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TMI Blog1983 (3) TMI 69X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 object, inter alia, of carrying on the business of hoteling and catering, etc. " And whereas the second party approached the first party to allow the proposed company intended to be floated by the second party to develop the said premises by constructing a building thereon for the purpose of running a hotel on the said premises in partnership with the first party to which the first party has agreed. Now it is hereby agreed and declared by and between the parties hereto as follows : 1. The first party, until the proposed company to the floated by the second party is duly incorporated, has in the meantime allowed with effect from 15-2-1974, the second party to develop the said premises by constructing building and appurtenances thereon for the purposes of ultimately running a hotel on the said premises and for this purpose the second party shall employ his own resources available with the second party. 2. The second party undertakes that it will take all reasonable steps to ensure that all formalities legal or otherwise are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evant for the assessment years 1975-76 to 1977-78. A total expenditure of Rs. 10,04,292 was incurred in the construction. This amount was borrowed by the assessee from the HUF of Sadiram Gangaprasad. An account in the books of the latter, called 'Shri D.P. Kanudia Building Fund Account', was opened which was debited with various expenses relating to the construction of the hotel building. A meeting of the board of directors of the company was also held on 30-6-1976. In this meeting, the assessee as a promoter of the company placed before the board statement of expenses incurred by him on behalf of the company up to the date in connection with the construction of the hotel building and other incidental expenses. The board, after careful examination of the statement, approved the total expenditure incurred by the assessee and directed that the same be incorporated in the books of the company for the year ended 30-6-1976 by credit to the account of Shri D.P. Kanudia, the assessee. The expenditure also included interest payable by the assessee on the borrowings. 5. The question before the ITO was regarding the cost of construction of the hotel building. He referred the matter of valua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rding to this clause the construction of this building has to be started by Shri D. P. Kanudia individual and for this purpose he was to employ his own resources available to him. This makes it amply clear that the funds for constructing the building of the hotel in the initial stages have to be arranged by Shri Kanudia which could be either by borrowings or from his own resources. In the instant case Shri Kanudia has taken money from the books of Sadiram Gangaprasad (HUF) where an account has been opened in the name of Shri D.P. Kanudia Building Fund Account and the amounts advanced to Shri Kanudia debited thereof from time to time. This would show that Shri D. P. Kanudia was arranging for the funds for the construction and if ultimately it is found that some unaccounted investment was made in this building, then he will have to be responsible for such an unaccounted investment and it can be rightly taxed in his hands. The other two entities in whose hands such income could be considered for taxation could be the HUF of Sadiram Gangaprasad but it has to be treated as not responsible in view of clause (1) of the agreement referred to above. So far as the company or the Hotel Ganges ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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. The question whether the promoters can be said to be trustees for a company not in existence and what exactly is the relationship between a promoter and a company, which comes into existence later, has been the subject-matter of several decisions. Though, strictly speaking, it cannot be said that a person is a trustee for a beneficiary not in existence, it has been held that, on the company being floated, the relationship between a promoter and the company that he has floated must be deemed to be a fiduciary relationship from the day the work of floating the company had been started. In Lydney and Wigpool Iron Ore Company v. Bird [1886] 33 Ch. D. 85 at 94 Lord Justice Lindley said that although the promoter is not an agent of the company nor a trustee for it before its formation, the old familiar princ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture 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." There is no doubt a contrary decision of the Calcutta High Court in the case of CIT v. Tea Producing Co. of India Ltd. [1963] 48 ITR 200. However, we are bound by the decisions of the Allahabad High Court in the present case. 9. As laid down in the case of Bijli Cotton Mills Ltd., that if the promoters of a company buy a property 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. We have already seen that the agreement da ..... X X X X Extracts X X X X X X X X Extracts X X X X
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