Income Tax Appellate Tribunal - Hyderabad
Hotel Emerald (P.) Ltd. vs Income-Tax Officer on 15 November, 1985
Equivalent citations: [1986]19ITD298(HYD)
ORDER
K.S. Viswanathan, Accountant Member
1. These are cross-appeals by the assessee and the department against certain findings of the Commissioner (Appeals) in respect of the assessment year 1981-82. The assessee is a private limited company carrying on the business of a hotel.
2 and 3. [These paras are not reproduced here as they involved minor issues.]
4. We now take up the department's appeal. The assessee had in the income-tax returns claimed depreciation on buildings at 25 per cent. The written down value of the buildings amounted to Rs. 7,17,898. During the course of the hearing, the assessee claimed that the depreciation should be at the rate of 10 per cent plus another 10 per cent for triple shift allowance as well as 5 per cent by way of additional allowance. These claims were based on the submission that the building in which the hotel was run is to be treated as 'plant' for the purpose of Section 32 of the Income-tax Act, 1961 ('the Act'). The ITO did not accept the assessee's contention and he granted depreciation at 2.5 per cent only.
5. The Commissioner (Appeals), however, accepted the assessee's contention. He based his findings mainly on a ruling given by the Madras Bench of the Tribunal in the case of Hotel Srilekha (P.) Ltd. v. Third ITO [1983] 5 ITD 541.
6. The department is in appeal before us. Shri Padmanabhan submitted that under Section 32 building is treated separately as a subject of depreciation apart from plant and machinery. Therefore, if the statute prescribes a rate of depreciation for buildings, that should be applied. The question here, according to Shri Padmanabhan, is not whether a building could be treated as plant. The question here is whether the asset in question could be treated as a building. He submitted that the Legislature had treated hotel building only as 'building' and not as 'plant' and this is evident from the provisions of Section 32(1)(v). In this provision, a special depreciation is being granted to hotels in respect of their investment in buildings. This would show that Legislature considered the building of a hotel for the purpose of depreciation only as a building. He then referred to the Explanation to Section 80J(6) of the Act. This Explanation refers to 'any building which had been used as a hotel previously'. Here also, the building of a hotel is not treated as a plant. He also referred to the depreciation rules where extra depreciation is granted for a hotel building. All these would show that it was never the intention of the Legislature to treat the building of a hotel as a plant.
7. Shri Ratnakar submitted that while it may be true that all buildings may not be plant, under certain circumstances a building can be treated as a plant. He then referred to the decision of the Supreme Court in the case of CIT v. Taj Mahal Hotel [1971] 82 ITR 44. In that decision, the Supreme Court has treated the sanitary fittings in a hotel as a plant. He submitted that a hotel cannot function without sanitary fittings in a hotel as a plant. He submitted that a hotel cannot function without sanitary fittings and it is part and parcel of the hotel building itself. If the sanitary fittings which are part of the building it can be treated as a plant, he submitted, the entire hotel building can also be treated as a plant. He then submitted that the building has been designed and built only for running a hotel and it cannot be put to any other use without any drastic change in the design. He then gave instances of cases where buildings are treated as plant. Shri Ratnakar then adverted to the usual test to distinguish between a 'plant' and a 'building'. The test to consider whether an article is a plant is to find out whether it is the tool of the trade or the setting in which the business is conducted. If it was the tool of the trade, then it is a plant. If it is the setting in which the business is conducted, it will be a building. He submitted that in the case of a hotel, the building itself is a tool. It is impossible to conduct a hotel business without the building. So, without the building, there could be no business. Therefore, the building is a tool and so qualifies as a plant. He then submitted that there are enough authorities to show that a swimming pool, a dry dock and a silo are treated as 'plant'.
