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PETITIONER: THE INDIAN HOTELS COMPANY LTD.  & OTHERS

       Vs.

RESPONDENT: THE INCOME TAX OFFICER, MUMBAI & OTHERS

DATE OF JUDGMENT:       08/08/2000

BENCH: M.B.Shah, S.P.Bharucha, Ruma Pal

JUDGMENT:

     Shah, J.

     T.C.Nos.  20 to 24 of 1989:

     Under  Article  139A of the Constitution, the  appeals which  were pending before the Income Tax Appellate Tribunal were  transferred to this Court and numbered as  Transferred Cases  No.20-24 of 1989.  Transferred Cases No.20-21 and  24 of  1989 are filed by assessee - the Indian Hotels Co.  Ltd. and  others, which pertain to the Assessment Years  1977-78, 1978-79  and 1976-77 respectively.  Transferred Cases  No.22 and  23  of  1989 are filed by the Revenue  and  pertain  to Assessment Years 1977-78 and 1978-79.  At the outset, we may point  out  that  at  the time of hearing  of  these  cases, learned  counsel for the parties confined their  submissions to  the  Flight  Kitchen operated by the assessee  -  Indian Hotels.   Hence, other contentions raised in these cases are not required to be dealt with.

     In  the  appeals,  the   Commissioner  of  Income  Tax (Appeals)  accepted the contention of the assessee that  Taj Flight  Kitchen  cannot be considered as a hotel as it is  a separate  industrial  undertaking  which is engaged  in  the production  of  food  packages  on  a  large  organized  and mechanized  basis  for  the  use  of  various  international airlines.   After considering the contention, he arrived  at the  conclusion that the Flight Kitchen of the appellant was engaged  in the manufacture or production of articles within the  meaning  of Section 80J(4)(iii) of the Income Tax  Act, 1961  (hereinafter referred to as the Act) and it was  not part of the hotel activity of the assessee.  Hence, it would not come within the purview of section 80J(6) which provides for  approval  by  the Central Government.   He,  therefore, directed  the  ITO to allow deductions under section 80J  in respect of the capital employed in the Flight Kitchen.

     It  is  the contention of Dr.  Gouri Shanker,  learned Senior Counsel for the assessee that the activity pertaining to  the Flight Kitchen is not a hotel activity.  The  Flight Kitchen  is  a  separate  industrial  undertaking  which  is engaged  in manufacture or production of food packages on  a

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large  organised and mechanized basis for the use of various international  airlines  and, therefore, is entitled to  get the  benefit  of Section 80J of the Act.  As  against  this, learned  Solicitor  General  Mr.  Salve, on  behalf  of  the revenue  submitted  that  the  activity  of  Flight  Kitchen carried on by the assessee is part of the hotel business and for getting the benefit of Section 80J(1), it is required to obtain  approval as provided under Section 80J (6)(d) of the Act.

     CIVIL APPEAL No.1774 of 1992

     In  this  appeal,  M/s  Hotel &  Allied  Traders  Pvt. Ltd.-the  assessee  sought benefit of  investment  allowance under Section 32A of the Act for the assessment year 1978-79 by  contending  that  assessee-company   was  an  industrial undertaking  engaged in manufacturing activity.  That  claim was  finally  rejected  by  the  Tribunal  by  holding  that assessee  cannot  be considered to be an industrial  company engaged in manufacturing or processing of articles and hence was  not  entitled to get benefit under Section 32A  of  the Act.   Further  the  Tribunal relied upon  the  decision  in C.I.T., Kerala v.  Casino Pvt.  Ltd.  [1973 (91) ITR 289] of the  High Court.  Against that order petition under  section 256(2)  of the Act was filed before the High Court of Kerala which  was rejected by order dated 7.1.1985.  That order  is challenged in this appeal.

     S.L.P.(C) No.  324/1997

     Leave granted.

     In  this  appeal  also, the assessee    Hotel  Shashi Private Ltd., a company engaged in the business of running a hotel named the Valley View Resort situated at Mahableshwar, claimed  the  benefit of investment allowance under  Section 32A  of  the Act.  Finally, that claim was rejected  by  the Tribunal.  The application for reference by the Tribunal was also  rejected  as  the issue involved was  covered  by  the decision  of  the Bombay High Court in Fariyas  Hotels  Pvt. Ltd.   v.  Commissioner of Income Tax, [1995 (211) ITR 390]. For the said reason, the Bombay High Court also rejected the reference  application vide its order dated 3.9.1997.   That order is challenged in this appeal.

