Indian Hotels Co. Ltd. And Others v. Income Tax Officer, Mumbai And Others

M.B Shah, J.—

TCs Nos. 20 to 24 of 1989

1. Under Article 139-A of the Constitution, the appeals which were pending before the Income Tax Appellate Tribunal were transferred to this Court and numbered as Transferred Cases Nos. 20-24 of 1989. Transferred Cases Nos. 20-21 and 24 of 1989 are filed by the assessee Indian Hotels Co. Ltd. and others, which pertain to Assessment Years 1977-78, 1978-79 and 1976-77 respectively. Transferred Cases Nos. 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.

2. 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 mechanised 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 80-J(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 80-J(6) which provides for approval by the Central Government. He, therefore, directed the ITO to allow deductions under Section 80-J in respect of the capital employed in the flight kitchen.

3. It is the contention of Dr Gauri Shankar, 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 the manufacture or production of food packages on a large, organized and mechanised basis for the use of various international airlines and, therefore, is entitled to get the benefit of Section 80-J 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 80-J(1), it is required to obtain approval as provided under Section 80-J(6)(d) of the Act.

Civil Appeal No. 1774 of 1992

4. In this appeal, M/s Hotel & Allied Traders Pvt. Ltd., the assessee sought benefit of investment allowance under Section 32-A of the Act for Assessment Year 1978-79 by contending that the assessee Company was an industrial undertaking engaged in manufacturing activity. That claim was finally rejected by the Tribunal by holding that the 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 32-A of the Act. Further the Tribunal relied upon the decision in Commissioner Of Income-Tax, Kerala v. Casino (Pvt.) Ltd. (1973) 91 ITR 289 (Ker) 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.

SLP (C) No. 324 of 1998

5. Leave granted.

6. 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 Mahabaleshwar, claimed the benefit of investment allowance under Section 32-A 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 (Bom). 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

7. For appreciating the contentions raised by the learned counsel for the parties, we would first refer to the relevant provisions of the Act:

“80-A. Deductions to be made in computing total income.—***

80-J. Deduction in respect of profits and gains from newly established industrial undertakings or ships or hotel business in certain cases.—(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 such profits and gains reduced by the deduction, if any, admissible to the assessee under Section 80-HH or Section 80-HHA 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.

(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 1st 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;

(6) This section applies to the business of any hotel, where all the following conditions are fulfilled, namely—

(a)-(c)***

(d) the hotel is for the time being approved for the purposes of this sub-section by the Central Government;”

(emphasis supplied)

8. The relevant part of Section 32-A of the Act which grants investment allowance reads thus:

“32-A. (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 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)

9. 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.”

10. 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 forms of powers;

(ii) in the construction of ships;

(iii) in manufacturing or processing of goods; and

(iv) in mining.

11. 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 per cent of such total income.

12. Section 80-J 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-sections (4), (5) and (6) respectively are satisfied. The question would be — whether 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 the flight kitchen is essentially an ancillary unit. This would mean that operation of the flight kitchen was ancillary to its business of hotel. Hence, the 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 80-J(1) it must fulfil the conditions laid down in sub-section (6).

The next question would be — whether under the aforesaid provisions it can be held that the assessee's hotels manufacture or produce foodstuffs

13. 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 the manufacture of food packages on a large scale in an organized and mechanised 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 80-J(4)(iii) of the Act.

14. In the civil appeals filed by M/s Hotel & Allied Traders (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 32-A of the Act. It has been contended that the appellant assessee satisfied the requirement of an industrial company as defined under Section 2(7)(c) of the Finance Act, 1979. He submitted that a hotel which inter alia converts raw materials into foodstuffs 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 32-A.

15. From the sections quoted above, i.e, Section 80-J(1) proviso, 80-J(4), 80-J(6) and Section 32-A, for getting benefit of deduction or investment allowance, the requirement is that the assessee company 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 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 80-J 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 CIT v. N.C Budharaja and Co. 1994 Supp (1) SCC 280 this Court considered the provisions of Section 32-A and Section 80-HH(2) of the Act and held that machinery or plant “for the purposes of business of construction, manufacture or production of any article or thing” would not cover machinery employed in digging borewells. The Court also considered the Ninth Schedule (applicable at the relevant time) which contained Item 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 is — from such raw materials eatable foodstuff is prepared.

16. In support of his contention, learned Solicitor General referred to the decision of this Court in Sterling Foods v. State Of Karnataka (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 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 351 US 49 (1955) 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, have gone through a processing stage. But neither has been ‘manufactured’ in the normal sense of the word.”

(emphasis supplied)

17. In our view, same would be the position with regard to the foodstuff 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.

18. Further, the legislature has differentiated industrial undertaking and trading activity of the assessee who deals in the 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 32-A or for grant of deduction under Section 80-J. Under proviso (c) to Section 32-A deduction of investment allowance is not to be made 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 80-J for a business of hotel and industrial undertaking separate provisions are prescribed making the 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.

19. 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 (Gau) 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 foodstuff 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 the assessee's hotel was an industrial undertaking within the meaning of sub-clauses (ii) and (iii) of sub-section (2) of Section 32-A 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 which brings 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 that 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 32-A of the Act provides for business of manufacture or production of goods and not for manufacture or processing of goods.

20. 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 Commissioner Of Income-Tax, Kerala v. Casino (Pvt.) Ltd. (1973) 91 ITR 289 (Ker) the 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 the 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 a similar view in Commissioner Of Income-Tax v. Berry'S Hotels Pvt. Ltd. (1994) 207 ITR 615 (Bom) and held that benefit of Section 2(7)(c) of the 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 (Bom) it held that investment allowance under Section 32-A is not available in respect of machinery installed for the purpose of business of the assessee who is engaged in the business of running a hotel as it is essentially a trading activity. Similarly the Calcutta High Court in Commissioner Of Income-Tax v. S.P Jaiswal Estates (P.) Ltd. (1992) 196 ITR 179 (Cal) held that an assessee who claims investment allowance under Section 32-A 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 the 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.

21. In the result, Transferred Cases Nos. 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 80-J. Transferred Cases Nos. 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. 4443 of 2000 @ SLP (C) No. 324 of 1998 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.