Depreciation: Hotel Building-Liberal Interpretation by Madras High Court (applicable till A.Y. 2002-03). And then uncertainty as to -how to claim depreciation in absence of specific rate of depreciation for hotel building.

[C.A. DEV KUMAR KOTHARI]

As businessman  (hotelier) as well as a customer of hotel visualize a hotel as a building or group of buildings having facilities  which constitute hospitality besides simple boarding and lodging. A person setting up a five star hotel will setup hotel with more facilities in comparison to a three star hotel. While setting up a hotel some spaces are provided to other agencies also to cater to the needs of the customers of hotel. Hotel functions round the clock, therefore some staff are also provided residential facilities in hotel complex or in nearby area to ensure easy and timely service.  A bank, a shopping centre, a foreign exchange dealer a travel agent within the premise of hotel are extended facilities to customers/ guests. In some categories of hotels certain facilities are essential. Therefore, all buildings used directly by the owner of hotel or through some outside agencies are used in the business of hotel. Therefore, all such buildings are considered as 'building used as hotel', and are eligible for higher rate as per special entry in depreciation rate chart found till assessment year 2002-03.

From A.Y. 2003-04, however, we find that there is no specific entry. Even depreciation at normal rate applicable to building may be denied, if a view is taken that hotel building is mainly used for providing residence. Reduction of rates for hotel building is unfortunate and undesirable. Hotels business is highly capital and labor intensive, Therefore, incentive by way of higher depreciation and additional depreciation should be reintroduced.

Hotel Building- hotel business and building used therein

In a hotel there are facilities for boarding and lodging, restaurants, conference halls, entertainment rooms for music and cultural functions, dining hall, bar, swimming pool, garden, terrace etc. depending on the nature of hotel, its location and star wise category.

The quality of service

Quality of service provided to the guests depends on the category of hotel, and charges levied.  For example, the services for a five star hotel would be much better than the services in one star hotel.  The extent of facilities, sizes of accommodations, open space available, extent and quality of furnishing would also depend on the category of hotel and charges levied.

Direct services for hotel business

In case of hotel business, we find that the following services are directly related to providing furnished accommodation with facilities to the guests.

i)  Air-conditioning.

ii)   Heating of water and providing hot water in bathrooms

iii)   Kitchen, dining space and bar in relation to fooding etc.

iv)  laundry.

v)  Telephone including inter-com,

vi)   TV, musical instruments and computers in rooms.

vii)   Gymnasium, yoga rooms.

viii)  Beauty parlor and saloons.

 The above services are directly useful for the guests while they stay in the hotel for business or leisure purposes. These are specifically related with comfortable living.

Indirect services

To facilitate and provide convenience to the guests, other services which hotels may render or make arrangement for are as follows:-

Banking facility - bank branch, ATM or counters.

Air and rail travel agents facilities,

Quality goods shops,

Foreign exchange facilities.

Taxi cab, motor cab service.

Sight seeing services.

These services are very much required by the guests and in any case they are part and parcel of hotel activity of international and national standards. They constitute part of hospitality and facilitation of guests.

 Hotel Building:

In case of an industry we say that a steel plant or textile mill is being set-up. Such set-up means all buildings with necessary equipments and furnishing. Similarly in case of a person setting up a hotel he would say that he is setting up a hotel of certain number of rooms and star category for example say a five star hotel with 450 rooms.

A hotel building when generally visualized means entire set up of buildings with precincts thereof which provide for facilities of roads to move around vehicles and persons in the hotel premises, car parking place and related services, reception center and office counters, lobbies, lifts, rooms, restaurants, bar and also incidental facilities like banking counters, foreign exchange counters, travel agents counters, shops etc.  Therefore, all these activities though may be carried out by other agencies are essential part of business of hotel and a hotel project envisages setting up of such facilities and for that purpose collaborate with other parties to set up their establishments like counter of bank, counter of travel agents, airlines or airline agents, cybercafé,etc.  Therefore, considering from the point of view of hotel business, the entire group of buildings and all parts of buildings are to provide all such facilities to the guests who stay in the hotel and also visitors who come to the hotel for meeting the guests or to take food in restaurant of the hotel.

Ruling of Madras High Court

In CIT vs. Sangu Chakra hotel, a matter for allowance of depreciation on hotel building came for consideration.  The assessing officer treated 1/4^th of the entire building as relating to hotel purpose and 3/4^th for non-hotel purpose and therefore, he allowed depreciation @ 20% and 10% respectively.  The assessee contended that the entire building is the hotel building as all the facilities including the counters or branch of banks were to facilitate the hotel business.  On appeal of the assessee the CIT(A) allowed higher depreciation on entire building which was confirmed by the Tribunal and on appeal of the department, the same has been confirmed by the Madras High Court also. The honorable High Court considered and held on the following lines:

a. A hotel not only provides the lodging facility or meals to the travelers and paying guests, but also other services, viz, the hotelier provides furniture and furnishings, linen, crockery and cutlery in the eating places.  The hotelier may add music, provide an area for floor dancing and in some cases floor show in addition to the supply of foods, drinks to the customers which all form part of other services to the travelers or paying guests or to any other traveling, visiting public. 

