1999 (2) TMI 102 - AT - Income Tax

Tribunal decision: Hotel investment disallowed, travel agent commission allowed as trading expense

Deputy Commissioner Of Income-Tax. Versus Asian Hotels Ltd.

The Tribunal ruled against the assessee regarding the investment allowance for the hotel business, disallowing the claim as hotels were not considered ... Investment Allowance, Machinery, Industrial Undertaking Issues Involved:1. Investment allowance on plant and machinery for a hotel business.2. Inclusion of commission paid to travel agents for calculating disallowance under section 37(3A) of the Income-tax Act, 1961.Detailed Analysis:1. Investment Allowance on Plant and Machinery for a Hotel Business:The primary issue was whether a hotel qualifies as an industrial undertaking eligible for investment allowance under section 32A of the Income-tax Act, 1961. The Assessing Officer (AO) disallowed the investment allowance claims for the assessment years 1985-86 and 1986-87, arguing that hotels do not constitute industrial undertakings and thus do not meet the criteria for investment allowance.The assessee argued that the Ministry of Tourism, Government of India, had declared the hotel business as an industry, and therefore, the benefits available to industrial undertakings should extend to hotels. The assessee relied on various High Court decisions, including the Supreme Court ruling in Commissioner of Income-tax vs Taj Mahal Hotel [1971] 82 ITR 44 (SC), which recognized hotel machinery as plant.The CIT(A) accepted the assessee's contention, allowing the investment allowance by following the ITAT's decision in the case of Oriental Express Co. (P) Ltd. vs Inspecting Assistant Commissioner [1985] 14 ITD 506, which held that hotels qualify as industrial undertakings for investment allowance purposes.The revenue appealed, arguing that hotels do not manufacture or produce any articles or things, and thus, are excluded from the purview of section 32A. They cited several cases, including Commissioner of Income-tax vs S. P. Jaiswal Estates (P.) Ltd. [1992] 196 ITR 179 (Cal) and Commissioner of Income-tax vs Casino (P.) Ltd. [1973] 91 ITR 289 (Ker), which supported their stance that hotels are not industrial undertakings.Upon review, the Tribunal concluded that the preparation of food in a hotel does not constitute manufacturing or processing of goods. The Tribunal emphasized that the term 'manufacture' implies a process resulting in a commercially new article, which does not apply to the activities carried out in a hotel. The Tribunal further noted that section 32A does not explicitly include hotels within its scope, and the business of running a hotel is essentially a trading activity, not a manufacturing one. Consequently, the Tribunal reversed the CIT(A)'s order and upheld the AO's decision to disallow the investment allowance.2. Inclusion of Commission Paid to Travel Agents for Calculating Disallowance Under Section 37(3A):The second issue involved the inclusion of Rs. 3,92,758 paid as commission to travel agents for calculating disallowance under section 37(3A) of the Income-tax Act, 1961. The AO included this commission as part of sales promotion expenses, making it subject to disallowance under section 37(3A).The assessee appealed, arguing that the commission paid to travel agents is a standard business practice in the hotel industry and should not be considered a sales promotion expense. The CIT(A) agreed with the assessee, referencing the ITAT's decision in Income-tax Officer vs Meera & Co. [1986] 15 ITD 227, which held that commission paid to agents for procuring orders and ensuring payments should not be treated as sales promotion expenses.The revenue appealed the CIT(A)'s decision, insisting that the commission paid was part of business promotion activities and should be included in the disallowance calculation.The Tribunal reviewed the arguments and relevant case law, including Commissioner of Income-tax vs Santosh Agencies [1994] 210 ITR 78 (Cal) and Commissioner of Income-tax vs Bata India Ltd. [1993] 201 ITR 884 (Cal). The Tribunal concluded that the commission paid to travel agents is a trading expense, not a business promotion expense. Therefore, the CIT(A)'s direction to exclude this commission from the disallowance calculation under section 37(3A) was justified and upheld.Conclusion:The Tribunal ruled in favor of the revenue on the first issue, disallowing the investment allowance for the hotel business, and in favor of the assessee on the second issue, excluding the commission paid to travel agents from the disallowance calculation under section 37(3A).