Income Tax Appellate Tribunal - Mumbai
Narangs Hotels (P) Ltd. vs Income Tax Officer on 8 December, 1999
Equivalent citations: [2000]74ITD190(MUM)
ORDER
Pradeep Parikh, A.M.
1. This appeal by the assessee is directed against the order of the learned CIT dated 19th January, 1982, passed under s. 263 of the IT Act, 1961 (the Act), for the asst. yr. 1977-78.
2. In the first ground, the assessee has challenged the validity of the proceedings initiated under s. 263 and has accordingly disputed the order under s. 263. However, this ground is not pressed at the time of the hearing and hence the same is rejected as such.
3. In the second ground, the assessee is aggrieved against the rejection of its claim to be an "industrial company". For the year under consideration, assessee returned an income of Rs. 9,05,910 which was assessed at Rs. 14,61,600. Assessee's claim to be taxed at concessional rate of tax on the ground of its being an industrial company was accepted by the AO and hence was taxed accordingly. On perusal of assessment records, CIT observed that the assessee did not satisfy the conditions for being charged at the rate of tax applicable to industrial company, that is, at 60 per cent, and hence issued notice to the assessee to show cause as to why it should not be taxed at the rate applicable to non-industrial company, that is, at the rate of 65 per cent.
4. The contention of the assessee before the CIT(A) was that its income from flight kitchen constituted more than 51 per cent, and whereas its income from hotel business was not an income from industrial income. Its income from flight kitchen was, and therefore, it was rightly taxed at 60 per cent by the AO. The CIT referred to the definition of the term "industrial company" as defined in s. 2(6)(d) of the Finance Act, 1968, which, according to him, did not apply to the assessee's case. The CIT placed heavy reliance on the decision of the Kerala High Court in the case of CIT vs. Casino (P) Ltd. (1973) 91 ITR 289 (Ker) in which it was held that preparation of food articles from various raw materials like vegetables, flour, sweets, etc. did not constitute manufacturing or processing of goods. Accordingly, the CIT rejected assessee's claim that its income from flight kitchen was an income from manufacturing or processing of goods, and that it was, therefore, an industrial company. He directed the AO to charge tax at 65 per cent instead of 60 per cent.
5. Smt. Shobha Jagtiani, the learned counsel for the assessee, at the outset, apprised us with the background of the assessee's activities. The assessee has two units, one a four-star hotel known as Ambassador Hotel, and the other, a flight kitchen which caters pre-set meals to various airlines. The matter being quite old, agreements entered into with the airlines could not be made available for our perusal. The flight kitchen, as a separate unit at Santacruz Airport, Mumbai, was started in 1969 and before that the assessee used to cater to the airlines from its Ambassador Hotel in the city.
6. It was submitted that preparation of meals involved an assembly line of production. It also contained modern kitchen equipments including plant and machinery like electric ovens, dough mixing machine, ice-cube making machine, air-conditioning plants, cold storages, etc. It processed raw materials like flour, raw chicken, mutton, butter, oil, etc. On an average, 3,000 meals are processed every day in three shifts. Finished products were totally different from its raw materials. The processing activities also included making of bread with the help of electric oven and preparation of other confectionery items. The unit was required to hold factory licence, food manufacturing licence, bakery licence, etc. Higher rate of depreciation applicable to factory building including extra shift allowance was given to the assessee.
7. The learned counsel for the assessee then referred to a number of decisions of various High Courts and the Supreme Court, as also to the decision of various Benches of the Tribunal. Particular reference was drawn to Casino's case (supra), Fariyas Hotels (P) Ltd. vs. CIT (1995) 211 ITR 390 (Bom) and CIT vs. Berry's Hotels (P) Ltd. (1994) 207 ITR 615 (Bom). These cases, it was submitted, were distinguishable insofar as that the assessees in those cases were engaged only in hotel and/or restaurant activities. Flight kitchen had nothing to do with customers as in hotel and there was no element of trading like people coming and going to buy. There was no element of hospitality involved. Flight kitchen involved more high speed and mechanised system.
