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TMI Blog2014 (6) TMI 260X X X X Extracts X X X X X X X X Extracts X X X X ..... is a member of the Hindu undivided family called M/s. Sadi Ram Ganga Pd. He entered into an agreement with the said Hindu undivided family on April 2, 1974. The Hindu undivided family owned a property situated at 51/50 Nayaganj, Kanpur. This was a tenanted property. The tenants were got vacated and the structure was demolished leaving the plot measuring 353 sq. yds. In the aforesaid agreement, it was stated that the assessee would be floating a company with the object of carrying on the business of hotelling and catering, etc., for which the assessee would be developing the land and constructing a building on the aforesaid plot. The first party of the agreement was the Hindu undivided family of M/s. Sadiram Ganga Prasad and the second party to the agreement was the assessee. The following clauses of this agreement are relevant for our purpose : And, whereas, the second party proposes to float a company limited by shares under the Companies Act, 1956, with the subject, inter alia, of carrying on the business of hotelling and catering, etc. And, whereas, the second party represented the first party to allow the proposed company intended to be floated by the second party to develop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... April 2, 1974, entered into between the assessee as promoter/director of the company and M/s. Sadiram Ganga Prasad, Hindu undivided family was placed before this meeting. The following resolution was passed. "Resolved that the agreement dated April 2, 1974, entered into between Sri D. P. Kanodia, promoter/director of the company and M/s. Sadiram Ganga Pd., Hindu undivided family, and terms and conditions thereof shall be and are hereby adopted and approved.' The company was granted certificate of commencement of business on April 13, 1976. On July 27, 1976, an agreement of partnership was executed between Sri B. N. Kanodia on behalf of the Hindu undivided family of M/s. Sadiram Ganga Prasad and Hotel Ganges Ltd. It was decided as per this agreement that the Hindu undivided family would be contributing the plot in question as its capital while the company was to contribute the development and construction as its capital. A copy of the partnership deed dated July 27, 1974, is made as annexure 'B' of the statement of the case. 5. The assessee engaged himself in the construction of a property on the abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 936 in the assessment year 197778 to the total income of the assessee. Copies of the assessment orders for the assessment years 1976-77 and 1977-78 are made as annexures C and D, respectively, being part of the statement of the case. 7. The assessee appealed to the Commissioner of Income-tax (Appeals). The first contention of the counsel for the assessee before the latter was that the building belonged to M/s. Hotel Ganges Ltd. and, therefore, the assessee could not be called upon to explain the source of investment and if there was any excess investment that has to be considered in the assessment of the limited company. It was next contended that reference to the valuation officer was uncalled for. It was finally contended that the expenditure as shown in the books of account was correct and required to be accepted." The Commissioner of Income-tax (Appeals) dismissed the appeal against which the assessee appealed to the Tribunal. The Tribunal, vide its order dated March 15, 1983, allowed the appeals of the assessee. The question, as noted above, was referred in view of the facts of the case. The relevant findings by the Commissioner of Income-tax (Appeals) have been recorded whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P. Kanodia (individual) which was taken by him from the Hindu undivided family and these facts would show that as far as the Hotel Ganges Ltd. is concerned up to March 31, 1976, it could not have had any unexplained income. Under these circumstances, there was no question that the company, M/s. Hotel Ganges Ltd. 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. Kanodia (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 the appellant, vide my appellate order dated January 30, 1980." Sri R. K. Upadhyaya, learned counsel appearing for the Revenue, has submitted that the certificate of commencement of business was granted to the company on April 13, 1976, and the expenses for construction was made by the assessee who is an individual, although after borrowing from the Hindu undivided family. He submits that the company had neither any capital nor any amount which was utilised in the construction was paid by the company, hence it could not have been asked ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vestment and the said investment has rightly been taxed in the hands of the assessee. The above findings of the Commissioner of Income-tax (Appeals) 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 July 27, 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 the company, it is the company who has to explain the undisclosed amount. The Tribunal in paragraph 8 of the judgment made the 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 company which was responsible to explain the sources of investment. Our this conclusion is based on the decisions of the Allahabad High Court itself. The issue had first come up for consideration of the hon'ble court in the case of CIT v. Bijli Cotton Mills Ltd. [1953] 23 ITR 278 (All):" The judgment of this court in CIT v. Bijli Cotton Mills Ltd. (supra) relied upon by the Tribunal n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessed in the hands of the assessee." The case of CIT v. Bijli Cotton Mills Ltd. (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 as follows (page 283) : "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 the business was carried on for the benefit of the company." In the present case, the ratio laid down by this court in CIT v. Bijli Cotton Mills Ltd. (supra) is not applicable. In the present case, the expenses for construction were being managed by the assessee by borrowing the funds from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its 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 licence 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 relied upon by the learned counsel for the assessee is Addl. CIT v. Syntex Fabrics Ltd. (supra). The said case was also a case of incurring of the expenditure prior to incorporation of company. Following CIT v. Bijli Cotton Mills Ltd. (supra), the Division Bench of this court held that the expenses should have been allowed. There can ..... X X X X Extracts X X X X X X X X Extracts X X X X
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