     Relevant  parts of the provisions that are required to be considered:

     For appreciating the contentions raised by the learned counsel  for  the  parties,  we would  first  refer  to  the relevant provisions of the Act.

     Section 80:  Deductions to be made in computing total income.   Section 80J:  Deduction in respect of profits  and gains  from  newly  established industrial  undertakings  or ships or hotel business in certain cases.

     80J.(1)  Where  the gross total income of an  assessee includes  any  profits and gains derived from an  industrial undertaking  or a ship or the business of a hotel, to  which this  section  applies, there shall, in accordance with  and subject  to  the provisions of this section, be allowed,  in computing the total income of the assessee, a deduction from

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such  profits  and gains reduced by the deduction,  if  any, admissible  to  the assessee under section 80HH  or  section 80HHA  of  so much of the amount thereof as does not  exceed the  amount calculated at the rate of six per cent per annum on  the  capital employed in the industrial  undertaking  or ship  or business of the hotel, as the case may be, computed in  the  prescribed manner in respect of the  previous  year relevant  to  the assessment year (the amount calculated  as aforesaid  being hereafter, in this section, referred to  as the  relevant amount of capital employed during the previous year) :

     Provided  that  in relation to the profits  and  gains derived  by  an  assessee,  being   a  company,  from   an industrial  undertaking  which  begins to  manufacture  or produce  articles or to operate its cold storage plant  or plants  after  the 31st day of March, 1976, or from  a  ship which is first brought into use after that date, or from the business  of  a  hotel which starts functioning  after  that date,  the provisions of this sub-section shall have  effect as  if for the words six per cent, the words seven and  a half per cent had been substituted.

     80J(4)  :   This  section applies to  any  industrial undertaking  which  fulfils  all the  following  conditions, namely:

     (i)  .   (ii) .  (iii) It manufactures  or  produces articles,  or  operates  one or more cold storage  plant  or plants,  in  any part of India, and has begun or  begins  to manufacture  or produce articles or to operate such plant or plants,  at any time within the period of thirty-three years next  following the Ist day of April, 1948, or such  further period as the Central Government may, by notification in the Official  Gazette, specify with reference to any  particular industrial undertaking;

     80J(6) :  This section applies to the business of any hotel,  where  all the following conditions  are  fulfilled, namely:

     (a)  .  (b) .  (c) .  (d) The hotel is for the time being  approved for the purposes of this sub-section by  the Central Government;"

     The  relevant  part  of Section 32A of the  Act  which grants  investment allowance reads thus:  - 32A.  (1).   In respect  of  a  ship or an aircraft or  machinery  or  plant specified in sub-section (2), which is owned by the assessee and  is wholly used for the purposes of the business carried on  by  him, there shall, in accordance with and subject  to the  provisions of this section, be allowed a deduction,  in respect  of the previous year in which the ship or  aircraft was  acquired or the machinery or plant was installed or, if the  ship, aircraft, machinery or plant is first put to  use in  the  immediately  succeeding  previous  year,  then,  in respect of that previous year, of a sum by way of investment allowance  equal to twenty-five per cent of the actual  cost of the ship, aircraft, machinery or plant to the assessee:

     Provided that no deduction shall be allowed under this Section in respect of

     (a)  any  machinery or plant installed in  any  office premises  or  any residential accommodation,  including  any

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accommodation in the nature of a guest house;

     (b) any office appliances or road transport vehicles;

     (c)  any ship, machinery or plant in respect of  which the  deduction  by  way of development rebate  is  allowable under section 33;  and

     (d)  any  machinery or plant, the whole of the  actual cost  of which is allowed as a deduction (whether by way  of depreciation   or  otherwise)  in   computing   the   income chargeable  under the head Profits and gains of business or profession of any one previous year.

     (2)  The  ship  or  aircraft  or  machinery  or  plant referred  to  in  sub-section (1) shall  be  the  following, namely:

     (a) a new ship or new aircraft acquired after the 31st day of March, 1976 by an assessee engaged in the business of operation of ships or aircraft;

     (b)  any  new machinery or plant installed  after  the 31st day of March, 1976

     (i)  for  the  purposes of business of  generation  or distribution of electricity or any other form of power;  or

     (ii)  in a small-scale industrial undertaking for  the purposes  of  business of manufacture or production  of  any article or thing;  or

     (iii)  in  any  other industrial undertaking  for  the purposes  of  business  of   construction,  manufacture   or production  of any article or thing, not being an article or thing specified in the list in the Eleventh Schedule.