8. Smt. Jagtiani then referred to the only decision directly on the subject by the Calcutta High Court in the case of CIT vs. East India Hotels Ltd. (1995) 209 ITR 854 (Cal). The said decision, though in the context of s. 80J, was relevant as it held that exclusive catering unit of the assessee supplying to international airlines eatables of specifications in bulk for consumption of air passengers was the bench-mark of what was merchandise. Therefore, assessee's claim for relief under s. 80J was allowed.
9. Referring to the history in assessee's own case, it was submitted that from asst. yr. 1975-76 onwards, assessee had started maintaining separate books of account. In asst. yr. 1974-75, the CIT(A) did hold that the activities of the assessee as far as flight kitchen was concerned, have to be considered as manufacturing or processing activities. However, since separate books of account were not maintained, it could not be established that assessee's income from flight kitchen was 51 per cent or more. Hence assessee's claim for concessional rate of tax was rejected. In view of losses, assessee did not pursue the matter further. Thus, it was finally pleaded that in view of the above facts and circumstances of the case, flight kitchen be considered as an industrial undertaking and since more than 51 per cent of the income is derived from flight kitchen, concessional rate of tax be applied to the assessee.
10. The learned Departmental Representative, Shri Deepak Tralshawala, opening his arguments, first referred to the definition of "industrial company" as given in s. 2(8)(c) of the Finance Act, 1974, which is relevant for the assessment year under consideration. It reads as follows :
"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."
Explanation - For the purposes of this clause a company shall be deemed to be 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, if the income attributable to any one or more of the aforesaid activities included in its total income of the previous year (as computed before making any deduction under Chapter VI-A of the IT Act) is not less than fifty-one per cent of such total income."
11. Referring to the above definition, the first submission of the learned Departmental Representative was that several terms when used together, should be understood in the same sense and meaning. Thus, it was submitted that the above definition speaks of generation of electricity, construction of ships and mining which signify heavy investment. Hence, the activity of manufacturing and processing of goods also should be understood in the same sense as which entails heavy investment. Processing of food articles in a flight kitchen, in his opinion, did not entail heavy investment and hence it could not be considered to be an industrial activity.
12. Notwithstanding the above, the learned Departmental Representative submitted that the word "manufacture" originates from the word "make". Both the words mean the same thing, however, what was relevant was the context in which the words are used. If the context changes, the meaning also undergoes a change. As an illustration, it was submitted that one makes a painting but does not manufacture a painting. Similarly, one makes tea or food but one does not manufacture tea or food to eat. Supplementing these arguments, the learned Departmental Representative referred to Roget's Pocket Thesaurus. According to the said Thesaurus, the word 'make' assumed different hues as : constitute, render, produce, form, complete, compel, create, demonstrate, etc. Hence, the word had to be used as the context required and it should be understood in the context in which it is used. Similar reference was also made to the word 'produce', which, as per the Thesaurus, had different hues like perform, operate, do, make, form, construct, fabricate, frame, contrive, manufacture, build, raise, rear, etc. In short, the thrust of the learned Departmental Representative's argument was that the word has to be used in the most acceptable meaning and should also be understood the same way.
