- (1.) 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, 1961, referring the following question for consideration of this court: Whether, on the facts and in the circumstances of the case, the Income-tax 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?
(2.) For noticing the facts, it shall suffice to refer to paragraphs 3 to 7 of the statement of facts which are as under: 3. The assessee is an individual. He 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 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 nearly agreed and declared by and between the parties here is 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 February 15, 1974, the second party to develop the said premises by constructing a 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 complied with in developing the said premises and any liability on this account whatsoever shall be on the account of the second party. . . 4. The second party undertakes that as soon as the proposed company is duly incorporated and certificate of commencement of business is obtained this agreement would be ratified by the said company provided, however, that in case the second party is unable to float the said company or the said company is unable to ratify this agreement, the second party shall be at liberty to nominate any other person or body corporate in this behalf. 5. As soon as possible after this agreement is ratified by the company to be floated by the second party the said company and the first party shall enter into a partnership agreement to carry on the business, inter alia, of hotelling, 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 of 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 April 7, 1974, is made as annexure 'A' forming part of the statement of the case. 4. In the meantime, the company called 'Hotel Ganges Ltd.' was incorporated on July 4, 1974. On July 27, 1974, a meeting of the board of directors of the company was held. A copy of the agreement dated 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 abovementioned plot in the accounting years 1974-75 to 1976-77 relevant 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 Hindu undivided family of M/s. Sadiram Ganga Pd. 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 June 30, 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 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 case be incorporated in the books of the company for the year ended June 30, 1976, by credit to the account of Sri D.P. Kanodia, the assessee. The expenditure also included interest payable by the assessee on the borrowings. 6. The question before the Income-tax Officer was regarding the cost of construction of the hotel building. He referred the matter of valuation to the valuation officer. The valuation officer estimated the cost of construction of the building in the above three assessment years at Rs. 14,11,425. On this basis, the Income-tax Officer held that there was excess investment of Rs. 1,33,941 in the assessment year 1976-77 and Rs. 2,10,935 in the assessment year 1977-78. It was contended before him that the property was constructed on behalf of the limited company, Hotel Ganges Ltd. and ultimately the cost of building was brought into the books of the limited company as an 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 Income-tax 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 Ltd. 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 an addition of Rs. 1,33,941 in the assessment year 1976-77 and Rs. 2,10,936 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 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.
(3.) 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.;