ltd. since reported in [1992] 195 ITR 763), where the judgment was delivered on March 7, 1989, to which one of us is a party. In that case, the question was whether the assessee could be treated as an industrial company. The assessee in that case was engaged in business wholly in processing goods, rendering them edible and then selling them in its restaurants as foodstuff and eatables. In that case, it was held that the assessee was engaged in processing of goods and accordingly, the court held that the Sky Room Private Ltd. was an industrial company within the meaning of section 2(7)(c) of the Finance Act, 1978. There the court held that the word “processing” is broad enough to take in the activity of purchasing of goods and rendering them edible and selling them to its customers or the guests of the hotel as foodstuff and eatables.

7. Our attention has been drawn to a decision of the Kerala High Court in CIT v. Casino (Pvt.) Ltd., [1973] 91 ITR 289, where the Kerala High Court held that a hotel was mainly a trading concern. It would not be appropriate in the ordinary sense to refer to the production of the food materials in a hotel as manufacture. This case was distinguished by this court in Sky Room Pvt. Ltd., [1992] 195 ITR 763, where the court observed that, before the Kerala High Court, the categorical finding was that hotel activity was the main activity and, accordingly, it was not engaged mainly in the activity of manufacture processing of goods. The ratio of that judgment was quite different and was given in a different context of facts. Accordingly, it was not necessary for this court in Sky Room Pvt. Ltd., [1992] 195 ITR 763 to follow the decision of the Kerala High Court in Casino (Pvt.) Ltd., [1973] 91 ITR 289. On the other hand, this court relied on a decision of this court in G.A Renderian Ltd. v. Commissioner Of Income-Tax, West Bengal-I., [1984] 145 ITR 387. In that case, the assessee, who carried on the business of purchasing tea of different qualities and blending the same by mixing one type with another, claimed that it was an industrial company within the meaning of section 2(7)(c) of the Finance Act, 1978, and was entitled to concessional rate of tax. This court held that the assessee was an industrial company entitled to this benefit. There, this court considered in detail the meaning of the word “processing”.

8. There, this court followed the decision of the Supreme Court in the case of Chowgule and Co. Ltd. v. Union of India, [1981] 47 STC 124 : (1981) 1 SCC 653 : AIR 1981 SC 1014. The question involved before the Supreme Court was whether blending of ore of different qualities for obtaining ore of requisite specification amounted to processing within the contemplation of the Central Sales Tax Act. The Supreme Court observed that though the blending of different qualities of ore possessing differing chemical and physical composition so as to produce ore of the contractual specifications could not be said to involve the process of manufacture since the ore that was produced could not be regarded as a commercially new and distinct commodity from the ore of different specifications blended together, the operation of blending would amount to “processing”of ore within the meaning of section 8(3)(b) and rule 13. This court, after considering the aforesaid Supreme Court decision and other decisions on this point, held that the word “processing” used in the definition of “industrial company” in section 2(7)(c) of the Finance Act, 1978, has not been defined in the Income-tax Act, 1961, and it must, therefore, be interpreted according to its own natural meaning. Webster's Dictionary gives the following meaning of the word “process” “to subject to some special process or treatment, to subject (especially raw material) to a process of manufacture, development or preparation for the market, etc., to convert into marketable form as livestock by slaughtering, grain by milling, cotton by spinning, milk by pasteurizing, fruits and vegetables by sorting and repacking”. Where, therefore, any commodity is subjected to a process or treatment with a view to its “development or preparation for the market”, as, for example, by sorting and repacking fruits and vegetables, it would amount to processing of the commodity.

9. The nature and extent of processing may vary from case to case; in one case, the processing may be slight and, in another, it may be extensive; but with each process suffered, the commodity would experience a change. Wherever a commodity undergoes a change as a result of some operation performed on it or in regard to it, such operation would amount to processing of the commodity. The nature and extent of the change is not material. The question is not whether there is manual application of energy or there is application of mechanical force. Whatever be the means employed for the purpose of carrying out the operation, it is the effect of the operation on the commodity that is material for the purpose of determining whether the operation constitutes “processing”.

10. At the hearing before us, it has been contended by learned counsel for the Revenue that the assessee is not entitled to get the benefit inasmuch as the main business of the assessee is the running of a hotel which does not necessarily involve the maintenance of any restaurant. He has contended that even assuming that the hotel has a restaurant, it does not mean that it is an industrial concern eligible for investment allowance.

11. The contention of Mr. Poddar, learned counsel for the assessee, however, is that it is true that the running of a restaurant is an integral part of the business of a five-star hotel. It is true that it is mainly engaged in the business of hotel, but it has also to run the restaurant for the guests. In the restaurant, food is served which involves processing of articles as held in the case of Sky Room Pvt. Ltd., [1992] 195 ITR 763 (Cal). He has also submitted that the decision of the Kerala High Court in Casino (Pvt.) Ltd., [1973] 91 ITR 289 has no application to the facts of this case, as there, the question was whether the assessee was an industrial company or not and, in determining that question, the court was of the view that the main activity of the assessee was hotel business and, accordingly, it was not entitled to be treated as an industrial company, because, after all, the hotel is a trading concern.