     (Emphasis supplied)

     Chapter II of the Finance Act, 1979 provides for rates of income tax.  Relevant part dealing with the Company is as under:   -  2(7) For the purposes of this section  and  the First  Schedule. (a)  (b)  (c) industrial company means a  company  which  is  mainly engaged  in  the  business  of generation  or distribution of electricity or any other form of  power  or  in  the  construction  of  ships  or  in  the manufacture or processing of goods or in mining.

     The aforesaid definition covers four categories of the activities  carried  on by a company and it must  be  mainly engaged:  -

     (i)  in the business of generation or distribution  of electricity or in other form of power;

     (ii)   in  the  construction  of  ships;    (iii)   in manufacturing or processing of goods;  and (iv) in mining.

     The  explanation further provides that a company shall be  deemed to be mainly engaged in the aforesaid  activities if the income attributed to any one or more of the aforesaid activities  in its total income of previous year is not less than fifty-one percent of such total income.

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     Section  80J  quoted  above   provides  for  grant  of deductions  to  an  assessee  who  derives  income  from  an industrial  undertaking or a ship or the business of a hotel to  which the Section applies and the Section applies to any industrial undertaking, any ship or business of any hotel if conditions  prescribed  under sub-section (4), (5)  and  (6) respectively  are satisfied.  The question would  bewhether the  assessee  has  derived  profits   and  gains  from   an industrial  undertaking or from the business of a hotel. Industrial  undertaking  is not given any meaning under  the Act,  hence  it is to be understood as per  common  parlance language.   Taking  this  into   account,  apparently,   the business  of  the  assessee is that of a hotel, which  is  a trading  activity and not that of an industrial undertaking. The  assessee  -  Indian  Hotels  Company  Ltd.   is  having business  of  a  hotel or chain of hotels and  is  not  an industrial  undertaking  as  understood in  common  parlance language.   Even before the Commissioner of Appeals, it  was contended by the assessee that Flight Kitchen is essentially ancillary  unit.   This would mean that operation of  flight kitchen  was  ancillary  to its business of  hotel.   Hence, result would be  it is a company engaged in the business of hotel and not of industrial undertaking.  Hence, for getting the  benefit of Section 80J(1) it must fulfil the conditions laid down in sub-section (6).

     The next question would beWhether under the aforesaid provisions it can be held that assessees hotels manufacture or produce foodstuffs?

     From  the reasoning of the Appellate Commissioner,  it appears  that  he arrived at the conclusion that Taj  Flight Kitchen  was  an industrial undertaking which is engaged  in the  production of food packages and in manufacture of  food packages  on  a large scale in an organized  and  mechanized manner  with  sophisticated  and   modern  techniques.   Its dominant  purpose  is manufacture of food cover for sale  to the  airlines  and  no retail sale in the  premises  of  the flight  kitchen  is involved.  He, therefore, held that  the Flight Kitchen of the assessee is engaged in the manufacture or  production  of  articles within the meaning  of  section 80J(4)(iii) of the Act.

     In  the  Civil  appeals filed by M/s  Hotel  &  Allied Products  (P)  Ltd.   and Hotel Shashi Pvt.   Ltd.,  learned counsel  Mr.   Choudhary  submitted that  manufacturing  and processing  of  goods  includes the  activity  of  preparing articles of food from raw materials entitling the Company to get  deduction  of  investment allowance as  provided  under section  32A  of  the Act.  It has been contended  that  the appellant-assessee  satisfies the requirement of  industrial Company as defined under section 2(7)(c) of the Finance Act, 1979.  He submitted that hotel which inter alia converts raw materials  into food stuffs is an industrial Company  within the  meaning  of  Section 2(7)(c) of the  Finance  Act  and, therefore, it is entitled to get the benefit of section 32A.

     From  the Sections quoted above, i.e.  Sections 80J(1) proviso,  80(J)(4),  80(J)(6), and Section 32A, for  getting benefit   of   deduction  or   investment   allowance,   the requirement  is   assesseecompany must be engaged  in  the business  of  manufacture  or production of any  article  or thing.   In  case of preparing food packages or selling  the same  or preparing foodstuffs for serving in the hotel there

