TaxTMI 
TaxTMI 
1995 (11) TMI 9
X X X X Extracts X X X X
X X X X Extracts X X X X
....ances of the case, the learned members of the Income-tax Appellate Tribunal were justified in holding that hotel is to be treated as plant and accordingly depreciation should be allowed at the rate applicable to a plant, and in further holding that the hotel being run 24 hours a day is also eligible to extra shift allowance on the basis of its being a plant ? " 3. The facts of this case relevant for the purpose of decision on the above question of law are that the assessee is a private limited company and is running two hotels under the name and style of Lake Palace Hotels and Motels and Garden Hotels and Motels. During the year in dispute, the assessee claimed depreciation on the hotel buildings at 10 per cent. claiming it to be a plant, but the Income-tax Officer allowed depreciation at 5 per cent. In appeal before the Commissioner of Income-tax (Appeals), Jodhpur, the disallowance of the claim was upheld. In second appeal before the Income-tax Appellate Tribunal, an additional ground was also taken that the hotel building being a plant, the assessee is entitled to extra shift allowance on the hotel building. The Tribunal allowed the said additional ground to be raised before ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....wed ---. . . (ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed : Provided that where the actual cost of any machinery or plant does not exceed five thousand rupees, the actual cost thereof shall be allowed as a deduction in respect of the previous year in which such machinery or plant is first put to use by the assessee for the purposes of his business or profession : Provided further that no deduction shall be allowed under this clause in respect of any motor car manufactured outside India, where such motor car is acquired by the assessee after the 28th day of February, 1975, and is used otherwise than in a business of running it on hire for tourists : Explanation 1. --- Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work, in or in relation to, and by way of renovation or extension of, or improvement to, the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e ordinary sense, it includes whatever apparatus is used by a businessman for carrying on his business, not his stock-in-trade which he buys or makes for sale, but all goods and chattels, fixed or movable, live or dead, which he keeps for permanent employment in his business. 16. In Thomas v. British Thomson-Houston Co. Ltd. [1953] 1 All ER 29 [1953] 1 WLR 67 (QB), it was held that the restaurant run within the curtilage of a factory exclusively for executive and administrative employees must be regarded as solely used for some purpose other than the processes carried on in the factory and was not considered as part of the factory while in Luttman v. Imperial Chemical Industries Ltd. [1955] 3 All ER 481 ; [1955] 1 WLR 980, a canteen meant for and solely used by the works people employed in the factory was regarded for the purpose incidental to the process of manufacturing carried on in the factory. 17. In CIT v. R. G. Ispat Ltd. [1994] 210 ITR 1018 (Raj), it was observed by this court that the functional test is whether a structure is used for carrying on the business and hence is a tool of the trade or whether it is only the place of business in which the business is carried....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... When it is so used, these words and phrases must be construed as comprehending not only such things as they signify according to their nature and import, but also those things which the interpretation clause declares that they shall include. The word ' include ' is also susceptible of other constructions which it is unnecessary to go into." 20. The Karnataka High Court in Santosh Enterprises v. CIT [1993] 200 ITR 353, applying the functional test, observed that : ". . . screening wall and the ceiling of the auditorium having been constructed with requisite installations so as to have a proper control of the sound effect and for the efficient screening of the films may be treated as part of 'plant' but no other part of the building can be included in the said term. The furniture, fittings and fixtures consisting of wooden walls including false ceiling and wooden panelling of the walls and the chairs would come within the purview of 'plant' for development rebate." 21. The chairs outside the auditorium were held not falling within the definition of "plant". The building, structures or part thereof by means of which the business activities are carried on was c....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... merely the place within which they were carried on, it was not plant. This functional test applies whether or not the structure was attached to the soil ; e.g., a vessel and barge for a floating restaurant business, although chattels and used in connection with the business, were not part of the apparatus employed in the commercial activities of the business, but were merely the structure within which the business was carried on and therefore not plant (Benson v. Yard Arm Club Ltd. [1979] STC 266). 26. The Calcutta High Court in S. P. Jaiswal Estates Pvt. Ltd. v. CIT (No. 2) [1994] 209 ITR 307, observed that buildings, non-factory or factory, are generally treated as buildings even though the extensiveness of the meaning of the word "plant" can also embrace them as a species of plant, but where the Legislature treats a particular species differently from the rest under a genus, the scope for bringing that species under the genetic description for the purpose of allowing depreciation is not permissible. Law requires that buildings irrespective of their use and function shall qualify for depreciation as buildings and not as plant. The hotel building in its entirety was not consid....
