1983-VIL-59-ITAT-

Equivalent Citation: TTJ 017, 550,

Income Tax Appellate Tribunal BOMBAY

Date: 30.04.1983

PRITAM HOTEL PVT. LTD.

Vs

INCOME TAX OFFICER.

BENCH

Member(s)  : D. V. JUNNARKAR., K. B. MENON.

JUDGMENT

These appeals by the assessee relate to the asst. yrs. 1977-78, 1978-79 and 1979-80, for which the relevant previous years ended on 30th June, 1976, 1977 and 1978 respectively.

Ground No. 1 for asst. yrs. 1977-78 and 1978-79 and the only ground for 1979-80:

2. This is to the effect that the Commissioner (Appeals) erred in holding that the assessee-company is a trading company and that it is not an industrial company entitled to the benefit of the lower rate of tax. (The ground for 1979-80 had originally mentioned s. 80J, but this has been allowed to be corrected). The assessee-company is engaged in the running of a hotel known as Pritam. The assessee claimed the benefit of the lower rate of tax applicable to an 'industrial company' under the relevant Finance Acts. It is common case that so far as it is relevant for the present purpose, to be treated as an 'industrial company', the company should be engaged 'in the manufacture or processing of goods'. The order of the ITO did not contain a specific reference to the claim of the assessee but the benefit of lower rate of tax was not allowed to the assessee. The Commissioner (Appeals) observed that it is not clear whether the assessee made a specific claim before the ITO that it is a trading company. However, he considered that claim on merits and disallowed the same relying upon the ruling of the Kerala High Court in the case of CIT vs. Casino Pvt. Ltd. (1973) 91 ITR 289 (Ker). He also observed that the assessee had not made proper entries for making the claim against item No. C in part I. The assessee has, therefore, come up in appeal. With regard to the question whether the assessee had made the claim before us by the ld. representative for the assessee that the assessee had only left the column in Annexure D blank, that it does not mean that the assessee is not claiming the benefit available to an industrial company, that the assessee had mentioned its business as restaurant in the relevant place and that the assessee is, therefore, entitled to claim the benefits, if it is entitled to the same otherwise. We are inclined to accept this submission and to hold that the claim cannot be disallowed merely on the technical ground. We would, therefore, consider the same on merits.

2.1. The question for consideration now is whether the assessee-company, which is running a restaurant can claim to be an 'industrial company', i.e., a company engaged in the manufacture or processing of goods. In support of the claim, the ld. representative for the assessee relied upon certain rulings. Addl. CIT vs. Farrukhabad Cold Storage Pvt. Ltd. (1977) 107 ITR 816 (All) and CIT vs. Radhanagar Cold Storage Pvt. Ltd. (1980) 18 CTR (Cal) 166 : (1980) 126 ITR 66 (Cal) are cases where the assessee was running a cold storage. It was held by the Calcutta High Court that the activity of manufacture of goods is different from the activity of processing goods and that the act of cold storage was an act whereby foods or products stored in the cold storage were prevented from natural decay and that this would amount to processing the goods. It is clear that these rulings will be of no help in deciding the present controversy. Similar is the position with regard to the ruling of the Delhi High Court in the case of Addl. CIT vs. Kalsi Tyre Pvt. Ltd. (1981) 131 ITR 636 (Del) wherein it was held that the activity of retreading tyres will amount to processing of goods. The ld. representative for the assessee also referred to a ruling of the Bombay 'E' Bench of the Tribunal dt 31st December, 1980 in ITA Nos. 3261 & 3262/Bom/1979. In that case, the assessee was engaged in the business of manufacture and selling of sweetmeats and other dairy products. It was held by the Tribunal that the assessee was engaged in the manufacture or processing of goods and in doing so, the Tribunal distinguished the ruling of the Kerala High Court in the case of CIT vs. Casino Pvt. Ltd. (1973) 91 ITR 289 (Ker). This ruling also, in our opinion, is not applicable to the facts of the present case.

