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Cit Kanpur v. Sarvashi Meghdoot Hotels P Ltd - INCOME TAX REFERENCE No. - 180 of 1985  RD-AH 16279 (4 October 2007)
HIGH COURT OF JUDICATURE AT ALLAHABAD
Income Tax Reference No.180 of 1985
Commissioner of Income Tax Vs. S/S. Meghdoot Hotels (P) Ltd., Kanpur.
Income Tax Reference No.46 of 1987
Commissioner of Income Tax Vs. S/S. Meghdoot Hotels (P) Ltd., Kanpur.
Hon'ble Prakash Krishna.
Hon'ble Bharati Sapru.
The Income Tax Appellate Tribunal, Allahabad has referred the following questions of law relevant to the assessment years 1974-75 and 1976-77 for opinion of this Court:-
"Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in directing that the value of the assessee's leasehold rights in the building be considered in the computation of capital employed for the purpose of allowing relief under section 80-J of the Income Tax Act, 1961?"
At the instance of the department the Tribunal has also referred for the opinion of this Court the following questions of law:-
1."Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was correct in law in holding that the making of various preparations of food and creation of controlled atmosphere could not be recorded as a 'manufacture or production of any article or thing' within the meaning of section 32-A (2) (b) of Income Tax Act, 1961?"
2."Whether on the facts and in the circumstances of the case the Income Tax Tribunal was correct in law in holding that the assessee was not entitled to investment allowance under section 32-A (1) read with section 32-A (2) (b) of Income Tax Act, 1961 on generator installed for the purpose of its business?"
The dispute relates to the assessment years 1974-75 and 1976-77. The assessee is a company and is running hotel business. It has taken a building on lease for a fixed period of 20 years for which it had been paying rent of Rs.40,000/- per annum. A copy of the said lease deed has been annexed with the statement of the case. It is provided therein that the said lease can be terminated by the lessor in case of default of breach committed by the lessee in payment of rent or for not observing the conditions or covenant claimed in the deed. It claimed before the Income Tax Officer that the assessee is also entitled for relief under section 80-J of the Income Tax Act of a sum of Rs.36,000/- calculated at the rate of 6 per cent an amount of Rs.6 Lakhs which according to the assessee represented the capitalized value of leasehold rights of the hotel building. The said claim was not accepted by the Income Tax Officer nor by the Commissioner of Income Tax (Appeals). They examined the lease deed in depth and reached to the conclusion that the assessee has not employed any capital to obtain the lease and on the lease amount/rent is being treated as Revenue expenditure. It was further found that the assessee was not the owner of the building, the above amount could not be included in the computation of capital employed in the business. The Tribunal held that the right of the assessee is lessee's right. It is an asset. It directed the Income Tax Officer to work out the yield which the said lease property might yield to the assessee if he had subleased it to others for the purposes of commercially exploiting it. The difference between the said yield and the rent namely Rs.40,000/- per annum would indicate the yield potential of the said property to the lessee for a period of 20 years on existing terms. Its present value will have to be ascertained by applying appropriate table of valuation and if necessary the Income Tax Officer may take the help of the Valuation Officer to find out the lessessee's interest in the said property. Whatever be its value, it would be included while computing the capital employed in the hotel business.
In this factual background the question no.1 reproduced above was referred by the Tribunal, at the instance of the assessee.
The contention of the learned standing counsel for the department is that on a correct reading of section 80-J of the Act the conclusion drawn by the Tribunal is legally correct.
It is appropriate to reproduce section 80-J as it then stood:-
"80J. (1) Where the gross total income of an assessee includes1 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 80HH)] ??[or section 80HHA] 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 manner specified in sub-section (1A)] 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).
4[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.]
5[(1A) (I) For the purposes of this section the capital employed in an industrial undertaking or the business of a hotel shall, except as otherwise expressly provided in this section, be computed in accordance with clauses (II) to (IV) and the capital employed in a ship shall be computed in accordance with clause (V).
(II) The aggregate of the amounts representing the values of the assets as on the first day of the computation period of the undertaking or of the business of the hotel to which this section applies shall first be ascertained in the following manner :-
(i) in the case of assets entitled to depreciation, their written down value;
(ii) in the case of assets acquired by purchase and not entitled to depreciation, their actual cost to the assessee;
(iii) in the case of assets acquired otherwise than by purchase and not entitled to depreciation, the value of the assets when they became assets of the business;
(iv) in the case of assets, being debts due to the person carrying on the business, the nominal amount of those debts;
(v) in the case of assets, being cash in hand or bank, the amount thereof."