b. A traveler or traveling public, of course, will have privilege to eat or not and, similarly, to avail other facilities or not, which is entirely left to his need and desire.  But, still it is left for the hotelier to maintain the hospitality whether its customer avails it or not.  Therefore, what is important is whether the hotelier, apart from lodging and boarding facility, also provides other services to the travellers, paying guests and other traveling public to maintain the functional character of the hotel, viz, the hospitality.  It is immaterial, in the course of such hospitality, whether such services are used by the visitors to the hotel also.

c. Use of facilities by non-guests and casual visitors is also to some extent incidental to hotel business as it provides hospitality. Even otherwise, such use will not change main character of hotel building. (As per author casual visitors to hotel while they come to meet hotel guests or otherwise can avail various facilities even without staying in the hotel. They can avail facilities of restaurant, bar, banquet halls, beauty parlors, yoga centers, and other facilities and add to the revenue of the hotel) 

d. The provision of accommodating the officers and staff of the hotel was, as rightly held by the Commissioner and the Tribunal, deemed to be part and parcel of the functional character of the hotel. (as per author residential facilities to some staff and workers in hotel premises may  help in better and timely service and add to the value of services of hospitality).

e. Letting out shops for antiques, emporium, arts and crafts, florists and travels, which were all intended as a part of service of the hospitality to the travellers, paying guests and other traveling public on commercial basis, would have the same effect as that of providing facilities and services like restaurant, bar room, health clinic, gymnasium centre, swimming pool, music, floor dance, etc.  Those services were not only intended to attract the customers as opined by the Commissioner (Appeals), but also a part and parcel of the hospitality of the hotel.

f. Therefore, the entire building had to be treated as composite building and could not be segregated in any manner, such as, one part of the building was used for hotel purpose and other part was used for accommodating the officers and staff of the hotel and housing the bank and shopping complex, etc, and therefore, such portions were entitled to 20 per cent depreciation.

g.  In the result, the entire composite building was entitled to depreciation of 20 per cent.

Letting out of building as incidental to business:

From this judgment it is also to be noted that if some building or portion of building is let out to facilitate business of the assessee, then the rental income from such building can be considered as business income and depreciation can be allowed. As in the case of hotel, as noted in the above case, we also find that when large industrial complexes are set-up, certain buildings are designed for ancillary services and facilities required for the industry. For such services, the assessee may avail service of other expert institutions and for the same purpose let out some of buildings to such institutions. For example for the purpose of hospital, schools, parks and clubs the industrial company may construct such buildings furnish and equip them and run for employees welfare. Instead of running the same by own organization the assessee may let out to other specialty institutions for running hospitals, schools, parks and clubs for the welfare of employees engaged in the industry. Providing buildings to post office and banks and some times even to police station / police choki is very common in case of a new and large industrial set-up.

All such buildings are considered as part and parcel of industrial unit like steel plant or textile mills or a tea estate. Therefore, all such buildings are part of industrial building which are used by assessee for business purposes even if some building are let out to others for availing necessary services.

The rate of depreciation:

A.   Before Madras High Court:

In the case before the Madras high Court the assessment year involved was 1992-93. At that time there was specific rate prescribed for "Buildings used as hotel" - 20% and furniture used in hotel - 15%. Though there was entry for buildings used mainly for residential purposes, however, in view of specific entry for hotel building, it was not possible for the revenue to contend that hotel rooms provide for residential accommodation so lower rate should apply. The relevant entries relating to building at that time read as follows:

 

 [Applicable for assessment years 1988-89 to 2002-03]

[See rule 5]

TABLE OF RATES AT WHICH DEPRECIATION IS ADMISSIBLE

Block of assets		Depreciation allowance as percentage of written down value
1		2
[part A
tangible Assets]
I. Buildings [See Notes 1 to 3 below the Table]
(1) Buildings other than those covered by sub-item (3) below which are used mainly for residential purposes		5
(2) Buildings which are not used mainly for residential purposes and which are not covered by sub-item (3) below		10
(3)   (i) Buildings used as hotels		20
(ii) Buildings with dwelling units each with plinth area not exceeding 80 square metres
(iii) New buildings, other than the buildings covered under entry (ii) of this item, with dwelling units each with plinth area not exceeding 80 square metres acquired on or after the 1st day of April, 1999 but before the 1st day of April, 2002		40]
(4) Purely temporary erections such as wooden structures		100

In the above table we find depreciation for =hotel buildings @ 20%

Depreciation rates assessment year 2002-03:

From the new depreciation rates applicable for buildings from assessment year 2003-04 we find that there is no specific entry for hotel buildings. In case of residential buildings exception is made for hotels and boarding houses. The other relevant entry which can be considered for a hotel business, is only non residential-buildings. The entries are reproduced below with highlight of relevant items: 

