2014 (1) TMI 1495 - HC - Income Tax

Unaccounted investment - Held that - The assessee had entered into an agreement with HUF to incorporate a company on the plot of lan belonging to the said HUF - Later on the company shall be run in partnership by both the assessee as well as HUF in which the contribution of the parties shall be the cost of construction and plot of land respectively - The expenses for construction were being managed by the assessee by borrowing the funds from the HUF - The expenses made by the assessee has been adopted by the company - The company has not even obtained the certificate of commencement of business up to 2nd January, 1976 and up to 31st March, 1976 the company had no source of income - The company had no income at the time when the expenditure towards construction was undertaken - The unaccounted investment cannot be assessed at the hands of the company - There being no income of the company at the relevant period when unaccounted investment was made, the same has to be assessed in the hands of assessee - The Tribunal fell in error in applying the judgment of this Court in Commissioner of Income Tax, U.P. vs. The Bijli Cotton Mills Ltd., Agra - Decided against Revenue.

Issues Involved:
1. Ownership of the building and responsibility for explaining the source of investment.
2. Applicability of the judgment in Commissioner of Income Tax, U.P. vs. The Bijli Cotton Mills Ltd., Agra.
3. Assessment of unaccounted investment in the hands of the assessee or the company.

Issue-wise Detailed Analysis:

1. Ownership of the Building and Responsibility for Explaining the Source of Investment:
The primary issue was whether the building belonged to M/s Hotel Ganges Ltd. and if the company was responsible for explaining the source of investment in its construction. The assessee, an individual, entered into an agreement with an HUF on 2.4.1974 to develop land and construct a building for a hotel. The agreement stipulated that the assessee would employ his own resources for the construction until the incorporation of the company. The company, Hotel Ganges Ltd., was incorporated on 4.7.1974 and ratified the agreement on 27.7.1974. The construction expenses were initially borne by the assessee, who borrowed funds from the HUF. The Income Tax Officer added the unexplained investment to the assessee's income, which was upheld by the Commissioner (Appeals). The Tribunal, however, ruled that the company was responsible for explaining the source of investment since it ratified the agreement and adopted the expenses.

2. Applicability of the Judgment in Commissioner of Income Tax, U.P. vs. The Bijli Cotton Mills Ltd., Agra:
The Tribunal relied on the judgment in Commissioner of Income Tax, U.P. vs. The Bijli Cotton Mills Ltd., Agra, where the court held that if promoters carry out business on behalf of a company before its incorporation, the company can either accept or repudiate the actions of the promoters. If the company accepts, it can claim the income and expenses from the period before its incorporation. The Tribunal concluded that since Hotel Ganges Ltd. ratified the agreement and adopted the expenses, it was responsible for explaining the unexplained investment. However, the High Court found this reliance misplaced, distinguishing the present case from Bijli Cotton Mills. In Bijli Cotton Mills, the company accepted the income made by the promoters, whereas, in the present case, the assessee managed the construction expenses by borrowing funds from the HUF, and the company had no income at the relevant time.

3. Assessment of Unaccounted Investment in the Hands of the Assessee or the Company:
The High Court upheld the findings of the Commissioner (Appeals) that the unaccounted investment should be assessed in the hands of the assessee. The Commissioner noted that the company had no source of income until it obtained the certificate of commencement of business on 13.4.1976. The assessee arranged the funds for construction, and any unaccounted investment had to be taxed in his hands. The High Court agreed, stating that the company adopting the expenses did not explain the unaccounted investment. The Tribunal erred in applying the Bijli Cotton Mills judgment, as the facts were distinguishable. The High Court concluded that the unexplained investment had to be assessed in the hands of the assessee, not the company.

Conclusion:
The High Court answered the question in favor of the revenue and against the assessee, deciding that the unaccounted investment should be assessed in the hands of the individual assessee, not the company. The Tribunal's reliance on the Bijli Cotton Mills case was found to be erroneous given the distinct facts of the present case.

← Previous Next →