1983 (3) TMI 73 - AT - Income Tax

Issues Involved:

1. Ownership and responsibility for explaining the source of investment in the construction of the hotel building.
2. Validity of the reference to the Valuation Officer.
3. Justification for setting aside the assessment and directing the ITO to redetermine the quantum of additions.

Issue-wise Detailed Analysis:

1. Ownership and Responsibility for Explaining the Source of Investment:

The primary issue was whether the assessee or M/s Hotel Ganges Limited was responsible for explaining the source of investment in the construction of the hotel building. The assessee, an individual and a member of the HUF styled M/s Sadiram Gangaprasad, entered into an agreement with the HUF on 2nd April 1974 to develop a property for hotel business. The agreement stated that the assessee would float a company for this purpose, and the HUF allowed the development of the premises.

The company, Hotel Ganges Limited, was incorporated on 4th July 1974, and the agreement was ratified by the company on 27th July 1974. The company was granted a certificate of commencement of business on 13th April 1976, and a partnership agreement was executed on 22nd July 1976 between the HUF and Hotel Ganges Limited. The assessee engaged in the construction of the hotel building during the accounting years 1974-75 to 1976-77, incurring a total expenditure of Rs. 10,04,292, borrowed from the HUF.

The ITO held that the excess investment should be considered in the hands of the assessee, as the funds for the construction were arranged by him. The CIT (A) upheld this view, stating that the responsibility for any unaccounted investment lay with the assessee, as per the agreement clause that required him to employ his own resources for the construction.

However, the Tribunal concluded that the hotel building belonged to M/s Hotel Ganges Limited and that the company was responsible for explaining the source of investment. The Tribunal based its conclusion on the decision of the Allahabad High Court in CIT vs. The Bijli Cotton Mills Ltd., which established that if promoters carry on business on behalf of a company they intend to float, the company, upon incorporation, has the right to accept or repudiate the actions of the promoters. Since Hotel Ganges Limited accepted the agreement and the expenditure incurred by the assessee, it was responsible for explaining the source of investment. Consequently, the additions of Rs. 1,33,941 and Rs. 2,10,935 were deleted from the assessee's assessment for the years 1976-77 and 1977-78, respectively.

2. Validity of the Reference to the Valuation Officer:

The second issue was whether the reference to the Valuation Officer was justified. The CIT (A) rejected the contention that the reference was uncalled for. However, since the Tribunal concluded that the hotel building belonged to M/s Hotel Ganges Limited and that the company was responsible for explaining the source of investment, it was unnecessary to address this issue further.

3. Justification for Setting Aside the Assessment and Directing the ITO to Redetermine the Quantum of Additions:

The third issue was whether the CIT (A) was justified in setting aside the assessment and directing the ITO to redetermine the quantum of additions. The Tribunal's conclusion that the hotel building belonged to M/s Hotel Ganges Limited rendered this issue moot, as the additions were deleted from the assessee's assessment.

Conclusion:

In conclusion, the Tribunal allowed the appeals, deleting the additions of Rs. 1,33,941 and Rs. 2,10,935 from the assessee's assessment for the years 1976-77 and 1977-78, respectively. The Tribunal determined that M/s Hotel Ganges Limited was responsible for explaining the source of investment in the construction of the hotel building, based on the acceptance of the agreement and expenditure by the company. Consequently, the other issues regarding the reference to the Valuation Officer and the setting aside of the assessment were not addressed further.

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