By TIOL News Service

CHANDIGARH, APRIL 03, 2018: THE issue is - Whether the benefit of deduction u/s 80IC is available to the eco-tourism unit including the hotel in order to undertake 'substantial expansion' even though installation of plant and machinery is not required to carry such business activity. YES is the answer.

Facts of the case:

The Assessee-company, engaged in running a hotel in Himachal Pradesh under the Eco-tourism project. The Assessee had filed its return for the relevant AY. In the course of the assessment proceeding, the AO noted that the Assessee had claimed deduction @100% of the net profits u/s 80IC on account of substantial expansion of the unit claimed to be carried out in FY 2005-06. The Assessee had claimed that it was running an Eco-tourism project as mentioned in XIV schedule. The claim of the Assessee was that it had made substantial expansion in its hotel which was included in the definition of 'Eco-tourism' as provided in the XIV Schedule. However, the AO held that the Assessee's hotel failed to qualify as an Eco-tourism unit. Further, the AO stated that mere establishing of a hotel does not itself constitutes an Eco-tourism unit. The hotel was also not located in the area of operation of the Eco-tourism policy of the State Government of Himachal Pradesh. The hotel was also not involved in conversation of ecology while carrying out its business operation. Therefore, the AO held that the hotel of the Assessee failed to qualify for deduction u/s 80-IC being not an Eco-tourism unit. Later, while referring to the definition of ‘plant' given u/s 43(3), the AO observed that plant excluded building, furniture and fittings. Therefore, the AO denied the benefit of deduction under the provisions of sec. 80IC to the Assessee. On appeal, the CIT(A) upheld the findings of the AO and held that the Assessee was not entitled to benefit of deduction u/s 80IC.

the Tribunal held that,

++ the Supreme court in the case of Anand Theatres referred to the definition of 'plant' as provided u/s 43(3) and held that as per the scheme of sec. 32, separate rate of depreciation for building, machinery and plant, furniture and fittings was provided. The definition of plant was provided u/s 43(3) which nowhere included buildings. There was different rate of depreciation for each asset and further that for a building used for a hotel, specific provisions was made granting additional depreciation u/s 32(1)(v). The Supreme Court, therefore, held that even the building used for a hotel or theatre could not be given depreciation as a plant as the term 'plant' and 'building' had been defined separately and different rate of depreciation were available on different items. The proposition laid down by the Supreme Court in relation to the claim of depreciation on hotel or building cannot be imported while deciding the claim of an Assessee for deduction on account of substantial expansion in 'hotel', if such hotel undertaking is otherwise falls in the list of eligible undertakings for deduction under the provisions of sec. 80IC;

++ the deduction u/s 80IC is not only allowable on the commencement / start of operation of such units as are listed in the XIV schedule but also on the substantial expansion of such units. Admittedly, carrying of hotel business does not involve the setting up or installation of plant and machinery as is usually done in case of an industrial undertaking involved in manufacturing / production of things or articles. Despite the fact that in the project of a hotel, the setting up / installation of plant and machinery is not required, the benefit of deduction u/s 80IC has been given to such units provided they start / commence their operation within the stipulated dates or undertake substantial expansion during the said stipulated period if set up in the special category of States including state of Himachal Pradesh;

++ when a unit like a hotel is established in the special category of states whose main investment is on building, which has been so planned and constructed to serve the Assessee's special technical requirements of hotel/ hospitality services including the investment on furniture and fixtures, so specially required for carrying out such activity, and is eligible for deduction on its commencement of activity u/s 80IC, then under such circumstances, for the purpose of the meaning of 'substantial expansion' the expansion in such building, furniture and fixtures would constitute an investment in plant and machinery for the purpose of claim of deduction u/s 80IC. The term 'plant and machinery' in view of the special provisions of sec. 80IC, specifically enacted for promotion of certain industrial undertaking or enterprise in the special category of states of Himachal Pradesh and Uttaranchal will include the technically designed building and furniture, fittings and fixtures therein in case of hotel wherein otherwise no plant and machinery is required;

++ the Supreme court in the case of Karnataka Power Corporation has held that the question whether a building can be treated as plant, basically, is a question of fact and where it is found as a fact that a building has been so planned and constructed as to serve as Assessee's special technical requirements, it will qualify to be treated as a plant for the purpose of investment allowance. The dispute involved in the present case is relating to the benefit of deduction on account of investment. The special provisions of sec. 80IC are enacted for promoting investment activity in certain undertaking or enterprises in the special category of states including state of Himachal Pradesh. The Eco-tourism unit including the hotel has been specifically allowed in the list eligible for deduction as per special provisions which otherwise does not involve installation of plant and machinery;

++ if the original investment made for setting up of such unit is eligible for deduction u/s 80IC, then certainly the further investment in the same infrastructure for the purpose of expansion cannot be denied, merely because the investment does not involve setting up / installment of plant and machinery. Any other or strict definition of word 'substantial expansion' would defeat purpose for which the special provisions u/s 80IC have been made. Therefore, this Tribunal concludes that the restrictive meaning given by the lower authorities to deny the deduction u/s 80IC to the Assessee on account of substantial expansion cannot be held to be justified. Accordingly, set aside the order of the lower authorities on this issue and hold that the investment in building, furniture, fixture in the case of a hotel will qualify to be treated as investment in plant and machinery for the purpose of section 80IC and, therefore, hold that the Assessee will be entitled to deduction u/s 80IC on account of substantial expansion of the unit.

(See 2018-TIOL-484-ITAT-CHD)