1994 (2) TMI 37 - HC - Income Tax

Income Tax Act, Manufacture Or Production, New Industrial Undertaking, Special Deduction, Withdrawal Of Development Rebate

Summary

Issues Involved:
1. Admissibility of extra depreciation on plant and machinery used in a hotel.
2. Eligibility for benefit under section 80J for a flight catering unit.

Detailed Analysis:

1. Admissibility of Extra Depreciation on Plant and Machinery Used in a Hotel

The Tribunal referred the question of whether the Assessing Officer's order allowing extra depreciation on plant and machinery used in hotels was erroneous and prejudicial to the interests of the Revenue. The facts revealed that the assessee, a public limited company running hotels, claimed extra depreciation of Rs. 40,59,139 for the assessment year 1982-83. The Commissioner, upon examining the records, deemed the claim incorrect and prejudicial to the Revenue, citing the withdrawal of the development rebate effective from June 1, 1974.

The Tribunal, however, found that the extra depreciation allowance was independent of the development rebate, as per a precedent set in I.T.C. Ltd. v. I.A.C. The Tribunal noted that the power to approve hotels for the purpose of section 33 remained with the Department of Tourism, and such approval was still valid for granting extra depreciation, despite the withdrawal of the development rebate.

The High Court agreed with the Tribunal, emphasizing that the extra depreciation allowance under Appendix I, Part I, item III(iii) of the Income-tax Rules was contingent upon the hotel being approved by the Central Government. The withdrawal of the development rebate did not render the approval redundant, and the legislative intent was clear in retaining this provision. The Court noted that the Central Government continued to grant approvals under section 33 even after the development rebate's withdrawal, reinforcing the validity of such approvals for extra depreciation.

The Court also referenced the decision in S. P. Jaiswal Estates P. Ltd. v. CIT, which supported the view that extra depreciation allowance was specific to approved hotels and not affected by the general provisions applicable to other concerns. The Court concluded that the approval under section 33 remained vital for granting extra depreciation, and the Tribunal's decision to allow the extra depreciation was upheld.

2. Eligibility for Benefit Under Section 80J for a Flight Catering Unit

The second issue concerned the eligibility of the assessee's flight catering unit at Palam Airport for deduction under section 80J. The assessee claimed a deduction of Rs. 19,63,802, asserting that the unit, which prepared food for international airlines, qualified as an industrial undertaking. The Commissioner, however, revised the assessment, citing decisions from various High Courts that restaurants did not manufacture or produce articles and noting the lack of specific approval under section 80J(vi).

The Tribunal, however, sided with the assessee, referencing its reasoning in the case of Orient Express Company, which held that preparing food in a sophisticated kitchen with modern equipment constituted manufacturing or production under section 80J(4)(iii).

The High Court examined the arguments and precedents, including CIT v. Union Carbide India Ltd., where the processing of shrimps into frozen products was deemed production. The Court noted that the term "manufacture" implies creating a new substance, while "production" has a broader meaning, encompassing any process that results in a new product. The Court found that the food and confectionery produced by the assessee's unit were new products distinct from their raw materials, thus meeting the criteria for production.

The Court distinguished the present case from the cited High Court decisions, noting that section 80J used the term "articles" rather than "goods," which supported a broader interpretation inclusive of food products. The Court concluded that the assessee's catering unit met the requirements of section 80J(4)(iii) and was entitled to the deduction.

Conclusion

The High Court answered both limbs of the referred question in the affirmative, favoring the assessee and against the Revenue. The extra depreciation on plant and machinery used in the hotel was deemed allowable, and the flight catering unit qualified for the section 80J deduction. No order as to costs was made.