ORDER
Syed Shah Mohammed Quadri, J.
1. In this reference case the assessee is carrying on 'hotel business'. It claimed investment allowance under s. 32A of the IT Act, 1961, for short 'the Act'. The ITO negatived the claim of investment allowance on the ground that 'hotel business' could not be treated as in industrial concern which was manufacturing an article or thing. The assessee carried the matter in appeal before the CIT(A). The appellate authority took the view that the assessee was not entitled to investment allowance under s. 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 dt. 18th Feb., 1986. On the applications of the assessee as well as the Revenue, under s. 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 s. 32A of the IT 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 s. 43(3) of the IT Act, 1961'.
2. Mr. Y. Ratnakar, the learned counsel for the assessee contends that 'hotel' is 'plant' so far as the business of the assessee is concerned both for purposes of s. 32A of the Act as well as s. 43(3) of the Act, therefore the Tribunal ought to have granted the relief under the said provisions.
3. The learned standing counsel for the IT Department, has contended that 'hotel' is mere a building and it cannot be treated as 'plant', wherever the Parliament intended to grant relief to a 'hotel' it included the word 'hotel' for purposes of granting relief, so where the word 'plant' is used, the assessee cannot bring in 'hotel' within the concept of 'plant'. He further contended that after amendment of the IT Act, 1961 w.e.f. 2nd April, 1987 new classification has been introduced by the Parliament classifying 'hotel' under 'building' and that would also give an indication that the Parliament never intended 'hotel' to be brought within the meaning of 'plant'.
4. At the outset we may point out that w.e.f. 2nd April, 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 asst. yr. 1980-81, so the amendment has no bearing on the answer to the said question.
5. Since we are concerned with the entitlement of the assessee under s. 32A of the Act, it would be useful to read here s. 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-s. (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-s. (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 s. 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-s. (6) of s. 32AB.'
A plain reading of sub-s. (1), extracted above, and sub-s. (2) of s. 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 the 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 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 s. 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. 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.
6. Section 43 of the Act defines expressions used in ss. 28 - 41 of the Act. Sub-s. (3) of s. 43 defines 'plant' as follows :
''Plant' includes ships, vehicles, books, scientific apparatus and surgical equipment used for the purposes of the business or profession.' Since the definition contained in the above sub-section is 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 above mentioned items are added for being included within the ambit of 'plant'.
7. In CIT vs . Taj Mahal Hotel : [1971]82ITR44(SC) the matter arose under the IT 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 purposes of s. 10(2)(vib)(5) of the IT Act, 1922. After considering the definition of the term 'plant' in s. 10(5) of the said Act, the Supreme Court laid down that the sanitary and pipeline fittings fell within the definition of 'plant' in s. 10(5) and that the assessee was entitled to development rebate in respect thereof under s. 10(2)(vib). Their Lordships observed that the intention of the legislature was to give the word 'plant' a wide meaning.
8. In CIT vs . Sri Krishna Bottlers Pvt. Ltd. : [1989]175ITR154(AP) a Division Bench of our High Court considered the question whether bottles and shells used by the assessee in the manufacturing and selling soft drinks would be 'plant' for the purpose of s. 32(1)(ii) of the IT Act, 1961. After an exhaustive consideration of 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 in 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 the 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 a '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 also 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 & Sons vs . CIT : [1991]187ITR685(All) . 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 CIT vs . Kanodia Warehousing Corpn. : [1980]121ITR996(All) , 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 carrying on of those activities but merely constituted a place within which they were carried on, the building could not be regarded as a '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 constitute 'plant' along with its fittings and fixtures.
With regard to the cinema building the same view was taken by the Karnataka High Court in Santhosh Enterprises vs . CIT : [1993]200ITR353(KAR) .
9. In CIT vs . Dr. B. Venkata Rao : [1993]202ITR303(KAR) the question before the Karnataka High Court was whether a 'nursing home' was a 'plant' for purposes of s. 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 equipments and instruments were installed; it had an operation theatre, a pathological laboratory, X-Ray room, plant for sterilisation of clothes, 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'.
10. We may note here the view of the other High Courts on the construction of the expression of term 'plant'. In R. C. Chemical Industries vs . CIT : [1982]134ITR330(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 s. 43(3) of the Act and whether development rebate under s. 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.
11. In CIT vs . Hotel Ayodhya : [1993]201ITR1002(KAR) a Division Bench of the Karnataka High Court took the view that s. 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 the purposes of the Act. It referred to the judgment of the Calcutta High Court in S. P. Jaiswal Estates Pvt. Ltd. vs . CIT : [1992]196ITR179(Cal) holding that 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 loding house.
12. In S. P. Jaiswal Estates Pvt. Ltd. vs . CIT : [1994]209ITR307(Cal) the Calcutta High Court had to consider whether a 'hotel building' would qualify as 'plant' for purposes of s. 32 of the IT 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 s. 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 'hotel building' was not 'plant' within the meaning of s. 32(1) of the Act. The judgment of the Delhi High Court in R. C. Chemical Industries vs. CIT (supra) was referred to; however there is a wrong reference to the ratio of that case as holding that the building in the R. C. Chemical Industries case (supra) was treated as 'plant'.
13. From the above discussion, it follows that for purposes of deciding as to whether a building would be a 'plant' within the meaning of the expression in s. 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.
Yet another approach to the question would be as to whether the building was serving as 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 a '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 a 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 requirement 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, business of 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 specification to satisfy the modern needs and the requirement 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 s. 43(3) of the Act and, if so, whether the assessee is entitled to investment allowance under s. 32A of the Act.
14. The reference is accordingly answered, but in the circumstances of the case there will be no order as to costs.