13. The learned Departmental Representative referred to note No. 4 in the Notes on Flight Kitchen submitted by the assessee wherein the assessee itself had referred to the food prepared by it as "cooked food". For this, he drew support from the observations in Casino's case (supra) on p. 463 of the report (Vol. 91). The High Court observed that it was well settled that in construing a term used in a statute its meaning as is understood according to what is ascribed to it in common parlance in preference to its scientific or technical meaning has normally to be accepted. He then referred to the decision of Madras High Court in CIT vs. Buhari Sons (P) Ltd. (1983) 144 ITR 12 (Mad). On p. 17 of the report, the Court held that manufacture of eatables cannot be taken to be manufacture of goods. The Court, while interpreting the term "industrial undertaking" as defined in s. 2(7)(d) of the Finance Act, 1966, held that hotel business carried on by the assessee cannot be considered to be a manufacturing activity. Reference was made to the World Book of Encyclopaedia wherein cooking was meant to be preparation of food for eating. The learned Departmental Representative also referred to several other decisions, viz., CIT vs. Sterling Foods (1995) 213 ITR 851 (Bom), CIT vs. N. C. Budharaja & Co. & Anr. (1993) 204 ITR 412 (SC), CIT vs. Shah Construction Co. (1983) 142 ITR 696 (Bom), CIT vs. Highway Construction Co. (P) Ltd. (1997) 223 ITR 323 (Gau), Badshah Construction Co. (P) Ltd. vs. CIT (1997) 223 ITR 512 (MP) and CIT vs. Aspinwall & Co. (P) Ltd. (1997) 227 ITR 916 (Ker). The sum and substance of the learned Departmental Representative's argument by relying on these decisions was that food can be made or prepared but not manufactured, whatever processing was done, it was merely an incidental activity and the major items in the menu substantially retained their identity. Referring to the decision in case of Shah Construction Co. (supra), it was submitted that the words "construction of ship" were used in contradistinction to "manufacturing of goods" and, therefore, manufacturing of building was out of the purview of industrial company. Thus, dissecting the language, Bombay High Court observed that buildings and bridges were not goods. Drawing analogy from these decisions, the Departmental Representative submitted that in the context of the present case, two things ought to be considered : (a) whether food is manufactured, and (b) whether food prepared are goods. In his opinion, reply to both these questions have to be in the negative.
14. Coming to the facts of the present case, the learned Departmental Representative drew our attention to the P&L a/c of the assessee-company. Specially drawing our attention to the expense details, it was submitted that not a single expenditure related to industrial activity. Referring to the details of plant and machinery, it was submitted that major items consisted of cooking range, cream separator, etc. which could hardly be considered as manufacturing plants. Further, plant for flight kitchen was hardly worth Rs. 3,53,053 (p. 30 of paper book Vol. 4). Again, referring to the separate P&L a/c of the flight kitchen unit, it was submitted that not a single expenditure indicated direct manufacturing expense. The contention that there was no manufacturing was also borne out from the menu, e.g., chicken remained chicken after cooking. Thus, according to the learned Departmental Representative there was no manufacturing activity at all.
15. Responding to some of the specific arguments of the learned counsel, the learned Departmental Representative submitted that the decision of the Calcutta High Court in the case of East India Hotels (supra) was with reference to deduction under s. 80J and hence not applicable to the present case. It was submitted that the facts in the case of Casino (supra) were not brought out correctly in the case of East India (supra). It was contended that in the case of Casino, nowhere it is borne out clearly that the assessee was running a hotel in the sense of hiring of rooms and that preparation of food was incidental to it. Therefore, the attempt of the learned counsel in distinguishing the case of Casino (supra), according to the learned Departmental Representative, was not well founded. Similar erroneous impression was carried by the Calcutta High Court in the case of S. P. Jaiswal Estates vs. CIT (1994) 209 ITR 298 (Cal). Referring to the assessee's reliance on the decision of Calcutta High Court in the case of East India Hotels (supra), the learned Departmental Representative submitted that in the case of East India Hotels (supra), reliance was placed by the High Court on its decision in the case of Union Carbide Ltd. vs. CIT (1987) 165 ITR 558 (Cal). However, the jurisdictional High Court had dissented from the decision in Union Carbide (supra) in the case of CIT vs. Sterling Foods (Goa) (1995) 213 ITR 851 (Bom). With regard to the Supreme Court decision in CIT vs. Tieclcon (P) Ltd. (1987) 168 ITR 744 (SC), the learned Departmental Representative submitted that it was not applicable to the present case as the same was dismissed by the Supreme Court on the ground that it involved a question of fact. As regards the decision of the Supreme Court in the case of Chillies Exports House Ltd. vs. CIT (1997) 225 ITR 814 (SC), the submission was that the said decision also cannot be applied because the same is remanded back to the High Court for de novo consideration. The learned counsel had relied on the decision of the Supreme Court in the case of G. L. Hotels Ltd. & Ors. (p. 477 of paper book No. 3C) wherein hotels were treated as factories. However, it was submitted by the learned Departmental Representative that the said decision was rendered in the context of the provisions of s. 2(12) of the Employees' State Insurance Act, 1948, and hence the ratio laid down there could not be applied here.
