Commissioner of Income-tax Vs. Vrindavan Hotels (P.) Ltd. - Court Judgment

Om Prakash, C.J.

1. At the instance of the Revenue, the Income-tax Appellate Tribunal referred the following questions relating to the assessment years 1985-86 and 1987-88 for the opinion of this court :

'1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding :

(i) the equipment, used in the kitchen and store room can be conceivably looked upon for the purpose of producing an article or thing (ii) there is production of food materials in a hotel (iii) the assessee is entitled to the investment allowance under Section 32A of the Income-tax Act, on the building housing the kitchen, 'producing' the food stuffs 2. Whether, on the facts and in the circumstances of the case, is theassessee an industrial undertaking engaged in the production of an articleor thing as contemplated under Section 32A of the Income-tax Act, 1961 ?'

The question before the Appellate Tribunal was whether the assessee, engaged in the business of running a hotel, was entitled to investment allowance on the plant and machinery, employed in the course of hotel business. The Appellate Tribunal upheld the claim of the assessee in respect of the building housing the kitchen, store room, etc., and in respect of the equipment and apparatus used in the kitchen, relying on its earlier order in the case of ITO v. R. Ranganatha Reddiar, Radhas, Quilon (I. T. A. Nos. 609 to 611/Coch. of 1989), in which the Tribunal found as follows ;

'From the above it will be evident that there is production of food materials in a hotel.'

Thereafter, the Tribunal discussed the meaning of the words 'industrial undertaking' and held as follows ;

'Thus, a hotel is not a trading concern. Can it be described as an industrial undertaking The term 'industrial undertaking' has not been defined in the Income-tax Act. If there is organisation of labour and capital for production and distribution of goods and services needed to satisfy human wants and wishes, such organised activity can be viewed as an industrial activity and in an undertaking if such organised activities are carried on, the undertaking can be said to be an industrial undertaking.'

The Appellate Tribunal, in short, took the view that the requisite conditions of Section 32A(2)(b)(iii) stand satisfied and, therefore, the assessee is entitled to investment allowance on the building housing the kitchen, store room and the equipment used for producing the food stuffs.

2. Before us learned senior standing counsel for the Revenue relied on CIT v. Casino (Pvt.) Ltd. : [1973]91ITR289(Ker) , which the Appellate Tribunal also adverted to. In Casino (Pvt.) Ltd. : [1973]91ITR289(Ker) , the question for consideration was whether the activity carried on in preparing articles of food from raw materials in a hotel, would constitute 'manufacture or processing of goods' within the meaning of Section 2(6)(d) of the Finance Act, 1968. An industrial company engaged in the manufacture or production, was liable to tax at a lesser rate under Section 2(6)(d) of the Finance Act, 1968. This court, reviewing the entire case law germane on the point held in Casino (Pvt.) Ltd. : [1973]91ITR289(Ker) as follows (page 299) : 'The question ultimately would be whether in common parlance the activity of the assessee could be said to be one of manufacture or processing of the goods, whatever may be the technical meaning of the term. The assessee is dealing every day with his customers. Could it be said that the customers visiting the assessee's hotel would ask for the items in the menu list to be manufactured and supplied to them. We do not think that it would be appropriate to refer, in the ordinary sense in which we understand in the English language, to the production of food materials in the assessee's hotel as manufacture. Any customer visiting a hotel would ask to be supplied with the food and beverages that are for sale in the hotel and if the waiter is to tell the customer that his order is being 'manufactured', it is likely that the customer would feel something strange about it. It would not pass off, normally, unnoticed. Equally so the customer may not also appreciate if he is told that the wheat or the meat which are used as raw materials are being 'processed' as we understand the term ordinarily. 'Processing', in such context, would mean something less than the complete loss of identity of the goods which is the case when the food materials are prepared in the hotel. Hence, if construction of the term in the popular sense is the test to be applied, we do not think that it is possible to say that the assessee manufactures or processes goods in its hotel.'

3. This authority was further relied on by this court in Anjali Hotels Pvt. Ltd. v. CIT : [1988]170ITR419(Ker) , in which this court held that a hotel is not an industrial company, because the activity of conversion of raw materials into food in a hotel does not amount to manufacture or processing of goods within the meaning of Section 2(7)(c) of the Finance Act, 1979, and, therefore, a hotel is not entitled to concessional rate of tax as specified under Clause 2(i)(a) of paragraph E of Schedule I to the Finance Act, 1979.

4. From these authorities, it is amply clear that this court has discussed the question threadbare whether a hotel is an industrial undertaking, engaged in the manufacture or processing of an article, and on both the occasions this court answered the question in the negative, that is, in favour of the Revenue and against the assessee.

5. The questions referred to us are fully covered by these two decisions. Though the said decisions turned upon different provisions of law, in essence they discussed the ingredients of Section 32A(2)(b)(iii). Following the same, we answer both the questions in the negative, that is, in favour of the Revenue and against the assessee.