COMMISSIONER OF INCOME TAX Vs. N SATHYANATHAN AND SONS PRIVATE LIMITED

JUDGEMENT

(1.) THE question, which arises for consideration in these references is, as to whether the building used as a hotel is "plant" for the purpose of claiming the higher rate of depreciation allowed for plant. THE Tribunal has held that by applying the functional test, the term "plant" used in Section 32 of the Income-tax Act, 1961, is to be given a wider meaning and, having regard to the purposes for which the building is used a building is capable of being regarded as a plant. It has also been held that that building used by a hotel is required to be specially designed and many amenities provided in such a building in order to make it usable as a hotel and, therefore, such building with its amenities constitutes "plant" in the business of running a hotel, and such buildings are to be depreciated at the higher rate allowed for plant.

(2.) THE functional test adopted by the Tribunal is also the test that has been adopted by the High Courts at Patna, Calcutta, Andhra Pradesh, Karna-taka, Allahabad and Kerala with regard to buildings used as hotels or cinema theatres or as nursing homes. THE decision of the Patna High Court is to be found in the case of CIT v. Lawly Enterprises (P.) Ltd. [1997] 225 ITR 154, that of the Andhra Pradesh High Court in the case of Hotel Banjara Ltd. v. CIT [1996] 218 ITR 590, that of the Calcutta High Court in the case of S.P. Jaiswal Estates (P.) Ltd. v. CIT [1995] 216 ITR 145, that of the Karnataka High Court in the case of CIT v. Venkata Rao (Dr.) (B.) [1993] 202 ITR 303, and that of the Allahabad High Court in the case of S. K. Tulsi and Sons v. CIT [1991] 187 ITR 685. THE common reasoning in all these decisions is that the word "plant" used in Section 32 of the Act, which expression is defined in Section 43(3) of the Act in an inclusive manner, is a word of wide amplitude and capable of comprehending many things including buildings, if the same is used as a tool in the business of the assessee. THE buildings though recognisable as such, it has been held in these decisions, are to be regarded as "plant", by applying the functional test and by having regard to the nature and purposes of the user to which the building is put. THE modern hotel, it has been held in these decisions, consists of buildings specially designed to suit the requirements of the hotel with many amenities provided therein for the comfort of the customers using the hotel and that the attraction for the customer is the building itself and the facilities provided therein besides the quality of the service by the hotelier. Buildings specially designed as hotels and used as hotels, have, therefore, been held to be plant.

(3.) THE first class of asset mentioned therein is building. THE second, "furniture and fittings" the third "machinery and plant" not being a shed. THE fourth and the last class of asset mentioned therein is "ship". It is necessary to mention here that in these references, we are concerned with the assessment years 1980-81 and 1982-83. This Appendix was subsequently amended with effect from the commencement of the assessment year 1988-89. THE four categories of assets, viz., buildings, furnitures and fittings, machinery and plant and ships remain, but, under the head "Buildings", two new sub-categories "buildings used as hotels" and "buildings with dwelling units with a plinth area not exceeding 80 sq. meters" have been introduced in item (3) under the head "Buildings". THE rate of depreciation in respect of such buildings used as hotels from the assessment year 1988-89 onwards is 20 per cent. Prior to that assessment year, "buildings" had been classified as "First Class--Substantial buildings of selected materials ; Second Class-Buildings of less substantial construction ; Third Class--Buildings of construction inferior to that of second class buildings, but not including purely temporary erections, and lastly purely temporary erections, such as wooden structures. THE rate of depreciation allowed for these classes of buildings was at 2.5 per cent., 5 per cent., 7.5 per cent, and 100 per cent, respectively. In respect of the first, second and third class buildings, double those rates were to be taken for factory buildings excluding offices, godowns and employees' quarters. Another category, viz., structures or doing of any work in or in relation to building referred to in Sub-section (1A) of Section 32 of the Act was also to be found under the category of "buildings". THE rate of depreciation in respect of such structures being determined with reference to the earlier entries (1) to (4) depending on the classes of the building in relation to which the renovation or improvement is effected.