TMI Blog1999 (2) TMI 102X X X X Extracts X X X X X X X X Extracts X X X X ..... see company as commission to travel agents for the purposes of working out the disallowance under section 37(3A) of the Income-tax Act, 1961.' 3. Similarly, in ITA No. 7415 (Delhi) 91 the following grounds have been raised:- "On the facts and in the circumstances of the case, the learned CIT(A) has erred in :- 1. directing the AO to allow assessee's claim of investment allowance on plant and machinery amounting to Rs. 12,72,821 by ignoring the material fact that the assessee is in hotel business which is not an industrial undertaking and as such is not eligible for such allowance; and 2. directing the AO to allow investment allowance on plant and machinery of Rs. 12,72,821, ignoring the order of the Hon'ble ITAT in the case of Siddharth Intercontinental for assessment year 1984-85 [ITA No. 4307 (Delhi) 87 dated 31-5-1991] where the Hon'ble ITAT has held that only plant and machinery installed in the kitchen of hotel is eligible for investment allowance." 4. With regard to ground No. (a) for assessment year 1985-86 and grounds Nos. 1 2 for assessment year 1986-87 relate to investment allowance, the facts are like this that for the assessment year 1985-86 AO rejected the clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The appellant's claim of investment allowance is, therefore, allowed." 6. This order for assessment year 1985-86 was followed by the CIT(A) in appeal for assessment year 1986-87 and similar claim of investment allowance was allowed to the assessee. 7. Aggrieved by these orders of first appellate authority revenue has come up in appeals and it was pleaded that assessee as such is not manufacturing any thing or article and in view of relevant provisions of law investment allowance cannot be allowed to the assessee. Attention was invited to proviso to section 32A(1) of the I.T. Act and it was pleaded that investment allowance has been excluded from the purview of hotel. It was submitted that hotel cannot be treated as industrial undertaking in view of provisions as contained in section 32A(1)(6)(iii). Similarly, Schedule 11, item 22 debars allowing of such claim. Reliance was placed on Commissioner of Income-tax vs S. P. Jaiswal Estates (P.) Ltd. [1992] 196 ITR 179 (Cal) at page 182,185. Similarly in Commissioner of Income-tax vs Casino (P.) Ltd. [1973] 91 ITR 289 (Ker) and sections 80HH, 80-I and 80-J also excludes hotel and in section 32A hotel is conpicus by its absence. Relia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equipment only and not the entire hotel whereas other High Courts have taken different views and reasoning given by those High Courts are found to be more reasonable, logical and rational. Thus the ratio of these decisions deserves to be applied in the case in hand. So far as beneficial legislation in concerned, it was held in the cases relied upon that literal interpretation should be avoided but in this regard also there are divergent opinions. It was thus pleaded for setting aside of the order of CIT(A) and restoration of the order of Assessing Officer. 10. We have heard rival submissions, purused the record, gone through the relevant provisions and also orders of authorities below. We have carefully considered the submissions of both sides in the light of relevant case law cited and facts brought to our notice. The assessee is a hotelier in this case. In respect of certain machinery installed which are in the nature of music, T. V. cinematograph, computers, generators, elevators, air conditioning and cold storage, coolers and refrigerators, kitchen equipment and installation, laundry equipment and installation, water systems and sanitary installation, electrical equipments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... industrial company', so as to get the benefit of the said allowance as prescribed. This benefit is given only to industrial companies which satisfy certain requirements. The four categories of companies which are included in the scope of the term are those mainly engaged in the business of generation or distribution of electricity or any other form of power of mainly engaged in the construction of ships or similarly engaged in mining or in the manufacture or processing of the goods. The context is apparent from this definition. 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. And if we look at the practical aspect, 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. Similarly, any c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 the Supreme Court held that no processing is involved in a cold storage plant. The processing is understood as an action which brings forth some change or alteration of the goods or material subject to the act of processing. Even as a result of long duration of storage vegetables, fruits and other articles which require preservation do not undergo any processing. 