16. Thus, summing up his arguments as narrated above, the learned Departmental Representative vehemently stated that the activities of flight kitchen carried out by the assessee cannot be considered to be a manufacturing or processing activity and hence it was not an industrial undertaking eligible for concessional rate of tax.
17. Replying to the arguments of the learned Departmental Representative, Smt. Jagtiani, the learned counsel for the assessee, submitted that with the change in times, many home activities are converted into industrial activities, e.g., once upon a time shirts were made at home, which now is a huge garment industry. Similarly, food industry has become one of the largest industries as is evident from the varieties one finds at the fast food joints or in the super-markets. Therefore, the term "manufacturing and processing" is used as an umbrella phrase. To say that the case of Casino (supra) is only a case of restaurant is to say something different than what is said in the judgment. A line of distinction has to be drawn, it was contended, between hotel and restaurant on one side and a flight kitchen on the other. In a restaurant one rests and relaxes and hence service is of essence. It is not so in the case of a flight kitchen. The assessee, as a flight kitchen operator, is not concerned how it is served in the airline. Punctuality is of essence and hence and flight kitchen keeps on functioning for three shifts. Referring to the learned Departmental Representative's submission regarding absence of significant manufacturing charges, it was contended by Smt. Jagtiani that industries may be either capital intensive or labour intensive. Activities of flight kitchen are labour intensive and hence reference to the annual accounts to show the absence of manufacturing charges was not relevant. The assessee had 280 workers and the functions of the three shifts were normally divided as follows :
(i) Morning shift (a) Pre-cooking activities
(b) Washing Department
(ii) Afternoon shift (a) Bulk cooking of food
(b) Processing before packing
(c) Pre-setting
(iii) Night Shift (a) Heating of good before loading
(b) Loading and unloading
and that the assessee was also granted triple shift allowance by the Department. According to the learned counsel, the term "manufacturing and production" and to be understood in the widest possible sense. Finally, the basic distinction to be drawn between a hotel and restaurant on the one hand and flight kitchen on the other was the element of service in the former which was not there in the latter. Thus, it was vehemently urged by the learned counsel that the assessee was an industrial undertaking entitled to concessional rate of tax.
18. We have given our thoughtful consideration to the rival contentions and the material placed before us. Before proceeding to dispose of the ground, we may place on record two important proceedings which may have had a bearing on the issue before us. In an earlier year, the same issue had come up before the Tribunal in the assessee's own case. The Tribunal did not adjudicate upon it but remanded the matter back to the AO for fresh consideration. Against this order of the Tribunal, Department had preferred a reference before the Bombay High Court. The Hon'ble High Court upheld the remand by the Tribunal with a direction to the AO to consider, besides Tribunal decisions on the issue, also the decision of the Kerala High Court in the case of Anjali Hotels (P) Ltd. vs. CIT (1988) 170 ITR 419 (Ker). This order of the Bombay High Court in the assessee's case is CIT vs. Narang Hotels (P) Ltd. (1988) 41 Taxman 241 (Bom).
19. Secondly, in the case of Indian Hotels Co. Ltd. vs. IAC the following issue had come up before the Tribunal in ITA No. 6909/Bom/1987 for asst. yr. 1979-80) reported as (1989) 34 TTJ (Bom) 526).
"On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that the flight kitchen doing the business of preparing food for supply to airlines was an industrial undertaking eligible for investment allowance, ESA and relief under s. 80J."
20. The Tribunal observed that similar issued had arisen in respect of asst. yr. 1978-79 and the matter was pending before the Hon'ble Supreme Court in the assessee's India Hotels Co. Ltd. own case. Under the circumstances, the Tribunal set aside the orders of the IT authorities and restored the matter to the file of the IAC (Asst) with a direction to adjust the assessment in the light of the decision of the Hon'ble Supreme Court when pronounced.
21. In the course of the hearing of the present appeal, both the parties were requested to ascertain the outcome of the matter pending before the Hon'ble Supreme Court. It was reported by both the parties that the issue has not been decided by the Supreme Court. The matter which was under Writ Petition No. 808 of 1986, has been dismissed as follows by the Supreme Court by its order dated 8th October, 1987 :
"Writ petition is dismissed as not maintainable under Art. 32 of the Constitution."
