TMI Blog1972 (12) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... llaneous expenditure - Transfer of funds - Sanctioned." The amount in question was sanctioned before the company had commenced its trading activities. The amount was not spent at all and the company under intimation to the Government treated it as a capital reserve. When the company was assessed to income tax for the assessment year 1958-59, in respect of its first year of business for the accounting period ending on 30th June, 1957, the Income-tax Officer treated the sum of Rs. 2 lakhs as the assessee's income because, according to him, the grant-in-aid went towards reducing the revenue expenditure of the company thereby swelling its profit. The Income-tax Officer was of the view that the purpose for which the grant-in-aid was made determined its nature. If the grant was towards capital investment its nature was capital, if it was intended to reduce the assessee's burden of trading liabilities, it was revenue in character. The Income-tax Officer relied upon the decision in Higgs v. Wrightson to hold that the receipt was a trading receipt. On appeal by the company to the Appellate Assistant Commissioner, it was held that as the grant-in-aid had been sanctioned before the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime the amount was received by the company, it had not started any trading activity. If there is no business, there can be no trading receipt and hence in this case particularly this amount cannot be treated as a business receipt. To this, Mr. Kirpal answers, that a business receipt may be received before the business has commenced and this should not make any difference to the nature of the receipt. Mr. Kirpal has cited a number of authorities in support of his contention. However, not even one of those cases deals with a case in which payment, received before a company or other assessee started business, has been treated as a revenue receipt. I may now refer to the cases cited by him. In Ratna Sugar Mills Co. Ltd. v. Commissioner of Income-tax a subsidy had been received by the assessee-company from the Government of India to compensate for the loss of profits resulting from the Government of U.P.'s orders to pay wages at an enhanced rate ; the amount in question was paid out of additional excise duties recovered by the Government of India. It was held by the Allahabad High Court that the nature of the receipt was not to be gathered from the source of the payment, but from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relieve unemployment. It was held that this was not a receipt which had anything to do with trade. In Pretoria Pietersburg Railway Co. Ltd. v. Elwood a railway company had constructed a railway under a concession granted by the Government of the South African Republic. After the war of 1901-1903, the company's undertaking was taken over by the British Government, but the Government did so after payment of the share capital and after taking over the obligation of the South African Republic to pay guaranteed interest on share capital. The railway company did not operate during the period of the war and the question arose, whether the guaranteed amount, paid for that period as interest on share capital, was taxable as a revenue receipt. The Court of Appeal held that the amount in question was paid as a subsidy for the three years during which the railway did not operate. This case is relied upon to show that even though the company was not carrying on trading activities, this amount was treated as a revenue receipt. It, however, seems that the payment was made by reason of the British Government taking over the South African Republic's obligations to pay a guaranteed amount on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company to start on 18th May, 1956, and ending on 30th June, 1957, and thus business was carried on during the accounting year in which the amount in question was sanctioned in favour of the assessee-company. However, the Income-tax Officer has expressly pointed out that no trading activity was carried on till 1st July, 1956. The Indian Income-tax Act, 1922, in section 10(1) provides : " The tax shall be payable by an assessee under the head 'Profits and gains of business, profession or vocation ' in respect of the profit or gains of any business, profession or vocation carried on by him. " Mr. Sharma stresses the fact that a business must be carried on before there can be any profit or gains and if any receipt is received before the business is carried on, it is not a business receipt and if any expenditure is incurred before the business has started, it is also not a business expense. There seems to be substance in this view ; if an assessee incurs expense, it cannot be treated as a business expense, and, similarly, if he receives a sum before he starts business, it cannot be treated as a business receipt. It makes no difference that the sum which is received may have some c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set in this case being the business or trading activity itself. In Groz-Beckert Saboo Ltd. v. Commissioner of Income-tax, the Punjab and Haryana High Court held that certain raw material and semi-finished goods received by the assessee-company from its West German collaborators did not represent a revenue receipt. The said goods were in fact sold by the assessee-company and the proceeds credited to the profit and loss account. Reference was made to section 10(3) of the Income-tax Act, 1961, which corresponds to section 4(3)(vii) of the Indian Income-tax Act, 1922. The court observed : " We asked Mr. Awasthy, learned counsel for the department, as to what would be the position if instead of raw materials, a gift in cash had been made to the company and the company had proceeded to buy raw material with that amount. Mr. Awasthy was constrained to admit that the payment of cash as gift could not be termed as income. It would partake of proceeds of the nature contemplated by section 10(3) of the Act. Therefore, the mere circumstance that instead of cash, gift of raw material is made can make no difference. " The grant-in-aid in question in the present case is of a non-recurring n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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