13. Under section 32A(1), investment allowance is granted with reference to the subject matter on which an assessee invests, such as ship or an aircraft or machinery or plant specified in sub-section (2). The assessee should own the subject (here the machinery) and the said machinery is to be wholly used for the purposes of the business carried on by him. As per sub-section (2), the machinery referred to in sub-section (1) shall be the one enumerated in sub-section (2). Clause (b) of this sub-section, inter alia, states that the machinery installed in an 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 is machinery that would be covered by sub-section (1). Section 32A nowhe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be that of manufacture or production. This is apparent from the contradiction maintained by other sections of the Act where a manufacturing or producing undertaking stands apart from the business of a hotel. 15. In Northern India Caterers (India) Ltd. vs Lt. Governor ofDelhi[1978] 42 STC 386, the Supreme Court had an occasion to consider the nature of the hotel business. After tracing the origin and historic development of hotel business, the Supreme Court pointed out that sale of eatables is incidental to the services rendered in a hotel and, therefore, it was not a case of sale of goods. Relying on the observations of the Hon'ble Supreme Court in the above referred case it can safely be held that the preparation of good articles in a hotel is also incidental to rendering of the service at the hotel, whether it is a restaurant or a lodging house. Therefore, it cannot be said that a hotel is an industrial undertaking. 16. The assessee's case is that it has installed machinery to manufacture or produce food articles. It has installed it in the hotel or probably in a space which is convenient for the purpose of producing or manufacturing the food articles. Section 32A(2)(b)(iii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expression "goods" will not include eatables prepared in a hotel. Further, the expression "manufacture" does not connote a trading activity and an activity carried on in a hotel can only be taken to be a trading activity and not a manufacturing activity. The term "manufacture or processing of goods" has not been defined by the Finance Act, 1968. In its ordinary meaning "manufacture" is a process which results in an alteration or change in the goods which are subjected to such manufacture. A commercially new article is produced. The production may be by manual force, mechanical force or even by nature's own process such as drying by heat of the sun as in a salt pan. The real test is to see whether a commodity which in a commercial sense is different from the raw materials has resulted due to the manufacture. "Processing" has in one sense a wider meaning than the term manufacture. But, in the context of the Finance Act, 1968, a hotel is mainly a trading concern. It would not be appropriate in the ordinary sense to refer to the production of food materials in a hotel as manufacture. The activity carried on in preparing articles of food from raw materials in a hotel would not const ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng is providing lodging or maintaining a building consisting of many rooms for overnight accommodation which has nothing to do with any manufacturing or producing article or thing. The industrial undertaking as a whole has to carry on its business of producing or manufacturing articles or things. There is no scope for separation of the integrated activity of the industrial undertaking and treating any part thereof as an activity of the nature referred to in section 32A. It is the end result of the purpose of the business which is to determine whether the undertaking is an industrial undertaking and as such qualifies for the benefit of section 32A. Therefore, 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, it is the ultimate nature of the business of hotel keeping that is determinative of the issue. Therefore, preparation of food in a hotel does not constitute manufacture or production of any article or thing within the meaning of section 32A of the Act and the assessee running the hotel is not entitled to investment allowance under the section." 19. Similarly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus these were held to be includible for disallowance under section 37(3A) of the I.T.Act. Assessee preferred appeal against such inclusion of commission paid for calculating disallowance under section 37(3A) and it was pleaded before the first appellate authority that payment of commission to travel agents was an accepted norm in this trade and as such did not qualify for disallowance as made by the Assessing Officer. So it was pleaded for deleting such amount for working out disallowance under section 37(3A) of the IT Act. Reliance was placed on the decision of ITAT, Chandigarh Bench in the case of Income-tax Officer vs Meera Co. [1986] 15 ITD 227 where on similar facts it was held that commission paid to its agents for procuring orders ensuring payments from the customers and for providing after sales services during warranty period could not be treated as sales promotion expenses. CIT(A) deleted such addition for working out disallowance under section 37(3A) and against such direction revenue is in appeal and it was pleaded for restoration of the order of Assessing Officer as it is for business promotion activity and Assessing Officer was justified in including the same for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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