One appeal is by assessee and other is by department. They relate to assessment year 1980-81. 2. We will first take up assessee's appeal being 828 (Hyd.) of 1984. first ground in this appeal relates to capitalisation of preoperative expenditure. assessee had capitalised pre-operative expenditure of Rs. 98,25,457 incurred connection with setting up of hotel and for acquisition of capital assests. Out of above amounts ITO did not capitals following items amounting to Rs. 9,54,507: Consultancy fees 2,54,876 Legal audit and licensee fee 2,54,287 Other administrative expenses 3,33,619 Stationery 1,11,725 In respect of Rs. 21,94,338 ITO capitalised to extent of 60 pre cent thereof which came to Rs. 13,16,603. balance of Rs. 8,77,736 was not considered by ITO. Thus, ITO did not capitals Rs. 9,54,507 and Rs. 8,77,736 totaling to Rs. 18,32,243. On appeal, Commissioner (Appeals) directed ITO to capitalise to extent of 80 per cent in respect of expenditure of Rs. 9,54,507 which ITO did not capitals and in respect of expenditure which he capitals to extent of 60 per cent only. 3. learned counsel for assessee kly urged that Commissioner (Appeals) should have allowed capitalisation of 100 per cent instead of restricting it to 80 per cent. learned departmental representative justified order of Commissioner (Appeals). 4. We have considered rival submissions. We agree with finding of Commissioner (Appeals) in capitalising only 80 per cent of expenditure. I n respect of administrative expenses they cannot be capitalised as that is not expenditure incurred for purpose of setting up or election of machinery or in connection with acquisition of it So that cannot be added to cost of machinery or plant Similarly in respect of audit and licensee fee it cannot be added to cost of machinery or plant In respect of stationery also part of it is not connected with machinery or plant and it cannot be added to its cost. In CIT v. Simco Meters Ltd. [1978] 111 ITR 113, Madras High Court held that in absence of finding that managing agency remuneration rent and lighting law charges directors' sitting fees and depreciation on furniture related to acquisition of assets or erection of machinery Tribunal was not justified in allowing claim of assessee to capitals expenditure under those heads even to extent of 50 per cent. In CIT v. Polychem Ltd. [1975] 98 ITR 574 Bombay High Court held that printing and stationery expenses claimed had no conection with acquisition and installation of machinery Considering assessee's case in light of above decisions capitalisation allowed by Commissioner to extent of 80 per cent is very reasonable. decisions relied on by assessee's counsel were considered by Commissioner (Appeals). We agree with reasons given by Commissioner (Appeals) and uphold his order on this point 5. next ground is with regard to computation of capital for purpose of relief under section 80J of Income-tax Act, 1961 ('the Act'). This ground is to be rejected in view of decision of Supreme High Court in Lohia Machines Ltd v. Union of India [1985] 152 ITR 308 and also in view of amendment of section 80J. 6. next item is with regard to investment allowance under section 32A of Act. assessee claimed investment allowance under section 32A on ground that it is carrying on activity of manufacture or processing in producing foodstuffs which are not articles specified in Eleventh Schedule of Act ITO held that hotel business cannot be equated with that of industrial concern manufacturing article or thing Industry contemplates factory in which machinery and plant are instead for actual physical production of articles or things. He has placed reliance on decision of Kerala High Court in CIT v. Casino (P.) Ltd. [1973] 91 ITR 289. Thus, he rejected assessee's claim. On appeal, Commissioner (Appeals) held that there is no manufacturing or processing activity and as such assessee is not entitled to investment allowance under section 32A. 7. learned counsel for assessee submitted that assessee is industrial undertaking It carries on activity of manufacture or production of article or thing Out of raw materials assessee produces foodstuffs which are articles or thigh different from raw materials. Thus assessee satisfies all conditions required for allowing investment allowance. He placed reliance on orders of Tribunal in Orient Express Co. (P.) Ltd. v. IAC [1985] 23 TAXMAN 98 (Delhi - Trib.), ITO v. Elite Sea Foods [1983] 3 ITD 348 (Coch.), Naveen Mechanised Construction Co. (P.) Ltd. v. First ITO [1983] 3 ITD 456 (Bang.), First ITO v. Dr. P. Vittal Bhat [1983] 6 ITD 560 (Bang.), (SB) and also on CIT v. Ajay Printery (P.) Ltd. [1965] 58 ITR 81 (Guj.). learned departmental representative relied on orders of lower authorities. 