1979 (9) TMI 43 - HC - Income Tax

Court allows conference hall as hotel building for tax relief

The court held in favor of the assessee that the conference hall qualifies as a building used as a hotel under Section 32(1)(v) of the Income-tax Act. The ... Computation Of Capital, Initial Depreciation, New Industrial Undertaking Issues Involved:1. Whether the conference hall qualifies as a building used as a hotel under Section 32(1)(v) of the Income-tax Act.2. Addition of half of the profits of the current year while computing the capital for relief under Section 84 for A.Y. 1967-68.3. Deduction of loans from the Industrial Finance Corporation of India while computing capital for relief under Section 80J.4. Calculation of capital employed under Rule 19 or Rule 19A for A.Y. 1967-68.5. Deduction of loans while computing capital under Rule 19 and Rule 19A for A.Y. 1967-68 and 1968-69.6. Addition of depreciation amount to profits for computing capital under Rule 19 for A.Y. 1967-68.7. Inclusion of composition fees in the cost of the swimming pool and building for depreciation purposes.8. Initial depreciation claim on Rs. 50,635.Detailed Analysis:1. Conference Hall as a Building Used as a Hotel:The Tribunal found that the conference hall was completed after March 31, 1967, and was part of the hotel run by the assessee. The court held that a conference hall, being a part of a modern hotel, falls within the purview of Section 32(1)(v). The term 'building' includes additions to an existing hotel, and the conference hall, being a new construction, qualifies for depreciation under this section.2. Addition of Half of the Profits:The Tribunal added half of the profits of the current year while computing the capital under Rule 19(5). However, the court held that the computation should be done under Rule 19A, not Rule 19, thus negating the addition of half of the profits.3. Deduction of Loans for Section 80J Relief:The Tribunal allowed the inclusion of borrowed capital under Rule 19A(3)(b). The court, referencing the Kota Box Manufacturing Company case, held that Rule 19A(3) excluding borrowed capital is ultra vires. Therefore, the borrowed capital should be included while computing the capital for Section 80J relief.4. Calculation of Capital Employed:The court held that the relevant amount of capital employed for A.Y. 1967-68 should be calculated under Rule 19A, not Rule 19. Section 80J(3) allows the carry forward of unabsorbed capital, which should be calculated in the manner prescribed under Rule 19A.5. Deduction of Loans:Since Rule 19A(3) is ultra vires, the loans taken by the assessee should not be deducted while computing the capital. The computation has to be done under Rule 19A for both A.Y. 1967-68 and 1968-69.6. Addition of Depreciation Amount:Given the computation of capital employed is to be done under Rule 19A, the question of adding depreciation amount under Rule 19 becomes irrelevant and is left unanswered.7. Inclusion of Composition Fees:The court held that the composition fees paid for contravention of Cantonment Board bye-laws cannot be included in the cost of construction for depreciation purposes. The payment was viewed as a penalty for illegal erections, not as a cost of construction.8. Initial Depreciation Claim:The court disagreed with the Tribunal's view that expenses for painting and waterproofing incurred after the building was already in use could not be added to the cost of construction. It held that such expenses are essential for completing the building and should be included in the cost for calculating depreciation under Section 32(1)(v).Conclusion:1. Affirmative, in favor of the assessee: The conference hall qualifies as a building used as a hotel under Section 32(1)(v).2. Against the assessee: Addition of half of the profits is not valid as the computation should be under Rule 19A.3. Affirmative, in favor of the assessee: Borrowed capital should be included while computing capital for Section 80J relief.4. Computation should be done under Rule 19A.5. Loans should not be deducted, computation under Rule 19A.6. Unanswered.7. Affirmative, in favor of the department: Composition fees cannot be included in the cost of construction.8. Rs. 26,635 should be added to the cost for initial depreciation under Section 32(1)(v).Parties shall bear their own costs.