22. Thus, so far as the jurisdictional High Court and the apex Court are concerned, the issue is res integra insofar as it concerns the activities carried out by a flight kitchen.
23. Now, we take up the decision of the Calcutta High Court in the case of CIT vs. East India Hotels Ltd. (supra) on which heavy reliance has been placed by the assessee. In that case, the High Court was concerned about the admissibility of claim under s. 80J on the flight catering unit at Palam Airport, New Delhi. The claim was in respect of "Oberoi Flight Catering Unit" of the assessee-company. Undisputedly, the activities of the said Oberoi Flight Catering Unit (hereinafter referred to as Oberoi Unit) are identical to the activities of the flight kitchen unit of the assessee before us. The question before the Calcutta High Court, therefore, was whether food, confectionery and other products manufactured by the assessee in the said unit and sold to the international airlines could be said to be articles manufactured or produced by the assessee. Same is the case before us.
24. While deciding the issue, the Calcutta High Court relied on its own decision in CIT vs. Union Carbide India Ltd. (supra). In that case, shrimps were processed as frozen shrimps. The operation of cleaning, peeling, packing and freezing, the Court observed, might be short of the requirement of the word "manufacture" but not of the word "production". According to the Calcutta High Court, the change of natural shrimps into frozen shrimps and fish products is the closest approximation of raw materials being transformed into cooked and edible food products. Therefore, the Court said, the case of the assessee could not be taken out of the import of the expression "production".
25. The above view of the Calcutta High Court, we agree with the learned Departmental Representative has been dissented from by the Bombay High Court in the case of CIT vs. Sterling Foods (Goa) (supra) in which the assessee was engaged in the activity of processing prawns. Moreover, the said decision of the Bombay High Court has been approved by the Supreme Court in the case of CIT vs. Relish Foods (1999) 103 Taxman 392 (SC).
26. It may be pertinent to note that in both the cases, the two High Courts were primarily considering the activity of processing of shrimps and prawns. Hence, in our opinion, in that context, it would be quite far-fetched to directly apply the decision in East India Hotels (supra).
27. However, it may be worth considering the following observations in the case of East India Hotels (supra) given at p. 864 :
"Even otherwise, where the food prepared by caterer for supply to parties, whosoever may order for the supply, can as well be said to be merchandise. In fact, the exclusive catering unit of the assessee supplies to international airlines eatables of specifications in bulk for consumption of air passengers. These facts are the bench-mark of what is merchandise. Therefore, we hold that the assessee's separate catering unit satisfied the requirement of s. 80J(4)(iii) of the Act and the assessee's claim for relief under s. 80J allowable".
28. Sec. 80J(4)(iii) referred to above reads as follows :
"(4) this section applies to any industrial undertaking which fulfils all the following conditions, namely :
(i) .......
(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 1st 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 undertaking."
29. As against these provisions, let us consider the definition of the term "industrial company" as per s. 2 of the Finance Act, 1997. It is as follows :
"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."
Explanation - For the purposes of this clause, a company shall be deemed to be 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, if the income attributable to any one or more of the aforesaid activities included in its total income of the previous year (as computed before making any deduction under Chapter VI-A of the IT Act) is not less than fifty-one per cent of such total income".
