1986 (2) TMI 124 - AT - Income Tax

Issues Involved:
1. Capitalization of pre-operative expenditure.
2. Computation of capital for relief under section 80J of the Income-tax Act, 1961.
3. Investment allowance under section 32A of the Income-tax Act.
4. Depreciation rate applicable to hotel building.
5. Allowance of pre-operative expenses as revenue expenditure.
6. Extra shift depreciation allowance under item III(iv) of Part I of Appendix I of the Income-tax Rules, 1962.

Issue-wise Detailed Analysis:

1. Capitalization of Pre-operative Expenditure:
The assessee capitalized pre-operative expenditure of Rs. 98,25,457 for setting up a hotel and acquiring capital assets. The ITO did not capitalize Rs. 9,54,507 and only capitalized 60% of Rs. 21,94,338, leaving Rs. 8,77,736 uncapitalized. The Commissioner (Appeals) directed the ITO to capitalize 80% of the uncapitalized amounts. The Tribunal upheld the Commissioner (Appeals)'s decision, citing that administrative expenses, audit and license fees, and stationery are not related to the acquisition or erection of machinery or plant, referencing CIT v. Simco Meters Ltd. and CIT v. Polychem Ltd.

2. Computation of Capital for Relief under Section 80J:
The assessee's claim for relief under section 80J was rejected in light of the Supreme Court decision in Lohia Machines Ltd. v. Union of India and the amendment of section 80J. The Tribunal concurred with the rejection.

3. Investment Allowance under Section 32A:
The assessee claimed investment allowance under section 32A, arguing that the hotel's activity of producing foodstuffs qualifies as manufacturing or processing. The ITO and Commissioner (Appeals) rejected the claim, stating that hotel operations do not equate to industrial manufacturing. The Tribunal upheld this view, referencing CIT v. Casino (P.) Ltd. and CIT v. Buhari Sons (P.) Ltd., concluding that the hotel's activities are trading rather than manufacturing.

4. Depreciation Rate Applicable to Hotel Building:
The assessee claimed that the hotel building should be treated as a plant for depreciation purposes. The ITO treated it as a building, applying the lower depreciation rate. The Commissioner (Appeals) sided with the assessee, but the Tribunal reversed this decision, following precedents from the Hyderabad Bench in Hotel Emerald (P.) Ltd. and Progressive Hotels (P.) Ltd., determining that the hotel building should be treated as a building, not a plant, and depreciation should be allowed at the rate applicable to buildings.

5. Allowance of Pre-operative Expenses as Revenue Expenditure:
The assessee claimed Rs. 8,50,087 as revenue expenditure for the period from 29-3-1979 to 15-7-1979, arguing that the hotel was ready and had a trial run. The ITO disallowed this, but the Commissioner (Appeals) allowed it, stating the business was set up by 29-3-1979. The Tribunal upheld this, citing Western India Vegetable Products Ltd. v. CIT and CWT v. Ramaraju Surgical Cotton Mills Ltd., confirming that expenses incurred after the business is set up are allowable as revenue expenditure.

6. Extra Shift Depreciation Allowance:
The ITO allowed extra depreciation for approved hotels but not for triple shift working. The Commissioner (Appeals) allowed both, but the Tribunal reversed this, stating that sub-item (iii) specifically provides for approved hotels, and sub-item (iv) is a general provision for other concerns. The Tribunal referenced the Board's Circular No. 109 and clarified that machinery and plant in hotels do not qualify for extra shift depreciation allowance.

Conclusion:
The assessee's appeal was dismissed, and the departmental appeal was allowed in part. The Tribunal upheld the decisions of the lower authorities on most points, providing detailed legal reasoning and referencing relevant case law and statutory provisions.

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