8. We have considered rival submissions. Under section 32A (1) investment allowance will be allowed in respect of ship or aircraft or machinery or plant specified in sub-section (2). Sub-section 2(b) (iii) which is relevant for our purpose reads as under: "(2) ship or aircarft or machinery or plant referred to in sub-section (1) shall be following, namely:- (a) ** ** ** (b) any new machinery or plant installed after 31st day of March 1976, - (i) and (ii) ** ** ** (iii) in any other industrial undertaking for purpose of business of construction manufacture or production of any article or thing not being article or thing specified in list in Eleventh Schedule." reading of above provision would show that if any new machinery or plant owned and used for business carried on by assessee in any industrial undertaking for purpose of business or construction manufacture or production of article or thing which is not specified in list in Eleventh Schedule assessee will be entitled to investment allowance assessee is not hit by this list. first question to be considered is whether assessee manufactures or produces any article or thing. assessee runs hotel. manufactures or produces any article or thing. assessee runs hotel. foodstuffs prepared in hotel in preparing articles of food from raw materials would not constitute 'manufacture or production of any article or thing'. In coming to this conciliation we place reliance on decision of Kerala High Court in Casino (P.) Ltd.'s case (supra). following question was considered in that case: "Whether, on facts and in circumstances of case Appellate Tribunal is legally correct in holding that activity carried on by assessee in preparing articles of food from raw materials constitutes 'manufacture or processing of goods' within meaning of section 2(6) (d) of Finance Act, 1968, and that assessee is 'Industrial company' within meaning of definition contained in that section? " (p. 290) above question was answered in negative and against assessee. It was observed as under: "... hotel, according to us is one such as it is mainly anointed for trading and not for production or manufacture various items of foodstuff and be averages produced in hotel are intended for trading and conversion of raw materials into foodstuff is only process in trading. Notwithstanding this concerns would essentially be trading concern We are referring to this distinction because it appears to us that definition of term 'Industrial company' indicates that reference in regard to companies manufacturing or processing of goods is to manufacturing concerns and not to trading concerns....' (p. 300) above decision was followed by Madras High Court in CIT v. Buhari Sons (P.) Ltd. [1983] 144 ITR 12. It was observed as under: "... Manufacture of eatables cannot be taken to be manufacture of goods W e are of view that word 'goods' has been used there in sense of merchandise, that is, articles for sale. expression 'goods' if understood in commercial sense will not include eatables prepared in hotel. In addition to reasoning given by Kerala High Court in CIT v. Casino (P.) Ltd. [1973] 91 ITR 289, that expressing 'manufacture' in section 2(6) (d) of Finance Act, 1968, will not denote trading activate use of word 'goods' is another reason for holding that definition of 'industrial company' will not include trading activity such as one being carried on by assessee We also find that Income tax Act has drawn distinction between industrial undertaking and hotel and therefore when statute refers to activity carried on in hotel Take for instance section 80J of Income-tax Act which specifically differentiates industrial undertaking and hotel business We are therefore satisfied that view taken by Tribunal that hotel business carried on by assessee in this case is manufacturing activity so as to attract defintion of 'industrial company' occurring in section 2(7) (d) of Finance Act, 1966, cannot legally be sustained. " (p. 17) ratio laid down in above cases squarely applies to instant case. 9. decisions relied on by assessee's counsel are distinguishable. decision of Gujarat High Court in Ajay Printery (P.) Ltd.'s case (supra) and other orders of Tribunal are not case of hotel and have no application to facts of this case But decision of Tribunal in Orient Express Co. (P.) Ltd.'s case (supra) is, no doubt, hotel case. In view of above decision of Kerala High Court and Madras High Court we are unable to follow above order of Tribunal Thus assessee is not entitled to investment allowance Even presuming for sake of argument that it is allowance. Even presuming for sake of argument that it is allowable, investment allowance can be allowed only in respect of machinery or plant in kitchen which is used for preparation of foodstuff. 