30. Comparing the above two definitions, the difference between the two is quite noticeable. Definition under s. 80J excludes 'processing' of goods, whereas definition in the Finance Act excludes 'production'. The only controversy before us is whether preparation of food and packing it in a tray and supplying the same in bulk to various airlines amounts to manufacture or processing of goods. The difference between the above two definitions and the exact connotation of the words "manufacture" and "processing" has been well brought out by the Bombay High Court in the case of CIT vs. London Star Diamond Co. (I) Ltd. (1995) 213 ITR 517 (Bom). At pp. 520-521 of the report, the High Court observed as follows :
"It is evident from the above definition that in order to be an industrial company, it should "manufacture or produce articles". The word "processing" is conspicuous by its absence in the above definition. As against this, the expression used in the definition of "industrial company", in cl. (c) of s. 2(8) of the Finance Act, 1975, is "engaged in the manufacture or processing of goods". The use of different expressions by the legislature in the definition of the same expression for different purposes is not accidental. It rather appears to be a deliberate act of the legislature intended to extend the benefit of the particular provisions also to companies which are engaged in the business of processing of goods which in the ordinary course would not tantamount to or be regarded as "manufacture". The word "processing" has not been defined in the IT Act or the relevant Finance Act. According to the New Webster's Dictionary of the English Language (Encyclopaedic Edition), "process" means "to treat or prepare by some particular process; to convert an agricultural commodity into marketable form by some special treatment ......." According to Black's Law Dictionary (Sixth Edition), process is a "mode, method or operation whereby a result is produced and means to prepare for market or to convert into marketable form". In common parlance, "processing" implies an action which brings forth some change or alternation in the nature and character of the goods of material which is subjected to the act of processing. Thus, "process" is a word which has various meanings, some wider than others. There is, however, an essential difference between "processing of goods" and "manufacture of goods". Though as processing, manufacturing also implies a change, every change does not result in manufacturing. Something more is necessary for that purpose. There must be transformation; a new and different article must emerge, having a distinctive name, character or use. Only then it can be said that there is "manufacture". As observed by Pathak J. in Dy. CST vs. Pio Food Packers (1980) 46 STC 63 (SC) (at p. 65) :
'Commonly, manufacture is the end-result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kinds of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognised as a new and distinct article that a manufacture can be said to take place'. From the above discussion, it is clear that the expressions 'manufacture' and 'processing' used in s. 2(8)(c) of the Finance Act, 1975, are not interchangeable. These two expressions have been used to bring within the definition of 'industrial company', companies which strictly speaking, do not 'manufacture' goods but are engaged merely in the 'processing' of goods. The expression "processing" has thus been used to widen the meaning of 'industrial company'. So construed, a company engaged in processing of goods to convert them into marketable form would also be an 'industrial company' within the meaning of s. 2(8)(c) of the Finance Act, 1975'."
31. In the instant case, what is that the assessee is supplying and what is the marketable form in which it is supplied. It is undisputed that the assessee supplies the food prepared by it. Like a hotel or restaurant, it does not cater to the individual taste of the consumer. But depending upon the contract with respective airlines, there is a pre-set menu as per which the food is prepared. Broadly speaking, all the menus put together will cover a wide range of variety like Indian, continental, Mexican and other cuisines. The important point to be noted is that the flight kitchen unlike a hotel, caters as per the contract with each airline and not as per individual taste of the ultimate consumer.
32. Next important factor to be taken note of is that after processing the food, it is packed in trays and supplied in bulk to the airlines. In other words, the flight kitchen may prepare several items like bakery items, vegetables, chicken, etc., but what it supplies is a fixed meal in trays and that, too, we repeat, to the airlines. On the other hand, in a hotel chicken may be prepared, but it will be served only if a customer wants it. There is no prior contract to prepare it in bulk, as is the case with airline customer, which the hotel customer is bound to take. Thus, in a hotel, chicken prepared by the hotel will be served as chicken, whereas in the case of flight kitchen, it does not serve but it supplies. Further, it does not supply chicken or vegetable, but it supplies meals packed in trays.
33. Next, in the case of a hotel, service of food is the essence. For the flight kitchen, delivery of packed meals on schedule to the respective airlines is the essence. In the case of a flight kitchen, the latter does not serve the food. It is quite common to hear that a particular airline serves good food, whereas the other does not. Thus, what is important for the flight kitchen is to supply the food processed by it in bulk in the form of a packed meal to the airline on schedule. All the activities undertaken by the flight kitchen integrate into what will amount to "processing", which, strictly speaking, will not amount to manufacture. Yet, as held in the case of London Star Diamond Co. (supra), flight kitchen engaged in the processing of food to convert it into marketable form would be an "industrial company" within the meaning of s. 2(8)(c) of the Finance Act, 1974, though, strictly speaking, it does not manufacture anything. The learned Departmental Representative had vehemently argued that in common parlance one does not speak of manufacturing a cup of tea. In view of the interpretation placed by the jurisdictional High Court on the definition of industrial company, the argument of the learned Departmental Representative loses its relevance.
