C.S.P. Singh, J. - (1.) THE reference relates to the assessment years 1968-69 and 1969-70. It has been at the instance of both the assessee and the department. THE questions referred at the instance of the parties are : At the instance of the Commissioner for A.Y. 1968-69. " 1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the conference hall was a building which was being used by the assessee as a hotel within the meaning of Section 32(1)(v) of the I.T. Act ? 2. Whether, on the facts arid in the circumstances of the case, the Tribunal was correct in holding that half of the profits of the current year were liable to be added while computing the capital of the assessee for working out the relief due to it under Section 84 of the Income-tax Act for assessment year 1967-68 ? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the loan of Rs. 23,74,000 taken by the assessee from the Industrial Finance Corporation of India was not liable to be deducted while computing its capital for working out the relief due to it under Section 80 J of the Income-tax Act ? " At the instance of the assessee for A.Y. 1968-69. " 4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the computation of capital employed in the business of the hotel in the accounting year ended on September 30, 1966, should be done under rule 19 of the Income-tax Rules and not under Rule 19A, Section 80J(3) of the I.T. Act ? 5. Whether the Tribunal was correct in holding that loans taken by the assessee had to be deducted for computing its capital as per the provisions of Rule 19 and Rule 19A for the assessment years 1967-68 and 1968-69, respectively ? 6. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that under Rule 19 of the Income-tax Rules, 1962, the amount of depreciation was not liable to be added to the profits for computing the capital of the assessee in respect of the assessment year 1967-68?" At the instance of the Commissioner for A. Y. 1969-70. " 7. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the amount of Rs. 24,000 paid by the assessee as composition fees to the Cantonment Board was liable to be included in the cost of the swimming pool and the building for purposes of allow ance of depreciation on them ? " At the instance of the assessee. . . " 8. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in rejecting the assessee's claim for initial depreciation under Section 32(1)(v) on the amount of Rs. 50,635 ? "
(2.) THE accounting years for the assessment years involved in the reference ended on 30th September, 1967, and 30th September, 1968, respectively. THE facts relevant for answering the questions for the assessment year 1968-69 are being mentioned first. THE assessee was running a hotel. It constructed a conference hall which was completed in September, 1967, This hall, according to the assessee, was used for the first time on 3rd September, 1967, when a conference of the Indian Institute of Management was held therein. According to the assessee, an amount of Rs. 2,47,342 was spent on the construction of this hall. Claim for depreciation in respect of this construction was made under Section 32(1)(v) of the Act. THE ITO, however, took the view that the claim under Section 32(1)(v) was allowable in respect of a complete hotel and not for additions made thereto. THE AAC held that the conference hall had been constructed before the 31st March, 1967, and the shops which were also part of the construction had been let out before the 1st of March, 1967, and rejected the claim of the assessee. On an appeal before the Tribunal, the Tribunal after considering the evidence on record held that the conference hall had been completed after the 31st March, 1967. Taking the view that the conference hall was a part of the hotel being run by the assessee, it upheld the depreciation claimed under Section 32(1)(v). THEre was another dispute in this assessment order and that was in respect of relief under Section 80 J. This provision had been introduced in the I.T. Act with effect from 1st of April, 1968. Simultaneously with the introduction of this provision, Section 84 of the Act had been deleted. Under this provision, the assessee was entitled to a deduction from the profits and gains of the business of the hotel of 6% of the relevant capital employed during the previous year. THE method of computation of the capital employed was laid down in Rule 19A. Earlier, similar deductions were dealt with by Section 84 and the capital employed had to be computed in accordance with Rule 19. Section 80J, however, made a departure from Section 84 by providing under Sub-section (3) the right to carry forward the unabsorbed amount of capital employed for a period of seven years which could not be fully allowed in years of loss or when the profit was less. THE assessee-company had not made any profit from the hotel business during the assessment year 1967-68 and, therefore, no relief under Section 84 was granted to it in that year. In the assessment year 1968-69, the assessee had made profits and claimed that the unabsorbed relevant amount of capital employed be set off against the profits of the assessment year 1968-69. In this respect, the assessee's contention, further, was that the relevant amount of capital employed, for the assessment year 1967-68 should be calculated in accordance with Rule 19A and not by reference to Rule 19. This contention was, however, rejected and the ITO calculated the relevant amount of capital employed for the assessment year 1968-69 under Rule 19 and gave benefit for the same. THE AAC took the same view. THE Tribunal concurred. Connected with the issue of the calculation of the relevant amount of capital employed, was the addition of half of the profits to the amount of the capital computed in accordance with Rule 19(5). THE ITO, inasmuch as he was relying on Rule 19 for the purposes of the assessment year 1967-68, applied Rule 19(5) and added the amount of Rs. 27,298 while making the calculation under that rule. Another aspect of the controversy regarding the computation of the capital employed under Rule 19 was as to whether half of the amount of Rs. 4,15,909 representing the amount of depreciation debited in, the profit and loss account should be added to the book profit for purposes of computing the relevant amount of capital employed. THE ITO held against the assessee and so did the AAC. THE Tribunal concurred with the view of these two officers. A further issue was as to whether the amount of Rs. 23,74,000, being loans taken by the assessee from the Industrial Finance Corporation of India, was liable to be included while computing the relevant amount of capital employed for purposes of granting relief under Section 80J. THE ITO held that the amount of borrowed capital had to be excluded. THE AAC took a contrary view. THE Tribunal concurred with the view of the AAC mainly on the consideration that the loan had been taken for constructing the hotel and was repayable after a period