Commissioner Of Income Tax Tiruchirapalli v. M/S. Sangu Chakra Hotels Pvt Ltd. Trichy

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 31.10.2006 CORAM THE HON'BLE MR.JUSTICE P.D.DINAKARANANDTHE HON'BLE MR.JUSTICE P.P.S.JANARTHANA RAJA Commissioner of Income TaxTiruchirapalli...Appellant in all the AppealsVs.M/s. Sangu Chakra Hotels Pvt Ltd.Trichy..Respondent in all the Appeals----- Appeals under Section 260A of the Income Tax Act, 1961 against theorder of the Income Tax Appellate Tribunal, Madras 'A' Bench dated5.3.2003 in ITA Nos.765/Mds/1995 for the assessment year 1992-93 and theorder dated 11.4.2002 in I.T.A.Nos.1959 & 1964/Mds/1995 for the assessmentyears 1990-91 and 1991-92 respectively aganist, 1. Income Tax Appeal No. 307/94 & 95/TRY dated 10/01/95 on the fileof the Commissioner of Income Tax (Appeals) Madras-34 aganist PA.No/GIR/Noc4-2086 dated 21/04/1994 on the file of the Deputy Commissioner of Incometax, Special Range, Tiruchirapalli (In TC.Nos 106/2003) and 2. Income Tax Appeal No. 78/93-94/Spl Range/TR1 dated 20/06/1995 onthe file of the Commissioner of Income Tax (Appeals) Madras-34, aganistPAN /GIr.No.47-040-c4-2086 dated 236/02/1993 on the file of th DeputyCommissioner of Income Tax, Spl Range, Tiruchirapalli (in TC Nos 167 &168/2003)----- For Appellant : Mr.T.Ravi Kumar, Jr.S.C.For Respondent : Mr.M.P.Senthil Kumar For M/s. Philip George----J U D G M E N T (Delivered by P.D. DINAKARAN, J.) The tax case appeal Nos.167 and 168 of 2003 are directed against theorder dated 11.4.2002 in I.T.A.Nos.1959 & 1969/Mds/1995 for the assessmentyears 1990-91 and 1991-92 respectively, on the file of the Income Tax https://hcservices.ecourts.gov.in/hcservices/ Appellate Tribunal, Madras. The tax case appeal No.106 of 2003 isdirected against the order dated 5.3.2003 in ITA Nos.765/Mds/1995 for theassessment year 1992-93 on the file of the Income Tax Appellate Tribunal,Madras, following its earlier order dated 11.4.2002 referred to above.Hence, all the appeals were heard and disposed of together. 2.1. The revenue has preferred these appeals raising the followingsubstantial question of law, "Whether, in the facts and circumstances of the case, theTribunal was justified in directing higher depreciation at 20% inrespect of structures let out and structures used by employeesfor residence, over looking the fact that such structures are putnon hotel use?"under the common facts and circumstances of the case stated below. 2.2. The assessee company is running a hotel, viz. Sangu Chakra HotelPvt. Ltd at Trichy. While scrutinising its claim for the depreciation ofits building for the assessment year 1990-91, the Assessing Officer, inhis order dated 26.2.1993 found that part of the building is used for theresidence of the employees and yet another part of the building is let outto bank and to some other shops for rent, viz. State Bank of India, M/s.Raj Antique, Rock Fort Emporium, Cottage Art Crafts, M/s.Beena Floristsand Sita World Travels. 2.3. According to the Assessing Officer, the assessee company has abuilding asset, part of which was let out to tenants and the remainingpart has been used for the purpose of hotel within the meaning of Rule 5(1) of the Income Tax Rules (in short the "Rules") for Determination ofincome and Business Profits and Gains read with sub-clause 3 of Clause Iof Appendix I. According to the Assessing Officer, the assessee would notbe eligible for higher depreciation applicable to the hotel building,since a part of the building is used for non hotel purpose, in view ofsub-clause 3 of Clause I of Appendix I read with Rule 5(1) of the Rules. 3. Before proceeding further, it is apt to refer Rule 5(1) of theRules and Clause I of Appendix I which deals with the depreciation of thebuilding. 4.1. Rule 5(1) of the Rules, (as it then was) reads as under:5. Depreciation 3. Before proceeding further, it is apt to refer Rule 5(1) of theRules and Clause I of Appendix I which deals with the depreciation of thebuilding. 4.1. Rule 5(1) of the Rules, (as it then was) reads as under:5. Depreciation (1) Subject to the provisions of sub-rule (2), theallowance under clause (ii) of sub-section (1) of section 32 inrespect of depreciation of any block of assets shall becalculated at the percentages specified in the second column ofthe Table in Appendix I to these rules on the written down valueof such block of assets as are used for the purposes of thebusiness or profession of the assessee at any time during the previous year.(2) ... " 4.2. Clause I of Appendix I, which deals with Table of rates at whichdepreciation is admissible, reads as under: __________________________________________________ Depreciationallowance as %age of writtendown value Block of Assets __________________________________________________ I. BUILDINGS (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) below10(3) (i) Buildings used as hotels } } (ii) Buildings with dwelling } units each with plinth area }20 not exceeding 80 square } metres }(4) Purely temporary erections such as wooden structures 100...