8. We have considered the submissions. The assessee is running a boarding and lodging hotel in the city. Part of the building consists of rooms, halls, etc., which are let out to customers. These rooms are well furnished and air-conditioned. The question is whether this part of the building consisting of the rooms which are to be let out should be considered as a building or as a plant for the purposes of Section 32. At the time of hearing, Shri Ratnakar had made it clear that his claim is only in respect of the rooms and halls. The rooms where the office is situated or the rooms where a restaurant is run are not claimed to be part of the plant. Thus, it would be seen that even on the assessee's own admission a part of the structure is not claimed to be a plant. The extent of this structure will have to be ascertained by the officer if in case the assessee's claim is to be admitted. But, since our finding is against the assessee, it is not necessary to go into this issue at this stage.
9. The provisions of Section 32 read as follows :
In respect of depreciation on buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of Section 34, be allowed-
It will be seen that for the purpose of Section 32, the depreciable assets are divided into four categories. They are building, machinery, plant and furniture. Now, the assessee's case is that the building in which the hotel is housed should be treated as plant. The department's contention as put forward by Shri Padmanabhan is that since there is a separate classification of building in Section 32, the asset has to be treated only as a building for the purpose of this section.
10. We quite agree that for certain purposes a building could be considered as a plant but a building can be considered as a plant for certain sections of the Act and it need not hold good for the other sections of the Act. This has been made clear by the Bombay High Court in their decision in the case of CIT v. Bank of India Ltd. [1979] 118 ITR 809. At page 818, their Lordships were considering an argument that wiring and fittings were considered as plant and machinery for the purpose of depreciation and, therefore, they should be considered as plant and machinery for the purpose of development rebate also. The High Court pointed out that two answers can be given to the contention raised by the assessee. In the first place, if the entire item in the Depreciation Rate Schedule is properly considered, it would appear that wiring and fittings of electric light and fan installations are not dealt with as specific items for which a separate rate of depreciation is provided but that these are considered as adjuncts to switchgears and instruments. Secondly, the argument that inasmuch as the ITO has allowed them depreciation at 10 per cent considering them as plant, it must be held to be a plant for the purpose of development rebate, does not reflect, according to their Lordships, a correct approach. Rejecting this contention, the High Court stated that they had to consider in the first place whether such electric installations can be regarded as plant and machinery and whether they can be considered to be plant and machinery used by the assessee in its business. The various cases referred would show that what is plant and machinery on which development rebate is available for one assessee need not be plant and machinery for another.
11. From the above, it will be clear that merely because, for certain purposes, say capital allowance as in the English cases referred to by Shri Ratnakar, the building was treated as plant, it does not follow that a building has to be treated as a plant even for Section 32. A hotel building, as we see, can be covered under Section 32 both by the expression 'building' as well as the expression 'plant'. Since the expression 'plant' would include buildings of certain types, that expression is a wider expression than the expression 'building'. In other words, the expression 'building' is a special provision covering structures which would be treated as 'building', whereas the expression 'plant' is a general expression which would also include certain types of building. When a building is covered by the expression 'plant' its identity as a building is lost.
12. The question then is whether the general provision, i.e., 'plant' or the special provision, i.e., 'building' will be applicable in these cases ? There is no doubt at all that the maxim Generalia specialibus non derogant will be applicable in such cases. That being so, when there are special provisions for buildings giving certain different rates of depreciation, that alone should be considered in a building even if such buildings for certain other purposes could be considered as a plant. This is supported by the Bombay High Court decision in the passage referred to in paragraph 10 of this order.
13. It would appear to us from a reading of the provisions that the Legislature, for the purpose of Section 32, considered hotel buildings only as buildings. There is a special provision, as pointed out by Shri Padmanabhan, in Section 32(i)(v) which gives extra depreciation in respect of a new building, the erection of which was completed after 31-5-1967 where the building is owned by an Indian company and used by such company as a hotel and such hotel is for the first time being approved by the Central Government. If the Legislature had conceived hotel buildings at least under certain circumstances as plant, there would have been no description of such an asset only as a building in Section 32. In our opinion, this provision clearly decides the issue in favour of the department. Shri Ratnakar's submission that Section 32(1)(v) gives an additional incentive over and above what is available to the hotel building as a plant is not acceptable at all. In Section 32, there is a uniformity regarding the classification of depreciable assets. A particular asset cannot be a plant under Section 32(1 )(ii) and at the same time be treated as a building under Section 32(1 )(v). At least, within that section there should be uniformity in the classification of the asset.