It was contended by the learned counsel for the assessee that the right of the assessee under the lease deed is a valuable right and is transferable also. He submits that for the purposes of deduction as admissible under section 80-J, the value of the said right after determination is liable to be deducted from the profits and gains of the hotel business. Under section 80-J profits and gains derived from business of hotel is entitled to deduction at the rate of 6 per cent per annum on the capital employed in the business of hotel. The words 'capital employed' are significant and the manner of their determination has been provided for in sub clause (II) of Section 80-J. According to Shri Shubham Agrawal, learned counsel for the assessee the case falls under clause III of sub section (II) of Section 80-J. Sub section (II) of section 80-J provides a machanism to find out the aggregate of amounts representing the values of the assets of the business of hotel. According to the learned counsel the leasehold right in question is an asset which has been acquired otherwise than by purchase and is also not entitled to depreciation. Thus, the value of the asset namely leasehold right becomes the asset of business, submits the learned counsel for assessee. It is difficult to agree with the said proposition. Section 80-J talks about the 'capital employed'. Sub section (II) of section 80-J contains five sub clauses. From a close reading of all clauses is but apparent that it talks about the 'asset', entitled to depreciation as also such asset not entitled to depreciation, assets acquired by purchase, assets acquired otherwise than by purchase, assets being debt due to the person carrying on the business and the assets being cash in hand or bank. These clauses though indicate that the assets in sub section (II) has been used in the sense of tangible things and not otherwise. Leasehold right is not a tangible right. It may be a valuable right but it cannot be treated as an asset. A conjoint reading of words 'capital employed' and 'asset' entitled to depreciation or not entitled to depreciation owned by assessee or acquired other than by purchase do indicate that leasehold rights are not included in assets.
Apart from the above, it is not in dispute that assessee except making payment of lease money annually has not invested or paid any amount by way of premium to acquire the leasehold rights. The said lease is for a fixed term and is determinable in case of breach of covenant at the instance of the lessor.
In the balance sheet also no such asset finds place as claimed by the assessee to claim benefit of Rs.6 Lakhs (alleged value of the asset) as per assessee. The finding of the fact recorded by the Tribunal is that the assessee has not paid any thing by way of premium or otherwise except the liability to pay the annual rent. The Tribunal has rightly negatived the claim of the assessee with regard to the inclusion of Rs.6 Lakhs as asset of the leasehold right for the purposes of determination of benefits under section 80-J of the Income Tax Act. We find no error on this score in the order of the tribunal and the same is on terra-firma.
So far as the question no.2 is concerned, in the case of assessee for the Assessment Year 1987-88, this Court in ITR No.110 of 1995 CIT Vs. S/S. Meghdoot Hotels (P) Ltd. Kanpur on 6th of April, 2005 following the decision of the Apex Court in the case of Indian Hotel Companies Ltd. and others Vs. I.T.O., (2000) 245 ITR 538 has held that a 'hotel' is not entitled to investment allowance under section 32-A as it is not engaged in production of any 'article' or 'thing'. However, it was argued vehemently by Shri Shubham Agrawal that in view of subsequent decisions of the Apex Court as also the dictionary meaning of word 'crockeries' as given in 21st Universal Encyclopaedia, the matter requires fresh consideration. The learned counsel referred to Aspinwall And Co. Ltd. Vs. CIT (2001) 251 ITR 325, a judgement of Apex Court explaining the meaning of word 'manufacture' used under section 32-A of the Act.
Considered the aforesaid submission and it is difficult to agree, in view of direct and authoritative pronouncement of the Apex Court in the case of India Hotels (supra). The said decision still holds the field and is binding on us.
A hotel industry is in the nature of a service industry. Strictly speaking, there is no manufacture or production of any 'article' in this industry. Even the food items and beverages, which are prepared in a hotel are to cater to the further comfort and service of their guests and, therefore, are commonly known as 'catering services'. So, it would be wholly fallacious to extend the meaning of the word 'manufacture' and production used in the section in context to such catering services in the hotel industry.
In view of the above discussion, the order of the Tribunal holding that the assessee is entitled for investment allowance on hotel building, is not correct. We, therefore, answer the second question in negative i.e. in favour of the department and against the assessee.
Income Tax Reference No. 46 of 1987
In this Income Tax Reference the Income Tax Appellate Tribunal A Bench Allahabad has referred the following question relevant to the assessment year 1981-82 for opinion to this Court under section 256 (1) of the Income-tax Act, 1961:-
"Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that the machinery installed in a hotel could be said to be used for the purpose of manufacture or production of any article or thing and consequently entitled to investment allowance under section 32A of the Income-tax Act, 1961?"
The said question has been decided against the assessee and in favour of the department, as noted above.
We, therefore, answer the question in negative i.e. in favour of the department and against the assessee.
(Prakash Krishna, J)
Dt.4.10.2007 (Bharati Sapru, J)
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