34. Very heavy reliance has been placed by the Department on the decision of Kerala High Court in the case of Casino (P) Ltd. (supra). There also, the Kerala High Court was seized with the interpretation of the definition of the term "industrial company" as given in Finance Act, 1968. In the present case, of course, we are concerned with the definition as given in Finance Act, 1974. However, the definitions being similar, the interpretation given by Kerala High Court can be dissected for our purposes. The decision in Casino (supra) is clearly distinguishable. Kerala High Court gave more weightage to the term "manufacture" than to the term "processing". This is evident from the following observations of the Court at p. 299 of the report :
"We need not go into the scope of the term "processing" in the circumstances of the case, as the contention of the assessee is that there has been a material change or alternation in the goods resulting in the production of a commercially different article, and if we find that notwithstanding this to be the case, it does not amount to manufacture, naturally the question as to the scope of the term "processing" need not be gone into further.
35. The Bombay High Court, on the other hand, at p. 521 in London Star Diamond, observed as follows :
"Processing is much wider than "manufacture". It includes activities which may not tantamount to "manufacture". Cutting and polishing of rough diamonds is definitely a process which amounts to "processing of goods" to convert them into marketable form, if not 'manufacture' of goods".
36. The Bombay High Court, therefore, laid stress on conversion of goods into marketable form. Thus, in the case before us, after preparing various food items, assessee packed it in trays to make a complete meal and supplied it in that form to its customers - the airlines. This is not to suggest that merely assembling the various food items and packing them into individual trays amount to processing. We reiterate, it is the entire integrated activity of preparation of food, assembling it and packing it in trays render the food in a marketable form and hence "processing".
37. Next, the Kerala High Court observed (at p. 299) :
"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."
38. Earlier, we have already noted that the flight kitchen would not serve food to the customers. Hence, in this context also, the decision in Casino (supra) will not be helpful to the Revenue.
39. Further, at pp. 299-300, the High Court observed as follows :
"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 is 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 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 supplied, we do not think that it is possible to say that the assessee manufactures of processes goods in the hotel."
40. On the other hand, consider the case of flight kitchen. If there is a delay in delivery of meal/breakfast, and if the airline-customer were to enquire about it, in all likelihood the customer will be told that the meals are under process. At that point of time, the food items may be either on the assembly line or the trays may be in packing stage. Thus, one or two of the several processes may be going on at that point of time and hence the above reply by the flight kitchen.
41. Finally, the decision in Casino's case (supra) was rendered in the context of a hotel. That is why the Court, at p. 300, observed as follows :
"A Hotel, according to us, is one such as it is mainly intended by trading and not for production or manufacture. The various items of foodstuffs and beverages produced in a hotel are intended for the trading and the conversion of the raw materials is only a process in trading."
42. As against this, the intention of the flight kitchen is to produce meals and supply them to airlines. It is not an activity incidental to any other activity carried out by the assessee. In the words of Kerala High Court itself, any manufacturing concern must also normally engage in trading activity in the sense it must also sell. But, for that reason alone, it does not become a trading concern, as the main object of the concern is manufacture and the sale of goods manufactured is incidental. The main object of the flight kitchen is to produce meals/breakfasts and sale of foodstuffs made by it to the airlines is incidental to its main object. This is also borne out from the fact that one of the yardsticks applied to gauge the performance of a flight kitchen would be in terms of number of meals/breakfasts produced and supplied by it. Thus, even by the standards laid down by the Kerala High Court in the case of Casino (supra), the flight kitchen will satisfy the conditions for being classified as an industrial company.