__________________________________________________ 5.1. Even though the assessee claimed 20% depreciation of the entirebuilding stating that the entire building is used as hotel, the Assessingofficer, in his assessment order dated 26.2.1993, held that the assesseewas using only 25% of the building for hotel purpose and therefore allowed20% depreciation as per sub clause 3(i) of Clause I of Appendix I referredto above and for the balance 75% of the building, he allowed depreciationat 10% as they were neither used mainly for residential purpose nor usedas hotel nor as dwelling units with plinth area not exceeding 80 squaremetres, applying sub-clause (ii) of Clause I of Appendix I of the Rules. https://hcservices.ecourts.gov.in/hcservices/ 5.2. But, on appeal, at the instance of the assessee, theCommissioner, on facts, came to the conclusion that the provision foraccommodation to the officers and staff of the hotel cannot be consideredas non hotel purpose and that the maintenance of a bank, antinque shop,emporium for arts and crafts are part and parcel of the hotel business andtherefore, the assessee did not let out any portion of the building foranything not covered with this hotel business and accordingly, allowed 20%of depreciation for the whole building as per sub clause 3 of Clause 1 ofAppendix I read with Rule 5(1) of the Rules and the same was confirmed onappeal, at the instance of the revenue, by order of the Tribunal underchallenge. Hence, the present appeals raising the questions of lawreferred to above. 6.1. Mr.T. Ravi Kumar, learned Standing Counsel for the revenueassailing the order of the Commissioner, as confirmed by the Tribunal,contends that portion of the building used for accommodation purpose ofthe officers and staff of the hotel as well as the portion let out to thebank, antique shops, emporium, art and crafts, florists, travels are notdirectly connected with hotel business and the same was let out to thirdparties and therefore, the Assessing Officer is right in grantingdepreciation treating the said portion of the building referred for theabove purpose as 25% of the building and allowing only 10% of depreciationapplying sub clause 2 of Clause 1 of Appendix I read with Rule 5(1) of theRules for the balance 75% of the building. 6.2. On the other hand, justifying the reasons and the findingsrendered by the Commissioner and the Tribunal referred to above, thelearned counsel for the respondent contends that the Commissioner hadrightly granted 20% of depreciation to whole building. 6.2. On the other hand, justifying the reasons and the findingsrendered by the Commissioner and the Tribunal referred to above, thelearned counsel for the respondent contends that the Commissioner hadrightly granted 20% of depreciation to whole building. 7. We have given careful consideration to the submissions of bothsides. 8.1. We have already referred to Rule 5 and Clause 1 of Appendix Iwhich is relevant to decide the above substantial questions of law.Clause 2 of Appendix I deals with the buildings which are not used mainlyfor residential purpose and which are not covered by sub clause 3(i) viz.the buildings used as hotels and 3(ii) viz. the buildings with dwellingunits each with plinth area not exceeding 80 square metres. 8.2. In other words, sub clause 1 of Clause I of Appendix I dealswith the buildings used mainly for residential purpose. Sub clause 2 ofClause I of Appendix I deals with the building which are not used formainly residential and which are not covered under sub clause 3. Subclause 3 of Clause I of Appendix I deals with the buildings used as hotelas well as buildings with dwelling units each with plinth area notexceeding 80 square metres. In short, the buildings which are coveredunder sub Clause 1 excludes sub clause 2 and 3. Buildings mentioned insub clause (2) excludes buildings mentioned in Sub Clause (3). Sub clause https://hcservices.ecourts.gov.in/hcservices/ 3(i) deals with the buildings used as hotels which are eligible for 20%depreciation. 8.3. In the instant case, the assessee claims 20% of depreciationcontending that the entire building is used as hotel. Under the Act andRules read with Appendix, the hotel is not defined. Therefore, we areconstrained to refer Dictionary to apply the meaning for the building usedas hotel. The word "hotel" is explained in Encyclopaedia Britannica as "Building that provides lodging, meals and other services to thetravelling public on a commercial basis."Similarly, the word "hotel" is described in Merriam Webster OnlineDictionary as "An establishment that provides lodging and usually meals andother services for travellers and other paying guests." Likewise, in Stroud's Judicial Dictionary of Words and Phrases, the word"hotel" has been stated as "An "hotel" is a place where lodgings are let and whereprovisions are, to some extent, supplied." 