X X X X Extracts X X X X
X X X X Extracts X X X X
....considered "plant". The concept of "plant" has overtones of moveability, even though an item of plant may become fixed to the building in which it is situated but the overtones for moveability means that the building in which the trade is carried on cannot be considered as "plant" (Jarrold v. John Good and Sons Ltd. [1963] 1 All ER 141 (CA)). 31. The functional test was satisfied in respect of a hotel keeper's expenditure on decor and murals (e. g., wall plaques, tapestries, pictures and sculptures), such items creating or enhancing an atmosphere conducive to the comfort and well-being of his customers. It was observed that where it was claimed that part of a taxpayer's premises was plant, the test to be applied was that something which became part of the premises, instead of merely embellishing them was not plant except in the rare case where the premises were themselves plant. In relation to a hotel, the creation of the right atmosphere or setting to make the interior attractive to customers was a means to an end in the carrying on of such a trade, and was not a trade in itself or a separate part of the trade. Accordingly, the amenities and decoration were not the sett....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... just outside the boiler-house but formed no part of it, a double-boarded partition, forming a malt and grain store, and staging, erected by placing joists on the stout bearers built into the walls, were not to be included in the valuation (Re Nutley and Finn, [1894] WN 64). " 35. Encyclopedia Britannica 1968 Edn. vol. II, on page 748, dealing with modern hotels, observed as under : "All first class new hotels that were built in the late 1950's and early 1960's made provision for private bathrooms, and the larger London ones, such as the Churchill, Britannica, Portman, London International, and Sky line, mostly had accommodation for dealing with conferences, exhibitions and banqueting, which provide the back-bone of their off season business. Similarly, in some of the chief provincial centres and at the more important holiday resorts, establishments were specially geared to catering to conference trade. One new luxury establishment, the 60 bed-room Capital Hotel in Knightsbridge, London, took the novel step of providing disposable razors and toothbrushes in all bathrooms as well as individual telephones in all rooms. Also in use in the United Kingdom, were servi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s. 39. In the Digest Continuation, volume 28, it was observed in paragraph 1678(i) that the taxpayer company, who traded as caterers, installed false ceilings in the restaurant premises from which it operated. These were a permanent installation and provided support for services used by the company for carrying on its trade. The company claimed capital allowance under the Finance Act, 1971, section 41 in respect of the expenditure incurred, contending that it constituted capital expenditure on the provision of plant. On appeal by the Crown from the decision of the General Commissioners it was held that in determining whether something was a plant the " functional test " had to be applied, namely, whether it performs function in the actual carrying out of the trade. In the present case, the primary function of the ceiling was to provide cladding for the services. They were not part of the means by which the company provided services to its customers. Accordingly, the expenditure did not qualify for the allowance and the appeal would be allowed, Hampton v. Fortes Autogrill Ltd [1980] STC 80 ; [1979] TR 377. 40. In paragraph 1678(ii), it was further mentioned, the taxpayers owne....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing. 42. Under section 32(2) it has been provided that " new machinery or plant " includes machinery or plant which before its installation by the assessee was used outside India by any other person. This contemplates that the "plant" is to be installed. Section 32(1A) refers to the building not owned by the assessee where the business or profession is carried on which has reference to a building. The provisions of section 32(1) have separately categorised the building, machinery, plant and furniture owned by the assessee used for the purposes of business. This clause also contemplated the use of the building for the purpose of the business. The use of building by a person who carried on the business of hotel or cinema encompasses the building of hotel or cinema. This is further clarified by section 32(1)(v) where it is mentioned that where the building is owned by an Indian company and used by such company as a hotel it will be liable to higher depreciation. This clause has also contemplated that a hotel building even if used as hotel will remain a building. 43. Entry 49 of List II of the Seventh Schedule to the Constitution provides taxes on lands and buildings and hotels a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng or not. A building of hotel may be fitted with air-conditioning or may have the attached bath-room and furnished with furniture and other facilities. Even the walls may be decorated and carpet may be there which increases the utility of the hotel but it will not take it out of the category of building. In Australia and England for the purposes of income-tax laws the building of hotel has been considered to be a building and not plant. 48. The various principles which emerge from the various decisions of the apex court and other courts can be summarised as under : (i) The functional test is a decisive test. (ii) An item which falls within the category of " building " cannot be considered to be "plant". Buildings with particular specification for atmospheric control like moisture temperature are not "plant". (iii) In order to find out as to whether a particular item is a plant or not, the meaning which is available in the popular sense, i.e., the people conversant with the subject-matter would attribute to it, has to be taken. (iv) The term "plant" would include any article or object, fixed or movable, live or dead, used by a businessman for ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ustry no production can be normally carried on without a building where the plant and machinery is installed but for that reason the building cannot be considered as plant when there is a separate entry for buildings for purpose of depreciation. Buildings may accommodate plant and machinery or living persons. It remains a building. The structure having roof and durability is considered as building. Every movable and immovable property has its categorisation. It is basically the hospitality which is provided in a hotel, may be by human service or by equipment, surroundings, atmosphere, etc., which is provided by decorated rooms beautiful furnishing. The recompense of the hotelier is for the care, pain, facility which is provided by him by way of service rendered and not by providing the room alone it could be considered as a tool of the trade. The hotel industry is a service oriented industry and the better the service the higher the charges. The element of service is the dominant object and not providing the room alone. The room in a city like Jaipur differs from hotel to hotel. The ordinary rooms may be available at Rs. 100 per day whereas the suite in a five star hotel may be as ....