1972 (12) TMI 14 - HC - Income Tax

Grant-in-aid received by a government company before commencing the trading activities to meet expenditure in connection with administration held that such amount was not chargeable under section 10(1)

Summary

Issues Involved:
1. Taxability of the grant-in-aid received by the company.
2. Nature of the receipt (capital vs. revenue).
3. Timing of the receipt in relation to the commencement of business activities.
4. Applicability of Section 4(3)(vii) of the Indian Income-tax Act, 1922.

Issue-wise Detailed Analysis:

1. Taxability of the grant-in-aid received by the company:
The primary issue was whether the grant-in-aid of Rs. 2 lakhs received by the State Trading Corporation of India Ltd. from the Government of India was chargeable to income-tax. The Income-tax Officer initially treated the amount as taxable income, arguing that the grant reduced the company's revenue expenditure, thereby increasing its profits. However, the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal both held that the grant was not taxable. The Tribunal's decision was based on two grounds: (i) the grant was received before the commencement of business, and (ii) it was a casual and non-recurring receipt exempt under Section 4(3)(vii) of the Indian Income-tax Act, 1922.

2. Nature of the receipt (capital vs. revenue):
The nature of the receipt was debated extensively. The Income-tax Officer contended that the purpose for which the grant was given (to meet administrative expenses) made it a revenue receipt. Conversely, the company argued that since the grant was received before the start of any trading activities, it should be treated as a capital receipt. The court referred to various precedents, including Ratna Sugar Mills Co. Ltd. v. Commissioner of Income-tax and Seaham Harbour Dock Co. v. Crook, to analyze whether the grant was intended to compensate for business losses or to assist in starting the business.

3. Timing of the receipt in relation to the commencement of business activities:
A critical factor was the timing of the receipt. The grant was sanctioned on 21st June 1956, before the company began its trading activities on 1st July 1956. The court emphasized that under Section 10(1) of the Indian Income-tax Act, 1922, tax is payable on profits and gains from business activities. Since the business had not commenced when the grant was received, it could not be considered a business receipt. The court stated, "if any receipt is received before the business is carried on, it is not a business receipt."

4. Applicability of Section 4(3)(vii) of the Indian Income-tax Act, 1922:
The Tribunal also held that the receipt was exempt under Section 4(3)(vii), which exempts receipts of a casual and non-recurring nature from taxation. The court agreed, noting that the grant was non-recurring and received before the business commenced. The court concluded that the grant was not taxable under this provision, stating, "The grant-in-aid received by the assessee-company was received prior to the commencement of the business and, therefore, cannot be said to arise from business; moreover, it was casual and non-recurring in nature."

Conclusion:
The court answered the referred question in the negative, ruling in favor of the assessee and against the department. The grant-in-aid was not chargeable to income-tax as it was received before the commencement of business activities and was of a casual and non-recurring nature. The court left the parties to bear their own costs, noting the novelty of the issue.