1998 (6) TMI 29 - HC - Income Tax

Hotels Not Considered 'Plant' for Higher Depreciation

The court held that buildings used as hotels do not qualify as 'plant' for claiming higher depreciation rates under Section 32 of the Income-tax Act, ... Depreciation, Hotel Building Issues Involved:1. Whether a building used as a hotel qualifies as 'plant' for claiming a higher rate of depreciation under Section 32 of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Classification of Building as 'Plant':The primary issue is whether a building used as a hotel can be classified as 'plant' for the purpose of claiming higher depreciation under Section 32 of the Income-tax Act, 1961. The Tribunal had applied the functional test and concluded that a building used as a hotel, due to its special design and amenities, constitutes 'plant' and therefore qualifies for a higher rate of depreciation. This view aligns with decisions from various High Courts, including Patna, Calcutta, Andhra Pradesh, Karnataka, Allahabad, and Kerala, which have interpreted 'plant' in Section 32 broadly, encompassing buildings used as hotels, cinema theatres, or nursing homes.2. Legislative Intent and Statutory Interpretation:The court disagreed with the Tribunal and other High Courts, emphasizing the clear legislative distinction between buildings and plant in Section 32. The statutory provisions classify depreciable assets into buildings, furniture and fittings, machinery and plant, and ships, with specific depreciation rates for each category. The court noted that the Legislature had explicitly provided higher depreciation rates for factory buildings but not for hotel buildings before the assessment year 1988-89, indicating no legislative intent to treat hotel buildings as plant.3. Supreme Court Precedents:The court referred to the Supreme Court's decision in CIT v. Taj Mahal Hotel [1971] 82 ITR 44, where sanitary and pipeline fittings in a hotel were considered 'plant' due to their essential role in the hotel business. However, the Supreme Court did not extend this classification to the hotel building itself, reinforcing the distinction between buildings and plant. Similarly, in Scientific Engineering House P. Ltd. v. CIT [1986] 157 ITR 86, the Supreme Court held that documentation services could be classified as 'plant' due to their role in the business, but this did not imply that buildings could be considered plant.4. Clarificatory Nature of Amendments:The court rejected the argument that the 1988 amendment to Appendix I of the Income-tax Rules, which introduced a higher depreciation rate for hotel buildings, was clarificatory and should apply retrospectively. The court held that changes in depreciation rates are not clarificatory amendments and cannot be applied retrospectively. The classification of assets and corresponding depreciation rates in the relevant assessment years must be adhered to.Conclusion:The court concluded that buildings used as hotels do not qualify as 'plant' for the purpose of claiming higher depreciation rates under Section 32 of the Income-tax Act, 1961. The statutory distinction between buildings and plant must be maintained, and any higher depreciation rates for hotel buildings apply only from the assessment year 1988-89 onwards. The question was answered in favor of the Revenue, with costs awarded to the Revenue.