10. We will now take up departmental appeal being IT Appeal NO. 856 (Hyd.) of 1984. assessee claimed that hotel building should be trotted as plant and as such depreciation should be allowed at general rate applicable to plant ITO rejected this claim and Commissioner (Appeals) accepted assessee's clams and directed ITO to allow depreciation on hotel building at rate applicable to plant and not at rate applcable to building. learned departmental representative submitted that this issue is covered by order of Tribunal Hyderabad Bench 'B' in case of Hotel Emerald (P.) Ltd. [IT Appeal Nos. 976 and 1234 (Hyd.) of 1984 dated 15-11- 1985] which is in favour of raven In view of that hotel building cannot be rated as plant and depreciation should be allowed only at rate applicable to building. learned councel for assessee submitted that order of Tribunal Madras Bench in case of Hotel Srilekha (P.) Ltd. v. Third ITO [1983] 5 ITD 541 is in favour of assessee wherein it was held that hotel building is plant. He urged that order of Madras Bench of Tribunal should be followed If that is not followed then matter should be referred to Special Bench of Tribunal. 11. We have considered rival submissions Identical issue was considered by Hyderabad Bench 'B' of Tribunal in case of Hotel Emerald (P.) Ltd. (supra). In that case question that was considered was whether hotel building concession of rooms which are to be let out should be considered as building or plant for purpose of section 32 of Act for allowing depreciation Tribunal by its order dated 15-11-1985 held that hotel building cannot be considered as plant and depreciation should be allowed only at general rate applicable for building but not at general rate applicable for plant In this order Tribunal followed earlier order of Tribunal Hyderabad Bench 'A' in Progressive Hotels (P.) Ltd. [IT Appeal No. 846 (Hyd.) of 1984]. In both above of Hotel Srilekha (P.) Ltd. (supra) was not followed. We prefer to folow above orders of Hyderabad Bench. Following above order we hold that hotel building cannot be rated as plant and it is only building depreciation should be allowed only at general rate applicable to building but not at general read applicable to plant. We are also unable to accept alternative contention of learned counsel for assessee that building should be rated at least as factory and rate applicable to factory and rate applicable to depriciation. hotel building cannot be considered as factory building Thus we reverse order of Commissioner (Appeals) on this point and restore order of ITO in treating hotel building as only building and not as plant and allowing depreciation at general rate applicable to building. 12. next ground is with regard to Rs. 7,23,502 being per operative expenses disallowed by ITO but allowed by Commissioner (Appeals). expenses disallowed by ITO but allowed by Commissioner (Appeals). hotel was opened for use from 15-7-1979 prior to that on 29-3-1979 there was soft opening of hotel and staff members their family members friends and some VIP guests stayed in rooms of hotel. expediter amounting to Rs. 8,50,087 from 29-3-1979 to 15-7-1979 was claimed as allowable deduction on ground that hotel was ready in all respects by 29- 3-1979 and business was set up on that date though it was open to public on 15-7-1979. ITO disallowed claim.He held that business had commenced only on 17-7-1979. On appeal Commissionr (Appeals) held that infrastructure in form of hotel building plant and machinery were in existence even before 29-3-1979 ad these were ready for use by that date and trial run of hotel was started on that date by inviting staff members and VIP guests etc. Expenses were incurred therefore for purchase of provisions power fuel etc., and for preparation of food items of foodstuffs Salary payment were made to staff member and who were provided training regarding perparation of food items and provision of varies item of customers services These expenses incurred with effect from 27-3-1979 even though incurred prior to actual commencement of business on 15-7-1979 will have to be allowed as revenue expenditure. Thus, he deleted dis allowance of Rs. 7,23,502. 13. learned departmental representative submitted that business has commenced only after 15-7-1979 but not earlier So expenses incurred prior to that date is not allowable as revenue expenditure learned counsel for assessee counsel for assessee kly urged that by 29-3-1979 hotel was ready in all respects and trial run of hotel was started on that date Thus business had been set up on 29-3-1979 and expenditure incurred from that date till 15-7-1979 is allowable as revenue expenditure. He supported order of Commissioner (Appeals). 