Indian Hotels Company Ltd. & Ors Vs. The Income Tax Officer, Mumbai &
Ors  Insc 410 (8
S.P.Bharucha, Ruma Pal
20 to 24 of 1989:
Article 139A of the Constitution, the appeals which were pending before the
Income Tax Appellate Tribunal were transferred to this Court and numbered as
Transferred Cases No.20-24 of 1989. Transferred Cases No.20-21 and 24 of 1989
are filed by assessee - the Indian Hotels Co. Ltd.
others, which pertain to the Assessment Years 1977-78, 1978-79 and 1976-77
respectively. Transferred Cases No.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.
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 mechanized 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 80J(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 80J(6) which provides for approval by the Central
Government. He, therefore, directed the ITO to allow deductions under section
80J in respect of the capital employed in the Flight Kitchen.
the contention of Dr. Gouri Shanker, 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
manufacture or production of food packages on a large organised and mechanized
basis for the use of various international airlines and, therefore, is entitled
to get the benefit of Section 80J 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 80J(1), it is required to obtain
approval as provided under Section 80J (6)(d) of the Act.
APPEAL No.1774 of 1992 In this appeal, M/s Hotel & Allied Traders Pvt.
assessee sought benefit of investment allowance under Section 32A of the Act
for the assessment year 1978-79 by contending that assessee-company was an
industrial undertaking engaged in manufacturing activity. That claim was
finally rejected by the Tribunal by holding that 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 32A of the Act. Further
the Tribunal relied upon the decision in C.I.T., Kerala v. Casino Pvt. Ltd.
[1973 (91) ITR 289] 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.
No. 324/1997 Leave granted.
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 Mahableshwar,
claimed the benefit of investment allowance under Section 32A 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.
v. Commissioner of Income Tax, [1995 (211) ITR 390].
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.
parts of the provisions that are required to be considered:
appreciating the contentions raised by the learned counsel for the parties, we
would first refer to the relevant provisions of the Act.
80: Deductions to be made in computing total income. Section 80J: Deduction in
respect of profits and gains from newly established industrial undertakings or
ships or hotel business in certain cases.
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 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 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) :
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.
: This section applies to any industrial undertaking which fulfils all the
following conditions, namely:
(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 Ist 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
: This section applies to the business of any hotel, where all the following
conditions are fulfilled, namely:
(b) . (c) . (d) The hotel is for the time being approved for the purposes of
this sub-section by the Central Government;" The relevant part of Section
32A of the Act which grants investment allowance reads thus: - 32A. (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:
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;
office appliances or road transport vehicles;
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.
The ship or aircraft or machinery or plant referred to in sub-section (1) shall
be the following, namely:
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;
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.
supplied) 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.
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 form of power;
the construction of ships; (iii) in manufacturing or processing of goods; and
(iv) in mining.
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 percent of such total income.
80J 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-section (4), (5) and (6) respectively are satisfied. The question would bewhether
the assessee has derived profits and gains from an industrial undertaking or
from the business of a hotel.
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.
- 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
Flight Kitchen is essentially ancillary unit. This would mean that operation of
flight kitchen was ancillary to its business of hotel. Hence, 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 80J(1) it must fulfil
the conditions laid down in sub-section (6).
next question would beWhether under the aforesaid provisions it can be held
that assessees hotels manufacture or produce foodstuffs? 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 manufacture of food packages on a large scale in an
organized and mechanized 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 80J(4)(iii) of the Act.
Civil appeals filed by M/s Hotel & Allied Products (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 32A of the Act. It has been contended that the appellant-assessee
satisfies the requirement of industrial Company as defined under section 2(7)(c)
of the Finance Act, 1979. He submitted that hotel which inter alia converts raw
materials into food stuffs 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 32A.
the Sections quoted above, i.e. Sections 80J(1) proviso, 80(J)(4), 80(J)(6),
and Section 32A, for getting benefit of deduction or investment allowance, the
requirement is assesseecompany 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.
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
context of the provisions which deal with grant of investment rebate or
deduction under section 80J 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 C.I.T. Orissa
and Others v. M/s N.C.
and Company and Others [1994 Supp (1) SCC 280], this Court considered the
provisions of section 32A and Section 80HH(2) of the Act and held that
machinery or plant for the purpose of business of construction, manufacture or
production of any article or thing would not cover machinery employed in
digging bore wells. The Court also considered the IXth Schedule (applicable at
the relevant time) which contained item No.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.
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 isfrom such raw materials eatable food stuff
support of his contention, learned Solicitor General referred to the decision
of this Court in M/s Sterling Foods, A Partnership Firm v. State of Karnataka
and Another [(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 and 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 [100 L.Ed. 917] 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
view, same would be the position with regard to the food stuff 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.
the Legislature has differentiated industrial undertaking and trading activity
of the assessee who deals in 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 32A or for grant of deduction under Section 80J. Under proviso (c) to
Section 32A deduction of investment allowance is not to be made if 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).
under Section 80J for a business of hotel and industrial undertaking separate
provisions are prescribed making Section applicable namely sub-sections (4) and
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.
support of his contentions, learned counsel Mr.
referred to the decision of the Gauhati High Court in Commissioner of
Income-Tax v. Hotel Belle Vue (P.) Ltd., [1997 (223) ITR 675]. 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
food- stuff 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 assessees
hotel was an industrial undertaking within the meaning of sub- clauses (ii) and
(iii) of sub-section (2) of Section 32A 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 brought about a commercially new article in the market;
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 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 32A of the Act provides for
business of manufacture or production of goods and not for manufacture or
processing of goods.
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 C.I.T., Kerala
v. Casino (Pvt.) Ltd., [1973 (91) ITR 289], 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 said Section.
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 the similar view in
Commissioner of Income- Tax v. Berrys Hotels Pvt. Ltd., [1994 (207) ITR 615]
and held that benefit of Section 2(7)(c) of 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], it held that investment
allowance under Section 32A is not available in respect of machinery installed
for the purpose of business of the assessee which is engaged in the business of
running a hotel as it is essentially a trading activity. Similarly the Calcutta
High Court in C.I.T. v. S.P. Jaiswal Estates (P) Ltd., [1992 (196) ITR 179],
held that an assessee who claims investment allowance under Section 32A 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 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.
result, Transferred Cases No.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 80J. Transferred
Cases No.20, 21 and 24 of 1989 filed by the assessee-Indian Hotels Company Ltd.
Appeal No.1774 of 1992 and Civil Appeal No.______of 2000 @ S.L.P.(c) No. 324 of
1997 filed by M/s Hotel & Allied Traders Pvt. Ltd. and Hotel Shashi Private
are also dismissed. There shall be no order as to costs.