14. Let us now consider the alternative ground, whether a building in which a hotel is housed can be considered as a 'plant' under any circumstances. The main thrust of Shri Ratnakar's submissions is based on the Supreme Court's decision in the case of Taj Mahal Hotel (supra). He had submitted that the sanitary fittings and pipelines are part of a building and if such fittings could be treated as 'plant' the building should also be treated as 'plant'. As a matter of fact, we find that the Madras Bench of the Tribunal in the case of Hotel Srilekha (P.) Ltd. (supra) had also based their finding on certain observations of the Supreme Court in this case. At paragraph 8, they have extracted this quotation :
It cannot be denied that the business of a hotelier is carried on by adapting a building or premises in a suitable way to be used as a residential hotel where visitors come and stay and where there is arrangement for meals and other amenities are provided for their comfort and convenience. ...(p. 48) Now, a careful reading of the decision would show that the Supreme Court did not consider the sanitary fittings as a part of the building itself as Shri Ratnakar would want us to assume. In the case before the Supreme Court, the issue was whether such fittings by themselves could be 'plant'. It would appear that the Supreme Court had considered the fittings as something severable from the building itself and it will be clear from the following passage. The following passage occurs immediately after the passage quoted by the Madras Bench given above.
... To have sanitary fittings, etc., in a bathroom is one of the essential amenities or conveniences which are normally provided in any good hotel, in the present times. If the partitions in Jarrold's case [1963] 1 WLR 214, 223 (CA) could be treated as having been used for the purpose of the business of the trader, it is incomprehensible how sanitary fittings can be said to have no connection with the business of the hotelier. He can reasonably expect to get more custom and earn larger profit by charging higher rates for the use of rooms if the bathrooms have sanitary fittings and similar amenities. ... (p. 48) It will be seen from the above that the Supreme Court visualised bathrooms without sanitary fittings and that is why they have said that having sanitary fittings would enable a hotelier to get larger profit by charging higher rates. Therefore, the Supreme Court was not considering the sanitary fittings as part and parcel of a hotel premises.
15. There is, however, direct evidence in that decision itself that the Supreme Court considered a hotel as a setting in which the hotel business is carried on. That is why they had to repeat that the sanitary fittings have not to be treated as a setting but as a plant. They have stated :
It is, however, unnecessary to dwell more on the dictionary meaning because, looking to the provisions of the Act, we are satisfied that the assets in question were required by the nature of the hotel business which the assessee was carrying on. They were not merely a part of the setting in which hotel business was being carried on.
[Emphasis supplied] (p. 49) To repeat, the Supreme Court says that the sanitary fittings are not, repeat not, merely a part of the setting in which the hotel business was being carried on. What is the setting the Supreme Court is referring to is obvious. The setting the Supreme Court is referring to is the building in which the hotel business is being conducted. Since the hotel building in the Supreme Court's own observations is the setting in which the hotel business is conducted, it naturally follows that it cannot be considered as a plant.
16. Shri Ratnakar had submitted that in the case of a hotel, no business can be carried on without a hotel building. Therefore, the building itself is the tool with which the businesses carried on. Therefore, it is a plant. Now, a similar submission was made before the Bombay High Court in the case of CIT v. Sandvik Asia Ltd. [1983] 144 ITR 585. The report records the submission of the assessee thus :
. . . According to Mr. Dastur, roads within the factory premises must be treated as 'plant' because a road was essential for the operation of the whole factory, as, without a road, goods could not be taken from one part of the factory to another. . . . (p. 588) The Bombay High Court did not accept this line of reasoning. The submission of Shri Ratnakar is also similar. To put it differently, what is submitted is that if an asset is found to be essential for a business", that asset must be treated as a plant. We are unable to accept such a widely worded submission. Merely because an asset is indispensable for a business, it cannot be a plant. We can conceive of several assets which are necessary for carrying on a business but which still cannot be a plant. For example, in a dairy, the cows and buffaloes are essential and there could be no dairy business at all without them. Can it be said on that ground that cows are plant ?