14. We have considered rival submissions. By 29-3-1979, hotel was ready for use in all respects building was completed and plant and machinery were installed before that date. All infrastructure for running hotel was ready by that date. In fact, trial run of hotel was done on 29-3- 1979 which is described as soft opening by inviting staff member VIP guests, etc. Thereafter, staff members were provided with necessary training in preparation of food items and customer services etc. As hotel was ready for use by 29-3-1979, it has to be held that business was set up by that date Once business is set up expenses incurred thereafter had to allowed as revenue expenditure Thus expenditure incurred from 29-3-1979 to 15-7-1979 amounting to Rs. 8,50,087 has to allowed as revenue expenditure In Western India Vegetable Products Ltd. v. CIT [1954] 26 ITR 151, Bombay High Court held that it is only after business is set up expenses incurred in business can be claimed as permissible deduction It was observed as under: "... It seems to us that expression 'setting up' means as is defined in Oxford English Dictionary, 'to place on foot' or 'to establish' and in contradistinction to 'commence'. distinction is this that when business is established and is ready to commence business then it can be said of that business is it not set up But there may be interregnum then may be interval between business which is set up and business which his commenced and all expenses incurred after setting up of business and before commencement of business all expenses during interregnum, would be permissible deductions under section 10(2)..... " (p. 158). above decision was approved by Supreme Court in CWT v. Ramaraju Surgical Cotton Mills Ltd. [1967] 63 ITR 478 It was observed as under: "... unit cannot be said to have been set up unless it is ready to discharge function for which it is being set up It is only when unit has been put into such shape that it can start functioning as business or manufacturing organisation that it can be said that unit has been set up..... " (p. 481). ratio laid down in above cases squarely apply to instant case As pointed out already by 29-3-1979 hotel was ready for use in all respects and by that date business was set up Thus expenditure incurred from 20- 3-1979 to 15-7-1979 is allowable as revival as revenue expenditure. Commissioner (Appeals) was justified in deleting disallowance of Rs. 7,23,502. 15. next ground in departmental appeal is with regard to extra shift depreciation allowance under item III (iv) of Part I of Appendix I of Income-tax Rules, 1962 ('the Rules'). ITO allowed extra depreciation allowance admissible for approved hotels as per item III (iii) appended to Rules. He did not allow extra shift depreciation allowance. On this point there is no discussion in assessment order. On appeal Commissioner (Appeals) held that on perusal of subitems (iii) and (iv) of Item III is evident that these allowances are not alternative and are cumulative. There is no mention in Part I of Appendix I that grant of allowance under sub-item (iii) would forbid allowance under sub-item (iv). word 'concern ' used in sub-item (iv) would take in hotel also. He held that hotel had worked in three shifts throughtout 24 hours and plant and machinery was being used during that period. Thus assessee would be entitled to triple shift allowance equal to normal depreciation allowance admissible under section 32(1) in addition to extra shift depreciation allowance allowable to provide hotels in sub-item (iii). 16. learned departmental representative urged that in case of hotel only extra allowance under sub item (iii) is allowable and no triple shift allowance could be allowed. He placed reliance on Board circular. learned counsel for assessee kly urged that grant of extra allowance under sub item (iii) would not forbid triple shift allowance under sub item (iv). Thus, allowances are not alterative. Hence assessee is entitled for both allowances. Further, he urged that word 'concern' used in sub-item (iv) would take in hotel also. Since hotel has worked three shift throughout 24 hours, assessee is entitled for triple shift allowance. Thus, he supported order of Commissioner (Appeals). 