[Applicable for assessment years 2003-04 to 2005-06]

[See rule 5]

TABLE OF RATES AT WHICH DEPRECIATION ADMISSIBLE

Block of assets			Depreciation allowance as percentage of written down value
1			2
PART A
TANGIBLE ASSETS
I.Building[See Notes 1 to 4 below the Table]
	(1)  Buildings which are used mainly for residential purposes except hotels and boarding houses		5
	(2)  Buildings other than those used mainly for residential purposes and not covered by sub-items (1) above and (3) below		10
	(3)  Buildings acquired on or after the 1st day of September, 2002 for installing machinery and plant forming part of water supply project or water treatment system and which is put to use for the purpose of business of providing infrastructure facilities under clause (i) of sub-section (4) of section 80-IA		100
	(4)  Purely temporary erections such as wooden structures		100

[Effective from assessment year 2006-07 onwards]

[See rule 5]

Table of rates at which depreciation is admissible

Block of assets		Depreciation allowance as percentage of written down value
1		2
Part A
Tangible Assets
I. Building [See Notes 1 to 4 below this Table]
(1)  Buildings which are used mainly for residential purposes except hotels and boarding houses		5
(2)  Buildings other than those used mainly for residential purposes and not covered by sub-items (1) above and (3) below		10
(3)  Buildings acquired on or after the 1st day of September, 2002 for installing machinery and plant forming part of water supply project or water treatment system and which is put to use for the purpose of business of providing infrastructure facilities under clause (i) of sub-section (4) of section 80-IA		100
(4)  Purely temporary erections such as wooden structures		100

 The present depreciation rates

Since assessment year 2003-04 from the above mentioned two charts of applicable depreciation taken from the  appendix to the income tax rules,  we find that there is no separate entry for hotels either for the building or furniture as it was earlier.  Therefore, a question may arise at what rate depreciation should be allowed in case of hotel buildings.  On analysis of the entry in appendix, we find that entry no.(I)(1) is not applicable  because of specific exception by use of words except hotels and boarding houses. Items 1(2) also needs interpretation because one may say that hotel building is mainly for residential purpose and therefore, hotel building is not covered by this entry. 
The entry no.3 and 4 are not applicable to general hotel building.

 On consideration of entry No. 1 and 2, it can be said that hotels and boarding houses are excluding from item no.(1) by use of words "except hotels and boarding houses".  Therefore, it is clear that hotels and boarding houses are considered as residential buildings and the entry no.2 is applicable only to buildings other than those used mainly for residential purposes.  So if a hotel building is considered mainly for residential purpose then it will not be covered by entry no.2 also.

 Therefore, the entries as appeares in present appendix raises serious doubts about whether the hotel building will be eligible for depreciation at all?

 Where depreciation rate exists for hotel

As observed above, it may be difficult for a hotelier to claim depreciation on hotel building on the basis of entry no.1 and 2 both. Only buildings in nature of temporary erections (like some structures in lawns, and terraces) can clearly be eligible for 100% depreciation.

 Higher rates are desirable:

As noted above we find that from A.Y. 2003-04, there is no specific entry for hotel building and also furniture used in hotel allowing special and higher rate of depreciation. Even depreciation at normal rate applicable to building may be denied, if a view is taken that hotel building is mainly used for providing residence to guests and other facilities are incidental to such residential use. Reduction of rates for hotel building and furniture  is unfortunate and undesirable. Hotels business is highly capital and labor intensive. In hotel building and furniture suffer higher wear and tear and obsolescence and quick renewal and  replacement is required. Therefore, higher depreciation and additional depreciation should be reintroduced.

Need to treat entire hotel complex as 'plant':

As noted above we find that there is no specific entry for hotel building and furniture used in hotels. Therefore, if at all only general categories of building and furniture can be considered for hotel also. As discussed above in relation to buildings, it appears difficult to claim even depreciation @ 10% of general category. We find that earlier higher rate of depreciation was allowed besides additional depreciation was also allowed to approved hotels. Therefore present rate of overall deduction is very low.

In absence of specific entries and also due to uncertainty as to eligibility of even 10% rate, it appears that there is change in legislative intention and perhaps it is now considered proper to treat entire hotel set-up as 'plant' and to allow depreciation at general rate of 15% on all furnished buildings of hotel.

Therefore, it may be necessary to treat the entire building used in hotel along with all plant and machinery and equipments as composite plant for carrying hotel business and to claim depreciation @ 15%. It needs to be considered with a view that depreciation is intended on hotel buildings, and on reading of section 32, 43(3), and appendix to Rules it can be said that hotel building and furnishing used in hotel are not considered as a general building and furniture and fixtures  (which are excluded from definition of plant w.e.f. 01.04.2004) but entire hotel is considered as an apparatus for carrying hotel business.