43. For the reasons mentioned above, the decision of Bombay High Court in the case of Berry's Hotels (P) Ltd. (supra) cannot be applied to the case of a flight kitchen. Similarly, the case of Fariyas Hotels (P) Ltd. (supra) decided by the Bombay High Court is also on the same footing as Casino (supra) and Berry's Hotel (supra). In our opinion, the case of the assessee in the context of the definition of the term "industrial company" as given in the Finance Act, is on a much stronger footing than compared with the case of East India Hotels (supra) before the Calcutta High Court which held the Oberoi Unit to be an industrial undertaking in the context of the definition in s. 80J. In our view, the definition in s. 80J is narrower than in s. 2 of the Finance Act as observed by us earlier in para 26.
44. Thus, we hold the activity of the flight kitchen to be "processing of goods" and since its income therefrom is not less than 51 per cent, the assessee will fall within the definition of the terms "industrial company" as defined in s. 2 of the Finance Act, 1974, and will qualify for concessional rate of tax.
45. Next issue relates to the allowance of depreciation. Assessee claimed depreciation at 5 per cent on the flight kitchen building and also on the roads in the vicinity of the flight kitchen. This was allowed by the AO but CIT directed the AO to rework the computation after rectifying the mistake as regards the rate of depreciation as well as the written down value. The contention of the learned counsel for the assessee was that earlier always depreciation at 5 per cent has been allowed. However, this year, the CIT, without holding 'it to be erroneous on merits, merely considered it to be a case of arithmetical work. The contention of the learned Departmental Representative was that the CIT has merely given directions to follow the earlier appellate orders and has not discussed the issue on merits, hence the ground was out of place here. Nonetheless, it was submitted that the issue was largely consequential to the outcome of the first ground. At the most, if the building in which flight kitchen was housed is considered as a godown, then depreciation at 2.5 per cent was applicable.
46. We have considered the rival contentions. Firstly, we have already held the activity of the flight kitchen to be an industrial activity. Secondly, besides using high tension power, it also has a boiler, a high grade oven to make bakery items and other electrical gadgets. Thirdly, the Tribunal has in its order dated 17th January, 1984, in assessee's case for asst. yrs. 1971-72 to 1973-74 held that the flight kitchen premises are not used as hotel but it is a place where processing of goods takes place. For these reasons, we are inclined to hold that the flight kitchen building as well as roads in its vicinity are entitled to depreciation at 5 per cent. We direct accordingly.
47. Last ground in the appeal relates to the allowability of bad debts. Out of the total bad debts of Rs. 2,08,298 claimed by the assessee, AO disallowed the same to the extent of Rs. 1,17,448.60. Out of the bad debts allowed, according to the CIT, deduction of the debts was wrongly allowed in the year under consideration. These were : (a) Rs. 3,033 due from Shri R. J. Advani, and (b) Rs. 12,745 due from Shri J. C. Bahl. According to the CIT, these two debts seem to have become bad before the beginning of the accounting year. He, therefore, directed the AO to examine these two debts and allow the claim in the correct accounting year.
48. It was submitted by the learned counsel for the assessee that the disallowance of bad debts amounting to Rs. 1,17,448 has been deleted by the Tribunal vide its orders dated 10th January, 1997, in ITA No. 6482/Mum/1990. The facts and circumstances, it was contended, for writing off the total debts of Rs. 2,08,298 were the same and hence there was no reason to have the debts of Rs. 15,778 reexamined. The learned counsel, therefore, prayed for the allowance of the claim in the year under consideration. According to the learned Departmental Representative the assessee should not have been aggrieved on this score as the CIT had merely directed the AO to examine the year of allowability.
49. We have considered the rival contentions. It is not disputed that all the debts were in the nature of either bad debts, short recoveries or amounts disputed by the parties for wrong billings made by the assessee. Further, while deleting the disallowance of Rs. 1,17,448, Tribunal observed that details with regard to the amounts written off were furnished before the AO and that the CIT(A) had allowed the claim after scrutiny. In view of these findings by the Tribunal, we see no reason to have the debts amounting to Rs. 15,779 re-examined. Accordingly, it is directed that deduction of Rs. 15,778 be allowed in this year itself.
50. Before parting, we would like to place on record our appreciation for the erudite submissions made on behalf of both the sides and assisting the Bench in arriving at the decision arrived at by it.
51. In the result, the appeal of the assessee is partly allowed.