17. We have considered rival submissions. Section 32 deals with depreciation. Rules 5 of rules deals with calculation of depreciation. percentages of depreciation allowable in given in Part I of Appendix I. In that Appendix I, item III of Part I refers to percentage of depreciation allowabe in respect of machinery and plant at specified rates thereunder Under sub-item (iii) depreciation allowance for approved hotel is allowable. It reads as under: "An extra allowance of depreciation of amount equal to one half of normal allowance shall be allowed in case of machinery and plant installed by assessee, being India company, in premises used by its as hotel where such hotel is for time being approved by Central Government for purposes of section 33 of Act. Explanation: For purposes of this sub-item and sub-item (iv), 'normal allowance' means amount of depreciation allowance (other than extra depreciation allowance under this sub item or extra shift depreciation allowance under sub item (iv) which is allowable under rule 5." Again under sub item (iv) extra shift depreciation allowance is allowed which reads as under: "An extra allowance unto maximum of about equal to one half of normal allowance shall be allowed where concern claims such allowance on account of double shifts working and establishes that it has worked double shirt extra allowance up to maximum of AAC amount equal to normal allowance instead of one half of normal allowance shall be allowed where concert claims such allowance on account of triple shift working and establishe that it has worked triple shift. calculations of extra allowance for doulble shift working and for triple shift working shall he made separately in proportion which number of days for which concern worked double shift or triple shift as case may be bears to normal number of working days during previous year For this purpose normal number of working days during previous years shall be deemed to be- (a) in case of seasonal factory or concern, number of days on which factory or concern actually worked during previous year or 180 days, whichever is greater; (b) in any other case, number of days on which factory or concern actually worked during previous year or 240 days, whichever is greater." It is clear from above items that extra depreciation allowance is allowable for approved hotels. In our view extra shift depreciation allowance under sub-item (iv) is not allowable in case of approvedhotels as extra under sub-item (iv) is not allowable in case of approvedhotels as extra allowance alone is allowable for such approved hotels. Item (iii) is specific provision for approved hotel and item (iv) is general provision for other concerns. Hence, extra shift depreciation allowance is not allowable in case of approved hotels. When there is specific provision in respect of approved hotels general provision applicable to other concern cannot be applied to hotel. It cannot be said that hotel has worked double or triple shift. It is for that reason specific provision in sub-item (iii) has been made for approved hotel for allowing extra allowance and in respect of other concerns extra shift depreciation allowance is provided under sub-item (iv). if it is proved that concern has worked double or triple shift. Board's Circular No. 109 date 20- 3-1973 (see TAXMANn's Direct Taxes Circulars, Vol. I, 1985 end., p. 188) deals with extra shift depreciation allowance. In that circular it is stated as under: "Extra depreciation allowance for approved hotels for assessment year 1970-71 and subsequent years - Machinery and plant installed in hotel does not qualify for extra shift depreciation allowance but is entitled to extra allowance under Item III (iii) [of Part I of Appedix I to Income tax Rules]. " (p. 189) above circular clarifies that machinery and plant installed in hotel does not qualify for extra shift depreciation allowance In Chaturvedi and Pithisari's Income-tax Law, Third end., Vol. 1 it is stated asunder: "Machinery and plant installed in hotel does not qualify for extra shift depreciation allowance but is entitled to extra allowanc under item III (iii)... " (p. 947) Thus, in our view Commissioner (Appeals) was not justified in allowing extra shift depreciation allowance to assessee under sub-item (iv). In view that we have taken we are not considering whether hills has worked three shifts throughtout 24 hours and plant and machinery was used during that period. 18. learned counsel for assessee sought our permission for admission of additional groups in assessee's appeal. We are unable to admit these additional grounds These additional ground do not arise out order of Commissioner (Appeals). They are raised for first time before us Theses additional grounds involve investigation of facts as no finding has been given with regard to same by lower authorities and no material is availabe in assessee's order also. At this stage it is not possible to investigation facts. Thus we decline to admit theses additional grounds. 19. In result assessee's appeal is dismissed and deparmental appeal is allowed in part. *** HOTEL BANJARA LTD. v. INCOME TAX OFFICER