17. The correct test is not indispensability, but it is the functional test, i.e., whether a particular asset is an apparatus or whether it is the setting in which the business is carried on. A hotel building is the setting in which the business is carried on. It may be that the hotel building divided into rooms is given on licence to the customers. The assessee gets his profit by charging for the use of the rooms. If the assessee were to let out the rooms on long-term basis, then it would not be business it would be income from house property. It is only because the rooms are not let out on long-term basis but for shorter periods, that the letting out of the rooms is being considered as business. That does not mean that the building itself becomes an apparatus.
18. We may consider some of the case laws relied on. One decision which was considered to be nearest to facts, referred to by Shri Ratnalcar, is the case of Cooke v. Beach Station Caravans Ltd. [1974] 49 TC 514 (Ch. D). There, the question was capital allowance under the UK Act and as per their statute, such capital allowance was not available for buildings. It was available only for plant. Hence, the attempt of the assessee to bring in the cost of construction of a swimming pool as an expenditure for acquiring a plant The case of 'IRC v. Barclay, Curie & Co. Ltd. [1970] 76 ITR 62 (HL), was also a case for capital allowance which was not available for buildings. In this case, the assessee had constructed a dry dock. In Schofield v. R. & H. Hall Ltd. [1974] 49 TC 538 (CA), silos were considered to be a plant. But, all these cases were in respect of the claim for capital allowance in a statutory provision which did not contain the expression 'building'. To import the ratio of these cases into Section 32 which contains a specific provision for 'buildings' will amount to totally ignoring the differences in the statutory provisions. We are not prepared to do that.
19. Shri Ratnakar had referred to the decision of the Allahabad High Court in the Case of CIT v. Kanodia Cold Storage [1975] 100 ITR 155, wherein a building with insulated walls used as a freezing chamber was found to be part of a plant. This case had been considered by the Delhi High Court in R.C. Chemical Industries v. CIT [1982] 134 ITR 330, wherein the decision has been explained. The Delhi High Court has pointed out that the finding that a particular building was part of the air-conditioning plant was based on the inspection and observations of the Members of the Tribunal that it was impossible for the cold storage plant to function without the freezing chamber with special cork insulated walls. That is, in other words, air-conditioning plant which is accepted to be a 'plant', cannot function without a part of it which is in the shape of a building. It is on those facts that a structure in the shape of a building, which is a part of an air-conditioning plant, was considered as 'plant'.
20. The decision in the case of CIT v. Yamuna Cold Storage [1981] 129 ITR 728 (Punj. & Har.) cited by Shri Ratnakar, is not really relevant, because there they have decided that Thermocule insulation is a plant. They were not considering a structure like a building as plant. As a matter of fact, that very case, a cold storage building which has got a better right for being considered as a plant was only considered as a factory building.
21. Shri Ratnakar had also submitted that we will have to follow the ratio of the Madras Tribunal's decision in the case cited above. In another case, Progressive Hotels (P.) Ltd. [IT Appeal No. 846 (Hyd.) of 1984], the very same matter had come up before us earlier. We have observed :
Though, ordinarily, we are bound by precedent, we are of the opinion that the precedent is not binding when it ignores a patent provision of law and therefore we are not following the Madras decision and having regard to Section 32(1 )(v) we have to hold that there is no scope to hold that a hotel building should be considered as a plant for granting depreciation.
22. For the above reasons, we allow the departmental appeal and restore the order of the ITO on this point.
23. In the result, the assessee's appeal is dismissed and the department's appeal allowed.