2. 2. As against this, it was contended by the ld. departmental representative that the present case is fully covered by the decision of the Kerala High Court in the case of Casino Pvt. Ltd. That was also a case where the assessee-company was running a restaurant. After going into the matter in all its aspects, the Kerala High Court held that 'manufacture' is a process which results in an alteration or change in the goods which are subjected to manufacture, that in such cases a commercially new article is produced and that the production may be by manual force, mechanical force or even by manual force, mechanical force or even by nature's own forces, but the real test is to see whether a commodity which in commercial sense is different from the raw material has resulted due to the manufacture. It was then held that 'processing' has in one sense a wider meaning than the term 'manufacture'. But it was also held that the four categories of companies included in the definition of the term 'industrial company' in the Finance Act are manufacturing concerns as distinct from trading concerns and that a hotel is mainly a trading concern. It was observed that the activity carried on in preparing articles of food from raw materials in a hotel would not constitute manufacturing or processing of goods and that a company which carries on such activity will not fall within the definition of an 'industrial company'. The ld. representative for the assessee did not seriously dispute that this ruling is prima facie against the claim of the assessee. But it was contended by the ld. representative that it has been held by the Calcutta High Court in the case of G.A. Randerian Ltd. vs. CIT (1983) 32 CTR (Cal) 318, that the decision of the Kerala High Court in the case of Casino Pvt. Ltd. (1973) 91 ITR 289 (Ker) is no more good law in the light of the ruling of the Supreme Court in the case of Chowgule & Co. Ltd. AIR 1980 SC 1014 : 1981 Tax LR 2929. The question for consideration in the Calcutta case was whether an assessee who was carrying on the business of purchasing tea of different quality in auction, blending the same by mixing one type of tea with another and then selling the tea so blended in packets can claim to be an 'industrial company'. Following the ruling of the Supreme Court, in the case of Chowgule & Co. Ltd., it was held by the Calcuatta High Court, that the activity of the assessee company will amount to 'processing'. Before the Calcutta High Court, the department had relied upon the decision of the Kerala High Court in the case of Casino Pvt. Ltd. and had contended that the observations of the Supreme Court in the case of Chowgule & Co. Ltd. which was with reference to the provisions of ST Act, cannot apply in the case of IT Act. This contention was rejected by the Calcutta High Court as it was clear even from the ruling of the Kerala High Court that in the absence of a definition of the term 'manufacturing or processing' in the Act, the words were being given the meaning in common law or in other words the sense in which the people conversant with the subject matter will understand the terms. The Calcutta High Court then pointed out that there is another aspect on which the Tribunal, in the case before the Calcutta High Court, had rested its decision, namely, that the Kerala High Court had held that what was done manually and without application of mechanical forces could not be considered to come within the expression 'processing'. It was held by the Calcutta High Court that this argument accepted by the Kerala High Court has been expressly negatived by the Supreme Court in the case of Chowgule & Co. Ltd. It is clear from what is stated above that there is no merit in the contention that the entire ruling in the case of Casino Pvt. Ltd. has ceased to be good law. What can be claimed at the most is that it is no more good law for the proposition that there can be no 'processing' if the operation is done manually and without application of mechanical forces. But, in our view, the basic distinction pointed out by the Kerala High Court with regard to a manufacturing concern and a trading concern and the view expressed that the running of a hotel is a trading activity as distinguished from a manufacturing activity and that a company which carries on the activity of running a hotel will not fall within the definition of an 'industrial company' still hold good. Therefore, respectfully following the decision of the Kerala High Court, we decide the issue against the assessee.

Ground No. 2 for asst. yr. 1977-78 and ground No. 3 for the asst. yr. 1978-79

3. This relates to the disallowance by the Commissioner (Appeals) of 15% out of the motor car expenses. The car belongs to the assessee-company. The disallowance was on the ground that there was personal use of the car by the directors. The contention of the assessee is that although any expenditure relating to the personal use may constitute perquisite in the hands of the directors, it will be an allowable expenditure as far as the company is concerned. We find that this contention has been accepted by the Bombay 'C' Bench of the Tribunal in its order dt. 20th February, 1981 in the case of M/s Ramanlal Pvt. Ltd. Respectfully following the same, we decide the issue in favour of the assessee.

Ground No. 3 far asst. yr. 1977-78 and ground No. 4 for asst. yr. 1978-79

4. This relates to the disallowance of 15% of the depreciation on the car consequent on the decision covered by the grounds referred to in the preceding paragraph. As the disallowance of expenditure is being deleted, the disallowance of depreciation has also to be deleted. The ground is decided in favour of the assessee.

Ground No. 4 for asst. yr. 1977-78 and ground No. 5 for asst. yr. 1978-79

5. This relates to the disallowance of 20% of the expenditure on telephone No. 445834. The disallowance is on account of personal use. The disallowance was based on the practice followed in the earlier assessment years. No new materials have been placed before us so as to justify our interference with the order of the Commissioner (Appeals). This ground is decided against the assessee.

Ground No. 2 for asst. yr. 1978-79

6. This relates to the disallowance of Rs. 8,780 being the amount paid as membership fee for the directors in certain clubs. This was disallowed by the Commissioner (Appeals) only on the ground that the expenses of the directors would not be the expenditure of the company and that the contention of the assessee that the membership was for the advancement of the business of the assessee-company remains unsupported by any evidence. It has been held by the Bombay 'B' bench of the Tribunal in its order dated 14th April, 1981 in the case of M/s Sahni Karkud (P) Ltd. that such expenses are allowable as business expenditure. This decision itself based on the earlier decisions of the Tribunal. It is not practicable for the assessee to prove a claernut nexus between the increase in business and the membership in the club. But it is well known that membership of the directors in important clubs afford good contacts for developing the business of the company. Respectfully following the earlier decision of the Tribunal this issue is also decided in favour of the assessee.

7. In the result, appeal No. 2082 (asst. yr. 1977-78) and 2083 (asst. yr. 1978-79) are allowed in part and appeal No. 3062 (asst. yr. 1979-80) is dismissed.

 

DISCLAIMER: Though all efforts have been made to reproduce the order accurately and correctly however the access, usage and circulation is subject to the condition that VATinfoline Multimedia is not responsible/liable for any loss or damage caused to anyone due to any mistake/error/omissions.