Hotel depreciation and capital employed rules: conference hall additions and completion costs may qualify, but composition fees do not.

A conference hall built as part of an existing hotel may qualify as a new building used as a hotel for initial depreciation where the statutory conditions are met, and finishing works such as painting and waterproofing that are necessary to complete the structure may be included in the construction cost for depreciation. Composition fees paid for unauthorised construction retain their penal character and are not part of the asset's cost. For relief under section 80J, capital employed must be computed under rule 19A, with borrowed capital included and rule 19 adjustments, including those tied to profits and depreciation, not governing that computation.

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Issues: (i) Whether a conference hall constructed as part of an existing hotel qualified as a new building used as a hotel for initial depreciation under section 32(1)(v); (ii) whether, for relief under section 80J, the capital employed had to be computed under rule 19A and whether borrowed capital, profits and depreciation adjustments were to be treated accordingly; (iii) whether composition fees paid for unauthorised construction formed part of the cost of the asset for depreciation; and (iv) whether painting and waterproofing expenses incurred for the conference hall were includible in its construction cost for depreciation.

Issue (i): Whether a conference hall constructed as part of an existing hotel qualified as a new building used as a hotel for initial depreciation under section 32(1)(v).

Analysis: The provision required a new building completed after 31 March 1967, owned by an Indian company, used as a hotel, and approved by the Central Government. The hall was found to be a new construction completed after the relevant date. A conference hall formed an integral part of a modern hotel and the expression "building" was wide enough to include such a structure. Since the hall was used as part of the hotel, the statutory conditions were satisfied.

Conclusion: The claim for initial depreciation was held allowable in favour of the assessee.

Issue (ii): Whether, for relief under section 80J, the capital employed had to be computed under rule 19A and whether borrowed capital, profits and depreciation adjustments were to be treated accordingly.

Analysis: Section 80J required the relevant capital employed to be computed in the manner prescribed, and that manner was laid down in rule 19A. The earlier computation under rule 19 had relevance to section 84, which had been repealed. The earlier rule could not govern the new relief under section 80J. Since rule 19A(3) excluding borrowed capital was treated as not operative, borrowed capital was to be included. The same method applied to carried-forward unabsorbed capital under section 80J(3), and the additions made under rule 19, including half of the current profits and depreciation-related adjustments, could not stand.

Conclusion: The computation had to be made under rule 19A, with borrowed capital included, and the related adjustments under rule 19 were not sustainable; this issue was substantially decided in favour of the assessee.

Issue (iii): Whether composition fees paid for unauthorised construction formed part of the cost of the asset for depreciation.

Analysis: The amount was paid because the assessee had breached the cantonment bye-laws and the payment was in the nature of a penalty or composition for an offence. Such a payment did not alter the penal character of the underlying breach and could not be treated as part of the cost of constructing the building or swimming pool for depreciation purposes.

Conclusion: The composition fee was not includible in the cost of the asset and this issue was decided against the assessee.

Issue (iv): Whether painting and waterproofing expenses incurred for the conference hall were includible in its construction cost for depreciation.

Analysis: A building is not complete until finishing works that make it usable and presentable are done. Painting and waterproofing were integral to completing the conference hall and enhancing its utility. The fact that the hall had already been used did not prevent those expenses from being added to the total cost of erection for depreciation.

Conclusion: The expenses were includible in the construction cost and this issue was decided in favour of the assessee.

Final Conclusion: The reference was answered on a mixed basis, with the principal depreciation claim on the hotel conference hall and the inclusion of completion expenses being allowed, while the composition-fee question was rejected and the section 80J computation was governed by rule 19A.

Ratio Decidendi: A new structural addition forming an integral part of a hotel can qualify for hotel depreciation under section 32(1)(v), and expenses essential to complete the building may form part of its cost, but amounts paid as penalty or composition for unlawful construction are not part of that cost; for section 80J, the capital employed must be computed under the prescribed rule applicable to that provision.

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