1. Since the above appeals relate to the same assessee and also involve a common contention, they are disposed of by this consolidated order for the sake of convenience.
2. The assessee is an individual. He is member of HUF called Sadiram Gangaprasad. He entered into an agreement with the said HUF on 2-4-1974. The HUF owned a property situated at 51/50, Naya Ganj, Kanpur. This was 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 hoteling 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 HUF of Sadiram Gangaprasad and 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 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 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 got 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 hoteling, 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, Naya Ganj, 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.
3. In the meantime, the company called 'Hotel Ganges Limited' was incorporated on 4-7-1974. On 27-7-1974, a meeting of the board of directors of the company was held. A copy of the agreement dated 2-4-1974 entered into between the assessee as promoter/director of the company and Sadiram Gangaprasad, HUF, was placed before this meeting.
The following resolution was passed : Resolved that the agreement dated 2-4-1974 entered into between Shri D.P. Kanudia, promoter/director of the company and Sadiram Gangaprasad, HUF and terms and conditions thereof be and are hereby adopted and approved.
The company was granted certificate of commencement of business on 13-4-1976. On 22-7-1976, an agreement of partnership was executed between Shri B.M. Kanudia on behalf of the HUF of Sadiram Gangaprasad and Hotel Ganges Limited. It was decided as per this agreement that the HUF would be contributing the plot in question as its capital while the company was to contribute its development and construction as its capital.
4. The assessee engaged itself in the construction of a property on the above mentioned 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 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 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 ITO 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 Hotel Ganges Limited and ultimately the cost of building was brought into the books of the said 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 ITO 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 Sadiram Gangaprasad and that in the relevant account years 'Hotel Ganges Limited' 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 addition of Rs. 1,33,941 in the assessment year 1976-77 and Rs. 2,10,935 in the assessment year 1977-78 to the total income of the assessee.
6. The assessee appealed to the Commissioner (Appeals). The first contention of the counsel for the assessee before the latter was that the building belonged to Hotel Ganges Limited and, therefore, the assessee could not be called upon to explain the source of investment and if there was any excess investment, that had 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.
7. The Commissioner (Appeals) rejected the first contention with the following observations : So far as the first question is concerned, I have no doubt in my mind that if any such addition is called for then it has to be in the hands of Shri D.P. Kanudia in his individual status for the assessment year 1976-77. I have arrived at this conclusion on the basis of certain facts, the most important of which is the agreement dated 2-4-1974 between Sadiram Gangaprasad (HUF) and the appellant and especially Clause (1) of the said agreement which has been reproduced earlier in this order According 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 build-ing 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 Ganeaorasad (HUF) where an account has been opened in the name of Shri DP Kanudia Building Fund Account and the amounts advanced to Shri Kanudia debited thereof from time to time. This would show that Shri DP 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 Limited is concerned, this was completely out of the picture because up to 2-1-1976 (correct date is 13-4-1976), the company has not obtained even the certificate for commencement of business and it has no source of income till then.
Even after that up to 31-3-1976 the company had absolutely no sources of income and the expenditure incurred has been transferred to the building account The only funds available to the company was share capital of Rs. 700 and funds received from Shri D.P. Kanudia (Individual) which was taken by him from the HUF and these facts would show that so far as the Hotel Ganges Limited as concerned up to 31-3-1976, it could not have had any unexplained income. Under these circumstances, there was no question that the company Hotel Ganges Limited 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. Kanudia (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 30-1-1980.
He also rejected the second contention relating to the reference to the Valuation Officer. He, however, set aside the assessment with regard to the quantum of the addition directing the ITO to re-determine it.
8. The assessee is now in appeal before us. We have heard the parties.
We are of the opinion that the hotel building in question actually belonged to Hotel Ganges Limited 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.  23 ITR 278 (All.). The following observations as contained in the report are relevant : It is true that under the law the assessee, the Bijli Cotton Mills Ltd., came into existence only on its incorporation on the 11th of December, 1943 and it is not possible to hold that the legal title in the business or its profits vested in it before its incorporation. 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.
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  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 principles of the law of agency and of trusteeship have been extended and very properly extended, to meet such cases ; and using the word 'promoter' to describe a person acting as James Bird did, it is perfectly well settled that a promoter of a company is accountable to it for all moneys secretly obtained by him from it just as if the relationship of principal and agent or of trustee and cestui que trust had really existed between them and the company when the money was so obtained'. In Omnium Electric Palaces v. Baines  1 Ch. 332 it was doubted whether this was strictly accurate and whether it did not merely confuse matters to attempt to identify the fiduciary duties of a promoter with ordinary out and out trusteeship. Buckley in his Companies Act, 12th edn. at page 108, dealing with this matter says : 'The case of a promoter is a strong case of fiduciary relationship, inasmuch as the trustee or agent, so far from being selected by his cestui que trust or principal, actually creates the principal in whose affairs he acts.' If, therefore, the promoters have not bought some property or business for their own use but on behalf of or for the benefit of a company which they were about to float, though the company when floated may have the option to accept the benefit of the contract entered into by the promoters, or by the property purchased for its benefit, the promoters have no right to refuse to give the property or the business or the benefit derived therefrom to the company if the company wants to acquire that property or the business." (pp.
283-84) The above decision was followed by the Allahabad High Court in the case of Security Printers of India (P.) Ltd. v. CIT  78 ITR 766 with the following observations : It is no doubt true that the above expenditure was incurred before the incorporation of the assessee-company, but, as pointed out above, the corresponding receipts were entered in the accounts for the relevant previous year and included in the assessment for the year 1958-59. The principle laid down by this court in Commissioner of Income-tax v. Bijli Cotton Mills Ltd.  23 ITR 278 (All.) is that the profits 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-incorpora-tion 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." (p. 772) There is no doubt a contrary decision of the Calcutta High Court in the case of CIT v. Tea Producing Co. of India Ltd.  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. (supra), 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 dated 2-4-1974 entered into between the assessee and the HUF of Sadiram Gangaprasad was accepted by the company in the meeting of its board of directors held on 27-7-1974. We have already quoted the resolution passed by the company accepting the said agreement. We have also pointed out that in another meeting held on 30-6-1976, the company had directed that the expenditure incurred by the assessee on the construction of the building be incorporated in its books by credit to the account of the assessee. It is also clear that this constructed building was contributed as capital by the company in the firm constituted with Sadiram Gangaprasad. The capital of Sadiram Gangaprasad was the cost of the plot itself, which admittedly belonged to them. In the light of these facts and the legal principles discussed above, there is no escape from the conclusion that it was Hotel Ganges Limited, which was the owner of the building on the plot belonging to Sadiram Gangaprasad and, therefore, it was also responsible to explain the source of investment in such construction. It would have been a different thing if the company would not have accepted the action of the assessee. However, that is not the case here. The assessee, therefore, cannot be called upon to explain the source of investment in the building, even if the construction was carried on either before the company was incorporated or before it was granted the certificate of commencement of the business. On this finding alone, the additions of Rs. 1,33,941 and Rs. 2,10,935 will stand deleted from the assessments for the assessment years 1976-77 and 1977-78, respectively.
10. In the view we are taking, it is not necessary for us to deal with the other grounds of appeal, namely, whether the reference to the Valuation Officer was or was not called for and whether the setting aside of the assessments requiring the ITO to determine the quantum of additions, was justified.