8.4. A full bench of the Apex Court, in N.I. CATERERS (INDIA) LTD. v.LT. GOVERNOR OF DELHI (42 STC 386) where the appellant ran a hotel inwhich lodging and meals provided on "inclusive terms" to residents, wereserved to non residents also in the restaurant located in the hotel,considered the question of law, viz. Whether the service of meals tocasual visitors in the restaurant was taxable as a sale (i) when thecharges were lump sum per meal or (ii) When they were calculated per dish,and held that service of meals to visitors in the restaurant of theappellant was not taxable under the Bengal Finance (Sales Tax) Act, 1941,because, the supply of meals must be regarded as ministering to a bodilywant or to the satisfaction of a human need, as the same is provided byway of hospitality, which determines the functional character of thehotel. 8.6. Likewise, the hotel not only provides the lodging facility ormeals to the travellers and paying guests, but also other services, viz.the hotelier provides furniture and furnishings, linen, crockery andcutlery, in the eating places. The hotelier may add music, provide an areafor floor dancing and in some cases, floor show, in addition to thesupply of foods, drinks to the customers which all form part of otherservices to the travellers or paying guests or to any other travellingpublic. Of course, all are on commercial bases. 8.6. Likewise, the hotel not only provides the lodging facility ormeals to the travellers and paying guests, but also other services, viz.the hotelier provides furniture and furnishings, linen, crockery andcutlery, in the eating places. The hotelier may add music, provide an areafor floor dancing and in some cases, floor show, in addition to thesupply of foods, drinks to the customers which all form part of otherservices to the travellers or paying guests or to any other travellingpublic. Of course, all are on commercial bases. 8.7. A traveller or a travelling public, of course, will haveprivilege 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 forthe hotelier to maintain the hospitality whether its customer avails it or not. Therefore, what is important is whether the hotelier, apart fromlodging and boarding facility, also provides other services to thetravellers, paying guests and other travelling public to maintain thefunctional character of the hotel, viz. the hospitality. It is immaterialin the course of such hospitality whether such services are used by thevisitors to the hotel also. 8.8. An argument is also available for the revenue to say that thesefacilities like health clinic, gymnasium centre, swimming pool, music,floor dance, restaurant, bank, antiques, florists, emporium, arts andcrafts, facility of travelling agency would also be incidental use by thecasual visitors to the hotel. In our considered opinion, such usage bythe casual visitors much less general public who do not avail the lodgingfacility in the hotel, even though is incidental, by itself will not takeaway their main functional character of the hotel, viz. hospitality,inasmuch as these services are to be roped in to the main purpose of thehospitality of the above hotel. 8.9. In the instant case, the provisions for accommodating theofficers and staff of the hotel are, as rightly held by the Commissionerand Tribunal, deemed to be part and parcel of the functional character ofthe hotel, for the simple reason, when the facilities of the hotel couldbe utilised by the casual visitors to the hotel as an hospitality from thehotel, why could not such facility be extended to the officers, staff andemployees of the hotel. 8.10. Similarly, letting out shops for antiques, emporium, arts andcrafts, florists and travels, which are all intended as a part of serviceof the hospitality to the travellers, paying guests and other travellingpublic on commercial basis, shall have the same effect as that ofproviding facilities and services like restaurant, bar room, healthclinic, gymnasium centre, swimming pool, music, floor dance etc.These services are not only intended to attract the customers as opined bythe Commissioner, in our considered opinion, is a part and parcel of thehospitality of the hotel. Therefore, the entire building has to betreated as composite building and could not be segregated in any mannersuch as part of the building is used for hotel purpose and other part isused for accommodating the officers and staff of the hotel and housing thebank and shopping complex etc. and therefore, such portion is not entitledfor exemption of 20% under sub clause 3(i) of Clause I of Appendix I. 8.11. In the result, the entire composite building is entitled forexemption of 20%, giving benefit under sub clause 3(i) of Clause I ofAppendix I read with Rule 5 of the Rules. The appeal is dismissed and the questions of law are answered againstthe revenue and in favour of the assessee.kpl Sd/Asst.Registrar /true copy/ Sub Asst.Registrar To 1.The Assistant Registrar,Income Tax Appeallate Tribunal 3rd Floor, Rajaji Bhavan, Besant Nagar,Chenai-90. 2. The Commissioner of Income Tax,Trichy 3. The Commissioner of Income Tax (Appeals)Madras -34.