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PETITIONER:

THE INDIAN HOTELS COMPANY LTD. & OTHERS

Vs.

RESPONDENT:

THE INCOME TAX OFFICER, MUMBAI & OTHERS

DATE OF JUDGMENT: 08/08/2000

BENCH:

M.B.Shah, S.P.Bharucha, Ruma Pal

JUDGMENT:

Shah, J.

T.C.Nos. 20 to 24 of 1989:

Under 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.

and 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.

In the 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.

It is 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

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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.

CIVIL APPEAL No.1774 of 1992

In this appeal, M/s Hotel & Allied Traders Pvt.

Ltd.-the 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.

S.L.P.(C) No. 324/1997

Leave granted.

In 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.

Ltd. v. Commissioner of Income Tax, [1995 (211) ITR 390].

For 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.

Relevant parts of the provisions that are required to

be considered:

For appreciating the contentions raised by the learned

counsel for the parties, we would first refer to the

relevant provisions of the Act.

Section 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.

80J.(1) 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

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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) :

Provided that in relation to the profits and gains

derived by an assessee, being a company, from an

industrial undertaking which begins to manufacture or

produce articles or to operate its cold storage plant or

plants after the 31st day of March, 1976, or from a ship

which is first brought into use after that date, or from the

business of a hotel which starts functioning after that

date, the provisions of this sub-section shall have effect

as if for the words six per cent, the words seven and a

half per cent had been substituted.

80J(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 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 undertaking;

80J(6) : This section applies to the business of any

hotel, where all the following conditions are fulfilled,

namely:

(a) . (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:

Provided 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

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accommodation in the nature of a guest house;

(b) any office appliances or road transport vehicles;

(c) 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.

(2) The ship or aircraft or machinery or plant

referred to in sub-section (1) shall be the following,

namely:

(a) a 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;

(b) 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.

(Emphasis 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.

The 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;

(ii) in the construction of ships; (iii) in

manufacturing or processing of goods; and (iv) in mining.

The 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.

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Section 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.

Industrial 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.

The assessee - 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).

The 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.

In the 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.

From 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

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is no question of manufacture or production. The raw

material is at the most processed so as to make it eatable.

The 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 the Sections.

In the 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.

Budharaja 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.

The 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 is prepared.

In 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,

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have gone through a processing stage. But neither has been

manufactured in the normal sense of the word.

In our 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.

Further, 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).

Similarly, under Section 80J for a business of hotel and

industrial undertaking separate provisions are prescribed

making Section applicable namely sub-sections (4) and (6).

Conditions 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.

In support of his contentions, learned counsel Mr.

Choudhary 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;

when 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.

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As 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.

Foodstuffs 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.

In the 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. are dismissed.

Civil 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 Ltd.

respectively are also dismissed. There shall be no order as

to costs.