12. We have considered the rival contentions.

13. The decision of the Kerala High Court in Casino (Pvt.) Ltd., [1973] 91 ITR 289, to our mind, gives the clue to the answer in this case as well. There is no dispute that the said decision was rendered in the context of the definition of “industrial company” under the Finance Act and, therefore, has a special context. But this takes us to the question whether the context of section 32A(2)(b) also creates a special context wherein Casino (Pvt.) Ltd., [1973] 91 ITR 289 can carve out a place for it as the ambit of the two are intersecting. The said sub-section is extracted hereunder:

“(2) The ship or aircraft or machinery or plant referred to in subsection (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.”

14. The assessee's case could come under sub-clause (iii) of clause (b). The expression “in any other industrial undertaking for the purposes of business of construction, manufacture or production of any article or thing”, in our view, narrows down the scope of the assessee's claim for the deduction. In the first place, the activity of construction can be left alone. The question that remains is whether the course of the business of running a hotel tantamounts to manufacture or production of any article or thing merely because it also incidentally prepares and supplies foodstuff. The Kerala High Court, in Casino (Pvt.) Ltd., [1973] 91 ITR 289 has held that the manufacturing or processing involved in preparation of food materials cannot justify the hotel business being treated as of manufacturing or processing of goods because the manufacturing or processing of goods is only incidental to the main business which is purely trading.

15. By the same token, when the provisions of section 32A allows the special deduction only to an undertaking engaged in the business of manufacture or production of any article or thing, it cannot take in the business of a hotel. The business of a hotel is quint essentially a non-manufacturing or non-producing or even non-processing concern and is a trading concern. This will also be clear from the provisions of section 80J (now repealed) or section 80-I or section 80HH. In all these sections, the business of a hotel is treated as a business distinct and separate from an industrial undertaking manufacturing or producing articles. In all these sections, the business of a hotel has been of a category different from a manufacturing or producing undertaking.

16. It is no doubt true that a hotel also produces eatables from raw materials like vegetables, meat, fish, spices and so on, for catering to the needs of the customers. But such manufacturing or production of goods that may be involved therein is only incidental or ancillary to the business of hotel-keeping.

17. Apart from meals, a hotel provides entertainment and various personal services, with halls for drinking, dancing, exhibitions and group meetings with shops having both inside and streetside entrances and Offering for sale items such clothes, gifts, candy, theatre tickets, travel tickets. These are also ancillary activities, but do not fall in the activity of manufacture or production. The basic ingredient of hotel-keeping is providing lodging or maintaining a building consisting of many rooms for overnight accommodation which has nothing to do with any manufacturing or producing article or thing.

18. The formidable difficulty that the assessee's claim for the investment allowance has to overcome is the fact that preparation and supply of goods by a restaurant and the same act by a hotel-keeper does not stand on the same footing. Particularly when pitted against the expression used by the Legislature in sub-clause (iii) of clause (b) of sub-section (2) of section 32A, the assessee who claims investment allowance has to be an assessee carrying on the business of manufacturing or producing any article or thing. Therefore, the business itself has to be that of manufacture or production. This is apparent from the contradiction maintained by other sections of the Act where a manufacturing or producing undertaking stands apart from the business of a hotel.

19. It is nobody's case that the Kerala High Court in Casino (Pvt.) Ltd., [1973] 91 ITR 289 was incorrect in saying that hotel is a trading concern, The only contention raised is that the issue therein was whether a hotel is an “industrial company”. The definition of industrial company requires a fact-situation hardly different from that requisite for investment allowance. There are only two basic variations: first, investment allowance relates to both corporate and non-corporate assessee and second, the industrial company is to be mainly manufacturing or processing goods or things but an eligible assessee under section 32A is to be wholly manufacturing or producing. The latter variation further weakens the assessee's case before us. That reinforces the conclusion we are now going to draw.

20. Reliance placed by Mr. Poddar, learned counsel for the assessee, on the decision of this court in Sky Room Pvt. Ltd., [1992] 195 ITR 763 (Cal) does not advance his case for two reasons. First, in that decision, this court held that the serving of food in a restaurant involves processing of articles. But, here, the question is the assessee's eligibility for the deduction under section 32A by way of investment allowance. The provisions of section 32A limit the benefits only to an industrial undertaking whose business consists of, inter alia, manufacture or production of any article or thing. Thus, processing of article or thing is outside the scope of this privilege.

21. The second point against Mr. Poddar's plea is that, in the case of an industrial company, it is sufficient if the company's income to the extent of 51% arises from manufacture or processing of goods. But, there is no such concept of compartmentalisation of income in the test whether an industrial undertaking is to be treated as such for section 32A. The industrial undertaking as a whole has to carry on its business of producing or manufacturing articles or things. There is no scope for separation of the integrated activity of the industrial undertaking and treating any part thereof as an activity of the nature referred to in section 32A. It is the end result of the purpose of the business which is to determine whether the undertaking is an industrial undertaking and as such qualifies for the benefit of section 32A. Therefore, 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, it is the ultimate nature of the business of hotel-keeping that is determinative of the issue. As we hold that hotel-keeping is a trading activity, incidental processing of food will not entitle a hotel as a trading undertaking to the relief under section 32A.

22. In our view, therefore, the preparation of food in the hotel though involving only incidentally manufacture or production of articles or things cannot turn the business of running a hotel as such into a business of manufacturing or processing articles or things. If it were the intention of the Legislature to include a hotel as well within section 32A, it would have separately carved out a place for it as it did in section 80J now repealed) or section 80-I or section 80HH.

23. For the reasons aforesaid, we answer the question in the negative and against the assessee. There will be no order as to costs.

Bhagabati Prasad Banerjee, J.:— I agree.