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is  no  question  of  manufacture or  production.   The  raw material  is at the most processed so as to make it eatable. The  word  manufacture has various shades of  meaning  but unless  defined under the Act it is to be interpreted in the context of the object and the language used in the Sections. In  the  context of the provisions which deal with grant  of investment  rebate  or  deduction under section  80J  it  is apparent that it is used to mean production of a new article or  bringing  into  existence  some   new  commodity  by  an industrial undertaking.  It would not be applicable in cases where  only  processing activity is carried  out.   Further, such   production   activity  must  be  by   an   industrial undertaking  and  not by the assessee having mainly  trading activity.   In  C.I.T.   Orissa  and  Others  v.   M/s  N.C. Budharaja  and  Company and Others [1994 Supp (1) SCC  280], this  Court  considered  the provisions of section  32A  and Section  80HH(2) of the Act and held that machinery or plant for the purpose of business of construction, manufacture or production  of  any  article  or   thing  would  not  cover machinery  employed  in digging bore wells.  The Court  also considered  the  IXth Schedule (applicable at  the  relevant time)  which contained item No.15 therein relating to  ships and  observed that the appropriate word in the case of ships is  construction  and  in common parlance  one  speaks  of construction  of  ships and not manufacture of  ships.   The Court  held that, in this background, it is not possible  or permissible  to read the word construction as referring to construction  of dams, bridges, buildings, roads or  canals. The  Court  also observed that the association of  words  in former  sub-clause (ii) and the present sub-clause (iii)  is also not without significance and a statute cannot always be construed with the dictionary in one hand and the statute in the  other;  regard must also be had to the scheme,  context and to the legislative history of the provision.  Similarly, in  case  of  a  hotel  business there  is  no  question  of manufacturing or producing pulses, wheat, rice, meat or such other  items  but  what is done isfrom such  raw  materials eatable food stuff is prepared.

     In  support  of  his   contention,  learned  Solicitor General  referred  to  the  decision of this  Court  in  M/s Sterling  Foods,  A Partnership Firm v.  State of  Karnataka and  Another  [(1986)  3 SCC 469].  The Court in  that  case considered  the  question as to what happens  when  shrimps, prawns  and  lobsters purchased by the assessee  (under  the provisions of the Central Sales Tax Act, 1956) are subjected to  the  process  of  cutting   heads  and  tails,  peeling, deveining,  cleaning  and freezing before export.   Do  they cease to be original commodity and become commercially a new commodity or do they still retain their original identity as shrimps,  prawns and lobsters?  The Court held that  despite such  processing  they  continue to possess  their  original character  and  identity  and  even  though  processing  was necessary  for  making  them fit for the table.   The  Court referred  to the decision of the Supreme Court of the United States  in  East Texas Motor Freight Lines v.   Frozen  Food Express  [100  L.Ed.   917] where the question  was  whether dressed  and  frozen  chicken was  a  commercially  distinct article  from  the original chicken.  The Court relied  upon the  following  passage from the said judgment:  there  is hardly  less  difference  between cotton in  the  field  and cotton  at  the gin or in the bale or between cottonseed  in the  field and cottonseed at the gin, than between a chicken in  the  pen and one that is dressed.  The ginned and  baled cotton  and the cottonseed, as well as the dressed  chicken,

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have  gone through a processing stage.  But neither has been manufactured in the normal sense of the word.

     In our view, same would be the position with regard to the  food stuff served or sold by the Hotels.  The foodstuff prepared  by  cooking  or  by any  other  process  from  raw materials  such  as cereals, pulses, vegetables meat or  the like  cannot be regarded as commercially distinct  commodity and it cannot be held that such foodstuff is manufactured or produced.

     Further, the Legislature has differentiated industrial undertaking  and trading activity of the assessee who  deals in  business  of hotel by making different provisions.   The business  of  hotel  and that of industrial  undertaking  is considered  to  be distinct and separate for the purpose  of grant of investment allowance under Section 32A or for grant of  deduction  under  Section  80J.  Under  proviso  (c)  to Section  32A deduction of investment allowance is not to  be made  if in respect of any ship, machinery or plant to which the  deduction  of  development rebate  is  allowable  under Section  33.   For the machinery and plant installed  by  an assessee being an Indian company in premises used by it as a hotel,   specific  provision  for   grant  of  deduction  of development  rebate  is made under Section  33(1)(b)(B)(ii). Similarly,  under  Section 80J for a business of  hotel  and industrial  undertaking  separate provisions are  prescribed making  Section applicable namely sub-sections (4) and  (6). Conditions  which  are  required  to be  satisfied  by  such assessees  are  different.   Therefore, an assessee  who  is carrying on a trading activity of business of a hotel cannot claim  the  benefit granted to an industrial undertaking  by contending that it also produces foodstuff or food packets.

