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TMI Blog2014 (1) TMI 1495X X X X Extracts X X X X X X X X Extracts X X X X ..... er of Income Tax, U.P. vs. The Bijli Cotton Mills Ltd., Agra - Decided against Revenue. - Income Tax Reference No. - 96 of 1984 - - - Dated:- 23-1-2014 - Hon'ble Ashok Bhushan And Hon'ble Mahesh Chandra Tripathi,JJ. For the Applicant : R. K. Upadhyaya For the Respondent : R.S. Agarwal ORDER Heard Sri R.K. Upadhyaya, learned counsel for the revenue and Sri R.S. Agarwal learned counsel appearing for the assessee. This reference has been made by the Income Tax Appellate Tribunal, Allahabad under Section 256 of the Income Tax Act referring following question for consideration of this Court:- "Whether, on the facts and in the circumstances of the case, the Incometax Appellate Tribunal was legally correct in holding that the building in question belonged to M/s Hotel Ganges Ltd. and therefore, it was also responsible to explain the source of investment in its construction?" For noticing the facts, it shall suffice to refer to paragraph 3 to 7 of the statement of facts which are as under:- "3. The assessee is an individual. He is member of H.U.F. called M/s Sadi Ram Ganga Pd. He enter into an agreement with the said HUF on 2.4.1974. The HUF owned a property sit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sible after this agreement is ratified by the company to be floated by the second party the said company and the First party shall inter into a partnership agreement to carry on the business, inter alia of Hoteling, Restaurants, Caterers etc. and the contribution of the first party in the said partnership shall be the said vacant plot of land measuring 353 Sq. Yds. situate at 51/50 Nayaganj, Kanpur and the contribution of the said company in the said partnership shall be the cost constructing the building on the said premises and developing and furnishing the same and/or any other expenses made for the purpose of Hotel? A copy of the agreement dated 7.4.1974 is made as Annexure 'A' forming part of the Statement of the case. 4. In the meantime, the company called "Hotel Ganges Limited" was incorporated on 4.7.1974. On 27.7.1974, a meeting of the Board of Directors of the company was held. A copy of the agreement dated 2.4.1974 entered into between the assessee as promoter/director of the company and M/s Sadiram Ganga Prasad, HUF was placed before this meeting. The following resolution was passed. "Resolved that the agreement dated 2.4.1974 entered into between Sri D.P. Kanodia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ought into the books of the Limited Company as on asset and hence, if any addition was called for, it could be only in the hands of the limited company and not in the hands of the assessee as an individual. The Incometax officer rejected these contentions on the ground that the funds for the construction had been arranged by the assessee, that they had come from his account in the books of M/s Sadiram Ganga Pd. and that in the relevant account years M/s Hotel Ganges Limited had no other source of income. He, thus, held that whatever was the unexplained amount it had to be considered in the hands of the assessee. He, therefore, made addition of Rs.1,33,941/- in the assessment year 1976-77 and Rs.210936/- in the assessment year 1977-78 to the total income of the assessee. Copies of the assessment orders for the assessment years 1976-77 and 1977-78 are made as Annexure C D respectively being part of the statement of the case. 7. The assessee appealed to the Commissioner of Incometax (Appeals). The first contention of the counsel for the assessee before the latter was that the building belonged to M/s Hotel Ganges Limited and, therefore, the assessee could not be called upon to exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company or the Hotel Ganges Limited is concerned, this was completely out of the picture because upto 2.1.1976 (correct date is 13.4.1976) the company has not obtained even the certificate for commencement of business and it has no source of income till then. Even after that upto 31.3.1976, the company had absolutely no sources of income and the expenditures incurred has been transferred to the building account. The only funds available to the company was share capital of Rs.700 and funds received from Shri D.P. Kanudia (Individual) which was taken by him from the HUF and these facts would show that as far as the Hotel Ganges Limited is concerned upto 31.3.1976, it could not have had any unexplained income. Under these circumstances, there was no question that the company M/s Hotel Ganges Limited was investing any unaccounted fund and considering all these circumstances, the full responsibility of unaccounted investment, if any, has to be borne by Shri D.P. Kanudia (Individual). This question is, therefore, to be answered against the appellant and has been answered in this manner for the assessment year 1975-76 also in the case of appellant vide my appellate order dated 30.1.19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... am Ganga Prasad for carrying out the construction of the Hotel and a separate account, namely, D.P. Kanodia Building Fund Account was opened and the amounts advanced to the assessee were debited thereof from time to time. The Commissioner (Appeals) has found that since it was D.P. Kanodia who was arranging for the fund for construction and when it was found that some unaccounted investments were made in the building, it is the assessee who has to be held responsible for such unaccounted investment and the said investment has rightly been taxed in the hands of the assessee. The above findings of the Commissioner in this regard have already been quoted above. The Tribunal took the view that since the company has ratified the agreement and further in the meeting dated 27th July, 1974 the statement of expenses placed before the company by the assessee was approved and it was directed to incorporate the same in the books of company, it is the company who has to explain the undisclosed amount. The Tribunal in paragraph 8 of the judgment made following observations:- "We are of the opinion that the hotel building in question actually belonged to M/s. Hotel Ganges Ltd. and it was this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 and it was in the same position as a beneficiary for whom the income was earmarked as payable to it. The case is, therefore, to our minds govrned by the principle laid down in Trustees of Sir Currimbhoy Ebrahim Baronetcy Trust case and the income from the 11th of December, 1942, to 10th of December, 1943 could be legally assessed in the hands of the assessee." The case of Commissioner of Income Tax, U.P. vs. The Bijli Cotton Mills Ltd., Agra (supra) was a case where the assessee company had decided to accept the income made from the business at the time when the business was being looked into by the promoters. The Division Bench had further held following:- "..........It is, however, well settled that if the promoters of a company buy a property or carry on a business on behalf of a company which they intend to float, on the incorporation of the company, the company has a right to either accept what has been done on its behalf by the promoters or repudiate the same. If the company accepts what the promoters have done on its behalf it has a right to claim from the promoters the entire income of the property since its purchase or the entire income for the period during which th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d before the incorporation of the assessee-company, but, as pointed out above, the corresponding receipts were entered in the accounts for the relevant previous year and included in the assessment for the year 1958-59. The principle laid down by this court in Commissioner of Income-tax v. Bijli Cotton Mills Ltd. is that the profits of a business commenced by the promoters which is taken over by the company on its incorporation is assessable in the hands of the latter. If the pre-incorporation profits are assessable in the hands of the company the expenditure incurred to earn such profits must also be allowed in the assessment. In the present case, it is common ground that the business of the assessee-company was commenced by the promoters, namely, Mr. Harffey and the Khunnahs, and they secured orders of considerable value and also procured the necessary import licnece for indent of fugitive papers for the purpose of execution of jobs in security printing. These expenditures were, evidently, incurred wholly for the purpose of the business commenced by the promoters before incorporation and they should be allowed as deduction against receipts of the same period." The last case reli ..... X X X X Extracts X X X X X X X X Extracts X X X X
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