Commissioner of Income Tax vs Indian Hotels Co. Ltd.

The assessee is a company. The assessee owns Taj Group of Hotels. In this reference we are concerned with the assessment year 1980-81 corresponding to the previous year ending 31-3-1980. The assessee paid remuneration to its employee-director. The assessee claimed deduction in that regard u/s 40(c) of the Income Tax Act, 1961 (hereinafter referred to as the Act). This was disallowed by the department. It was the case of the department that section 40(c) has no application and what applied was section 40A(5) of the Act. On this point, the Tribunal held in favour of the assessee. Further, the assessee claimed depreciation by treating its hotel building as a plant. This was disallowed by the department on the ground that the hotel building was not a plant and, therefore, the assessee was not entitled to claim depreciation thereon. The Tribunal held in favour of the assessee.

Under the above circumstances, the following two questions have been referred to this court u/s 256(1) of the Act for its opinion. (Qs. at pg. 5)

" Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that section 40(c) instead of section 40A(5) was applicable in respect of employee-director for the purpose of disallowances out of remuneration and perquisites ?

2.Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in directing to treat the hotel building as plant for the purpose of granting depreciation ?"

Findings

In view of the judgment of the Supreme Court in the case of Commissioner of Income Tax, Bombay Vs. M/s. Indian Engineering and Commercial Corporation Pvt. Ltd., and particularly in view of the fact that payments were made to director employee, question No. 1 is answered in the affirmative, i.e., in favour of the assessee and against the department. Therefore, section 40(c) is applicable in respect of employee- director for the purposes of disallowances in respect of remuneration and perquisites paid to such employee director. This answer is given on the basis of the law as it stood at the relevant time.

In view of the judgment of the Supreme Court in the case of Commissioner of Income Tax, Trivandrum Vs. M/s. Anand Theatres, the above question No. 2 is answered in the negative, i.e., in favour of the revenue and against the assessee. Hence, the assessee was not entitled to depreciation in respect of the hotel building at the rates applicable to plant because the hotel buildings are held by the Supreme Court only to be buildings and not plants.

Reference is, accordingly, disposed of.