     In  support  of his contentions, learned  counsel  Mr. Choudhary referred to the decision of the Gauhati High Court in Commissioner of Income-Tax v.  Hotel Belle Vue (P.) Ltd., [1997  (223)  ITR 675].  In that case the assessee  who  was running  a  hotel,  installed machinery and plant  in  hotel premises  and claimed investment allowance in respect of  it by  contending  that  food- stuff was produced by  it.   The claim  was rejected by the Assessing Officer but was allowed by  the  Tribunal and on reference the High Court held  that assessees  hotel  was an industrial undertaking within  the meaning of sub- clauses (ii) and (iii) of sub-section (2) of Section  32A and was entitled to investment allowance.   The Court  held that the word manufacture has not been defined in the Finance Act and in its ordinary meaning manufacture is a process by which an alteration or change takes place in the  goods  which  are  subjected to  such  manufacture  and brought  about  a  commercially new article in  the  market; when  food is prepared from raw materials, definitely a  new product  is prepared or made, which is known as a  different item  and  the  said  item cannot be  brought  back  to  its original form.  The Court observed, therefore, when food is prepared  or  processed, it must be taken  as  manufacturing process.   In  our view, the aforesaid reasoning is on  the face  of it, erroneous as discussed above.  By processing of raw  food, it cannot be said that it results in  manufacture or  production of new articles.  What is done is raw food is processed  for  the  purpose of  consumption.   Further,  it appears  that  the  High  Court   has  mixed  up  the  words manufacture  and  process  as  section 32A  of  the  Act provides  for business of manufacture or production of goods and not for manufacture or processing of goods.

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     As  against  the  aforesaid  decisions,  it  has  been pointed  out that some other High Courts have taken the view that  (i) a hotel is merely a trading concern;  and (ii) the activity  carried  on for preparing food articles  from  raw materials  in  a hotel would not constitute  manufacture  or production  of  goods.  In C.I.T., Kerala v.  Casino  (Pvt.) Ltd., [1973 (91) ITR 289], Division Bench of the Kerala High Court  referred to Section 2(6)(d) of the Finance Act,  1968 which  defines  an  industrial company and held  that  the activity carried on by the assessee in preparing articles of food from raw materials would not constitute manufacture or processing  of  goods within the meaning of  said  Section. Foodstuffs  prepared in the hotels using raw materials  such as  pulses, wheat, vegetables or meat and the like cannot be said  to  be  manufacturing activity and such  activity  was trading  activity.   The  Bombay High Court  also  took  the similar  view  in  Commissioner of Income- Tax  v.   Berrys Hotels  Pvt.   Ltd.,  [1994  (207) ITR 615]  and  held  that benefit of Section 2(7)(c) of Finance Act, 1973 can be given to  manufacturing concerns and not to trading concerns.   In Fariyas  Hotels Pvt.  Ltd.  v.  Commissioner of Income  Tax, [1995  (211)  ITR  390], it held that  investment  allowance under  Section 32A is not available in respect of  machinery installed  for the purpose of business of the assessee which is  engaged  in  the business of running a hotel  as  it  is essentially a trading activity.  Similarly the Calcutta High Court  in C.I.T.  v.  S.P.  Jaiswal Estates (P) Ltd.,  [1992 (196)  ITR 179], held that an assessee who claims investment allowance  under  Section  32A of the Act has to be  (1)  an industrial   undertaking  carrying  on   the   business   of manufacturing  or producing any article or thing, therefore, the  business  itself  has  to be  that  of  manufacture  or production;   (2)  the processing of an article or thing  is outside  the scope of this provision;  and (3) the  business of   a  hotel  is  essentially   a  non-  manufacturing   or non-producing  or  even  non-processing  concern  and  is  a trading  concern.   The  Court  observed that  even  if  the incidental activity of processing food materials into edible products  for  service  to clients in the  restaurant  is  a necessary  adjunct  of  the hotel business and  is  ultimate nature  of  the business of hotel-keeping, it is  a  trading activity.  It cannot be held to be a business of manufacture or production of any article or thing.

     In  the result, Transferred Cases No.22 and 23 of 1989 filed  by  the Revenue are allowed and it is held  that  the Flight  Kitchen  operated  by   the  assessee-Indian  Hotels Company  Ltd.  is not entitled to get the benefit of Section 80J.   Transferred  Cases No.20, 21 and 24 of 1989 filed  by the  assessee-Indian  Hotels  Company Ltd.   are  dismissed. Civil  Appeal  No.1774 of 1992 and Civil Appeal  No.______of 2000  @  S.L.P.(c)  No.  324 of 1997 filed by  M/s  Hotel  & Allied  Traders  Pvt.  Ltd.  and Hotel Shashi  Private  Ltd. respectively are also dismissed.  There shall be no order as to costs.