Hotel company qualifies as industrial under Finance Act, eligible for lower tax rate

SP. Jaiswal Estates Pvt. Limited Versus Commissioner Of Income-Tax

SP. Jaiswal Estates Pvt. Limited Versus Commissioner Of Income-Tax - [1994] 209 ITR 298, 121 CTR 472, 73 TAXMANN 320 Issues Involved:
1. Whether the assessee-company was an industrial company.
2. Determination of the applicable rate of income-tax for the assessee-company.

Issue-wise Detailed Analysis:

1. Whether the assessee-company was an industrial company:

The primary issue was whether the assessee-company, which runs a five-star hotel, qualifies as an 'industrial company' under section 2(7)(c) of the Finance Act, 1982. The definition of 'industrial company' includes companies mainly engaged in the business of generation or distribution of electricity, construction of ships, manufacture or processing of goods, or mining. The explanation further clarifies that a company is deemed to be mainly engaged in these activities if the income from such activities constitutes not less than fifty-one percent of its total income.

The assessee argued that it manufactures and processes various types of eatables, thus qualifying as an industrial company. The court referenced the unreported decision in CIT v. Sky Room Pvt. Ltd., where it was held that a company engaged in processing goods and selling them as foodstuffs in a restaurant qualifies as an industrial company. The court also considered the decision in CIT v. Casino (Pvt.) Ltd., where it was held that a hotel is primarily a trading concern and not engaged in manufacturing. However, this decision was distinguished based on the specific facts of the case.

The court noted that the assessee's income from restaurant activities exceeded fifty-one percent of its total income, satisfying the criteria under section 2(7)(c). Additionally, the Central Board of Direct Taxes' Circular No. 103 clarified that a company could be considered an industrial company even if less than fifty-one percent of its income is from manufacturing or processing, as long as it is mainly engaged in such activities.

The court concluded that the assessee-company's activities of preparing and selling food and beverages constituted processing of goods, thereby qualifying it as an industrial company under section 2(7)(c) of the Finance Act, 1982.

2. Determination of the applicable rate of income-tax for the assessee-company:

Given the conclusion that the assessee-company is an industrial company, the applicable rate of income-tax was the concessional rate of sixty percent, as opposed to the sixty-five percent rate applicable to non-industrial companies. The court referenced the earlier decision in CIT v. S. P. Jaiswal Estates (P.) Ltd., which dealt with the issue of investment allowance under section 32A of the Income-tax Act, 1961. However, the court clarified that the controversy in the present case was distinct, focusing on the rate of tax under the Finance Act, 1982.

The court reiterated the principles laid down in previous cases, including the broad interpretation of 'processing' and the criteria for determining an industrial company. The court held that the assessee-company, by engaging in the processing of food and beverages and deriving more than fifty-one percent of its income from such activities, qualified for the concessional tax rate.

Conclusion:

The court answered both reframed question No. 1 and question No. 2 in the negative and in favor of the assessee, concluding that the assessee-company is an industrial company within the meaning of section 2(7)(c) of the Finance Act, 1982, and is chargeable to tax at the concessional rate of sixty percent. There was no order as to costs.