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High Court Of Allahabad
C.S.P. Singh, R.R. Rastogi, JJ.
Commissioner Of Income-Tax – Appellant
Versus
U.P. Hotel-Restaurant Ltd. – Respondent
Income-tax Reference 601 of 1976
Decided On : Sep 24,1979
INCOME TAX - Depreciation - New building - Conference hall - Whether a new building - Whether a part of hotel - Computation of capital employed - Whether borrowed capital to be excluded - Whether amount paid as composition fees for contravention of law can be included in cost of construction - Whether expenses incurred for painting and water proofing of roof of conference hall can be included in cost of construction.
Fact of the Case:
The assessee, a hotel owner, constructed a conference hall after 31st March, 1967. The assessee claimed depreciation under Section 32(1)(v) of the Income Tax Act, 1961. The ITO and the AAC rejected the claim on the ground that the conference hall was not a new building and was not a part of the hotel. The Tribunal allowed the claim.
Finding of the Court:
The court held that the conference hall was a new building and was a part of the hotel. The court also held that the borrowed capital could not be excluded while computing the capital employed. The court further held that the amount paid as composition fees for contravention of law could not be included in the cost of construction. However, the court held that the expenses incurred for painting and water proofing of the roof of the conference hall could be included in the cost of construction.
Issues: 1. Whether the conference hall was a new building? 2. Whether the conference hall was a part of the hotel? 3. Whether the borrowed capital could be excluded while computing the capital employed? 4. Whether the amount paid as composition fees for contravention of law could be included in the cost of construction? 5. Whether the expenses incurred for painting and water proofing of the roof of the conference hall could be included in the cost of construction?
Ratio Decidendi: 1. The court held that the conference hall was a new building as it was constructed after 31st March, 1967. 2. The court held that the conference hall was a part of the hotel as it was used for the purpose of the hotel business. 3. The court held that the borrowed capital could not be excluded while computing the capital employed as Rule 19A(3) of the Income Tax Rules, 1962, which excluded borrowed capital, was ultra vires the rule-making power. 4. The court held that the amount paid as composition fees for contravention of law could not be included in the cost of construction as it was a penalty for contravention of law. 5. The court held that the expenses incurred for painting and water proofing of the roof of the conference hall could be included in the cost of construction as they were essential for completing the conference hall.
Final Decision: The court answered the first and third questions in the affirmative, in favour of the assessee and against the department. The second question was answered against the assessee and in favour of the department. The fourth question was answered by saying that the computation had to be done in accordance with Rule 19A. The fifth question was answered by saying that the loans taken by the assessee could not be deducted while computing its capital which had to be done under Rule 19A and not Rule 19. The sixth question was returned unanswered. The seventh question was answered in the affirmative, in favour of department and against the assessee. The eighth question was answered by saying that the amount of Rs. 26,635 should have been added to the cost of erection for purposes of calculating the assessee's claim for initial depreciation under Section 32(1)(v) of the Act.
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 allowance 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 assessees 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 confer
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