1983 (3) TMI 69 - AT - Income Tax

Hotel Ganges Limited owns hotel building, responsible for investment source. ITO additions to assessee's income deleted.

The Tribunal concluded that the hotel building belonged to Hotel Ganges Limited, holding it responsible for explaining the source of investment. As a ... Promoter's fiduciary liability and promotorial acts accepted by the company - pre-incorporation acts taken on behalf of a company and subsequent adoption by the company - ownership of property constructed for and accepted by the company - liability to explain source of investment lies on the owner-company where the company adopts promoters' actsPromoter's fiduciary liability and promotorial acts accepted by the company - ownership of property constructed for and accepted by the company - liability to explain source of investment lies on the owner-company where the company adopts promoters' acts - Whether the cost of construction of the hotel building and any unexplained investment therein was to be assessed in the hands of the individual promoter-assessee or in the hands of Hotel Ganges Limited which accepted the promoters' acts - HELD THAT: - The Tribunal held that the building belonged to Hotel Ganges Limited because the company, after its incorporation, adopted and approved the pre-incorporation agreement entered into by the promoter and subsequently directed that the promoter's construction-related expenditure be incorporated in the company's books. Applying the principle that where promoters act on behalf of a company to be floated, the company on incorporation may accept those acts and thereby acquire the benefit and ownership (as explained in the decision of Bijli Cotton Mills Ltd. and followed by this Court in Security Printers of India ), the Tribunal concluded that the company became the owner of the constructed building and was the proper person to explain the source of investment. The Tribunal rejected the position that, because the promoter had advanced funds (debited to his account in the HUF's books) the unexplained investment should be taxed in the hands of the promoter; instead, once the company accepted the promoters' acts and incorporated the expenditure in its accounts and the building was contributed as company capital to the partnership, the burden to account for the source lay on the company. Because the company had accepted the promoters' work and expenditure, the additions made to the assessee's income for the assessment years 1976-77 and 1977-78 could not be sustained against the individual promoter.Additions made to the assessee's income for AY 1976-77 and AY 1977-78 deleted because Hotel Ganges Limited, having accepted the promoters' acts, was the owner of the building and liable to explain the source of investment.Final Conclusion: Both appeals allowed: the additions in the hands of the assessee for assessment years 1976-77 and 1977-78 were deleted as the company which adopted the pre-incorporation agreement was held to be the owner of the building and responsible to explain the source of investment. Issues Involved:1. Ownership and responsibility for the cost of construction of the hotel building.2. Legitimacy of the reference to the Valuation Officer.3. Justification for the setting aside of assessments and re-determination of the quantum of additions.Issue-wise Detailed Analysis:1. Ownership and Responsibility for the Cost of Construction of the Hotel Building:The primary issue was whether the cost of construction of the hotel building should be attributed to the assessee or to Hotel Ganges Limited. The Income Tax Officer (ITO) held that the unexplained investment had to be considered in the hands of the assessee because the funds for the construction were arranged by the assessee from his account in the books of Sadiram Gangaprasad HUF. The Commissioner (Appeals) upheld this view, emphasizing that the agreement dated 2-4-1974 stipulated that the construction was to be started by the assessee using his own resources. However, the Appellate Tribunal concluded that the hotel building actually belonged to Hotel Ganges Limited. This conclusion was based on the principle that if promoters of a company buy a property or carry on a business on behalf of a company they intend to float, the company has the right to accept or repudiate the actions upon incorporation. The Tribunal noted that the agreement dated 2-4-1974 was accepted by the company in a board meeting on 27-7-1974, and the expenditure incurred by the assessee was incorporated into the company's books. Consequently, the Tribunal held that Hotel Ganges Limited was the owner of the building and responsible for explaining the source of investment. Therefore, the additions of Rs. 1,33,941 and Rs. 2,10,935 were deleted from the assessments for the assessment years 1976-77 and 1977-78, respectively.2. Legitimacy of the Reference to the Valuation Officer:The Commissioner (Appeals) rejected the contention that the reference to the Valuation Officer was uncalled for. However, since the Tribunal concluded that the hotel building belonged to Hotel Ganges Limited and the assessee was not responsible for explaining the source of investment, it was not necessary for the Tribunal to address this issue further.3. Justification for the Setting Aside of Assessments and Re-Determination of the Quantum of Additions:The Commissioner (Appeals) had set aside the assessment with regard to the quantum of the addition and directed the ITO to re-determine it. However, given the Tribunal's decision that the hotel building belonged to Hotel Ganges Limited and the assessee was not responsible for the investment, the Tribunal did not find it necessary to deal with this ground of appeal.Conclusion:The Tribunal allowed both appeals, concluding that the hotel building belonged to Hotel Ganges Limited, which was responsible for explaining the source of investment. Consequently, the additions made by the ITO to the assessee's income for the assessment years 1976-77 and 1977-78 were deleted.