of more than seven years. In their view the loan fell outside the mischief of the first part of Rule 19A(3) in view of Clause (b) thereof. It also repelled the contention raised on behalf of the department that the amount had not been utilized for creating a capital asset as in its view the stand taken in the appeal was completely a new one. Coming to the facts relevant for answering the questions for the assessment years 1969-70, it appears that the assessee while constructing the hotel and a swimming pool had done so in contravention of the bye-laws of the Cantonment Board and as a result in the year 1969-70, had to pay an amount of Rs. 24,000 as composition fees. The assessee claimed that this amount be added in the construction cost of the building under Section 32(1)(v). The ITO and the AAC held against the assessee on the view that the amount paid was by way of penalty for contravention of law. The Tribunal, however, took the view that the composition fee could be included in the cost of the asset as in its view the words " cost of the asset " were of wide amplitude. In this year, a claim was also made for Rs. 50,635 as representing the cost of construction. This amount included the amount of Rs. 24,000 as composition fee and the balance cost of painting and water proofing, etc., of the roof of the conference hall. The claim regarding the painting and water proofing costs, etc., has been disallowed by all the three authorities on the ground that this expenditure was incurred after the conference hall had been created and did not relate to the costs of creation of the conference hall. We will begin by addressing ourselves to the first question for the assessment year 1968-69. As has been noticed, the conference hall was built while the hotel business was already, running. The Tribunal has found that the hall was built after the 31st of March, 1967. The assessee has claimed depreciation under Section 32(1 )(v) of the Act which runs as under: " 32. (1) In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of Section 34, be allowed :--...... (v) in the case of any new building, the erection of which is completed after the 31st day of March, 1967, where the building is owned by an Indian company and used by such company as a hotel and such hotel is for the time being approved in this behalf by the Central Government, a sum equal to twenty-five per cent. of the actual cost of erection of the building to the assessee, in respect of the previous year in which the erection of the building is completed or, if such building is first brought into use as a ho.tel in the immediately succeeding previous year, then in respect of that previous year ; but any such sum shall not be deductible in determining the written down value for the purposes of Clause (ii)."
(3.) IN order to qualify for the deduction under Section 32(1)(v), to begin with, the building must be a new building, the erection of which is completed after the 31st day of March, 1967. Secondly, the building must be owned by an INdian company and used by the company as a hotel. Thirdly, the hotel must be one which is approved by the Central Govt. It is not disputed that the assessee is an INdian company running a hotel and in view of the finding given by the Tribunal we have to proceed on the basis that the erection of the conference hall was completed after the 31st day of March, 1967. What is in dispute is as to whether the word " building " includes addition to an already existing hotel and further as to whether a conference hall is a hotel. With the passage of time the concept of what constitutes a hotel has changed. Formerly, while a hotel provided amenities in the nature of a hostel, now, it is appropriately used to describe a building of many rooms, chiefly for overnight accommodation of transients and several floors served by elevators, usually with a large open street level lobbies, containing easy chairs, with a variety of compartments for eating, drinking, dancing, exhibitions, and group meetings (as of salesmen or convention attendants), with shops having both inside and street-side entrances, and offering for sale items (as clothes, gifts, candy, theatre tickets, travel tickets) of particular interest to a traveller, or providing personal services (as hair-dressing, shoe-shining), and with telephone booths, writing tables, and washrooms. (See Webster's Third New INternational Dictionary, Vol. II, p. 1084). Dealing with modern hotels in Encyclopaedia Britannica, 1968 Edn., Vol. II, on page 748, we find the following description. " All first class new hotels that were built in the late 1960s and early 1970s made provision for private bathrooms, and the larger London ones, such as the Churchill, Britannia, Portman, London INternational, and Skyline, mostly had accommodation for dealing with conferences, exhibitions, and banqueting, which provide the backbone of their off-season business. Similarly, in some of the chief provincial centres and at the more important holiday resorts, establishments were specially geared to catering to conference trade. One new luxury establishment, the 60 bed-room Capital Hotel in Knightsbride, London, took the novel step of providing disposable razors and toothbrushes in all bathrooms as well as individual take operas in all rooms. Also in use in the United Kingdom were service credit cards valid at certain establishments for the payment of accommodation and meals." These reference books indicate the dramatic change in the facilities provided by new hotels which have sprung up of late. Conference halls have now become an established feature of good hotels. Section 80J was introduced on the 1st of April, 1968, and in view of the fact that modern hotels were providing conference halls as additional amenities, the Legislature must be taken to be cognizant of this facility afforded in big hotels, and also the fact that conference halls formed an integral part of newly established hotels. Thus, it has to be held that a conference hall being a part of a hotel would fall within the purview of Section 32(1)(v). The next question is whether it will answer the description of a new building. As has been noticed, the case of the department is that an addition to an existing hotel will not satisfy the requirements of Section 32(1)(v). Now, the word " building " has not been denned by the Act. But, it cannot be denied that a conference hall is a building, for, it is a roofed structure which is one of the factors which has to be taken into consideration while considering whether a construction would be a building. It is also not disputed that it is a new construction. Thus, the conference hall is a hew building constructed after the 31st of March, 1967, and used by the assessee as a part of the hotel, which hotel has been approved by the Central Govt. All the requirements of Section 32(1)(v) are, thus, satisfied and the assessee was entitled to the depreciation provided for under Section 32(1)(v).;