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TMI Blog1983 (3) TMI 73X X X X Extracts X X X X X X X X Extracts X X X X ..... party proposes to float a company Limited by share 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 between and declared by the parties hereto as follows. 1. The First Party, until the proposed company to be floated by the Second Party is duly incorporated has in the meantime allowed with effect from 15th February 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 for this purposes 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 complied with in developing the said premises and any liability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1974-75 to 1976-77 relevant for the asst. yrs. 1975-76 to 1977-78. A total expenditure of Rs. 10,04,292 was incurred in the construction. The amount was borrowed by the assessee from the HUF of M/s Sadiram Gangaprasad. An account book of the latter "Shri D.P. Kanaudia Building Fund Account" was opened in the books of M/s Sadiram Gangaprasad, which was debited with various expenses relating to the construction of the Hotel building. A meeting of the Board of the company was also held on 30th June 1976. At this meeting, the assessee as a promoter of the company placed before the Board a statement of expenses incurred by him on behalf of the company uptodate 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 30th June 1976 by credit to the account of Shri D.P. Kanaudia, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d earlier in his order. According to this clause the construction of this building has to be started by Shri D.P. Kanaudia, Individual and for this purpose he was to employ his own resources available to him. This makes it employ clear that the funds for constructing the building of the Hotel in the initial stages have to be arranged by Shri Kanaudia which could be either by borrowings or from his own resources. In the instant case that Shri Kanaudia has taken money from the books of M/s Sadiram Ganga Prasad (HUF) where an account has been opened in the name of Shri D.P. Kanaudia (Building Fund Account) and the amounts advanced to Shri Kanaudia debited thereof from time to time. This would show that Shri D.P. Kanaudia 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 M/s Sadiram Ganga Prasad but it has to be treated as not responsible in view of clause (1) of the Agreement referred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf 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. 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 latter 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 Lydndey and Wigpool Iron Ore Company vs. Bird (1886) 33 Ch. D. 85 at 94 Lord Justice Lindley said that although the promoter is not an agen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, 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 order of the considerable value and also procured the necessary import licences 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 and the deduction against the receipts of the same period." There is no doubt a contrary decision of the Calcutta High Court in the case of CIT vs. Tea Producing Company of India Ltd. (1963) 48 ITR 200 (Cal). 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 the company but a property on behalf of the 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 promoter or repudiate the same. W ..... X X X X Extracts X X X X X X X X Extracts X X X X
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