D.K. Kapur, J.
(1) The State Trading Corporation of India Ltd. was incorporated as a company on 18th May 1956 its entire share capital being subscribed by the Government of India. Its first accounts were closed on 30th June 1957. It started its trading activities to wards the beginning of July, 1956. By a letter dated 21st June 1956 the Government of India Ministry of Commerce and Industry conveyed to the company a sanction of Rs. 2 lacs 'as grant-in-aid to the State Trading Corporation of India (Private) Ltd. to enable the corporation to meet the expenditure in connection with its administration.' This letter was caplioned as follow? :
'STATETrading Corporation-Initial Establishment and Miscellaneous Expenditure-transfer of funds-sanclicned.'
(2) 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.
(3) 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 lacs as the assessed's income because according to him the grant-in-aid went toward reducing the revenue expenditure of the company thereby swerling 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 assessed's burden of trading liabilities, it was revenue in character. The Income-tax Officer relied upon the decision in Higgs V. Wrightson. 26 Tax Cas 73 to hold that the receipt was a trading receipt.
(4) On appeal by the company to the Appellate Assistant Commissioner it was held that as the grant-in-aid had been sanctioned before the assessed started its trading activities, it was a non-returnable and a non-trading receipt from its only share-holder for a specific purpose. He thus held that the receipt was not taxable.
(5) The Department appealed to the Income-tax Appellate Tribunal, which affirmed the Appellate Assistant Commissioner's decision on two grounds : (i) the grant-in-aid having been received prior to the commencement of the business could have no bearing on the profit of the company and (ii) it was a receipt of casual and non-recurring nature of the type of windfall and was consequently exempt under Section 4(3)(vii) of the Income Tax Act 1922.
(6) The Commissioner of Income-tax thereafter sought a reference under Section 66(1) of the Income Tax Act, 1922, the Tribunal referred the following question to this Court :
'WHETHERon the facts and in the circumstances of the case, the grant-in-aid was chargeable to Income-tax The Tribunal drew up a statement of the case and annexed the orders of the Income-tax Officer, the Appellate Assistant Commissioner and the Appellate Tribunal to form a part of the case. The facts set out above are to be found in that statement and its annexed orders.'
(7) Mr. B.N. Kirpal, learned counsel for the Commissioner of Incometax submits that the nature of the receipt has to be determined from the purpose for which the amount was sanctioned by the Government and it is irrelevant as to when this amount was received or as to the purpose for which it was utilised by the assessed company. He lays emphasis on the fact that the amount was sanctioned by the President, as a grant-in-aid to enable the Corporation to meet its expenditure in connection with administration. This means that the amount would be in the nature of a revenue receipt. He has cited several cases in support of the proposition that the nature of a receipt like the present, whether it be in the form of a subsidy, compensation or grant, has to be determined by the purpose for which the same is intended to be utilised by the person giving the subsidy, grant etc. On the other hand, Mr. G. C. Sharma learned counsel for the assessed company submits that the nature of the receipt is to be gathered from the manner in which the amount is utilised by the person receiving the same. Furthermore he submits that the question is purely academic in the present case because at the time 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. Kripal 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.
(8) Mr. Kirpal has cited a number of authorities in support of his. contention. However, not even one of those cases deals with acase ill which payment, received before a company or other assessed 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, U.P. & V.P., Lucknow, (1958) 33 LT.R. 644, a subsidy had been received by the assessed company from the Government of India to compensate for the loss of profits resulting from the Government of U.P,s order 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 payment, but from vhe purpose for which the payment was made. It was observed :-
'THEpayment was no doubt, made in the form of subsidy, but it is clear that it was made specifically with the object of compensating the company for the loss of certain profits arising to the company from being compelled to pay additional wages to the workman. This was, thereforee, an income or receipt by the company which was inseparably connected with the conduct of the business of the company and it arose from that business.'
(9) The decision of the House of Lords in C. Sealwin Harbour Dock Co. V. Crook, (1931) 16 Tax Cas.333 was distinguished on the ground that the payment in that case was not with the object of enabling the dock company to carry on its business or meet its trading liabilities. or cover its losses arising from business. The payment was for a purpose which was clearly distinct and separate from the purpose with which the business was carried on by the dock company. It may be mentioned that the purpose in that case was to use the grant so that men might be kept in employment. If the grant in the present case had been received after the State Trading Corporation had started its trading activities, it would be very difficult to distinguish this case decided by the Allahabad High Court.
(10) V.S.S.V. Meenakshi Auhi and another V. Commissioner of Incometax, Madras (1966) 60, I.T.R. 2430, was a case decided by the Supreme Court in which certain sums had been paid to Rubber Planters by the Government of Malay. The decision in Higgs V. Wrighlson, (1944) 26 Tax Cas.73,was relied upon to hold that the payments in question were made to the planters to meet the expenditure incurred in maintaining the rubber plantations. The facts of the case show that the payment in question was made to owners of rubber estates in the Federated Malay States after the Second World War on account of the destruction of their estate?. The payment was made to encourage planting or re-planting of rubber trees. No question arose in that case of payment being made before the business was started.
'INthe case of The Seaham Harbour Dock Company V. Crook, 16 Tax Cas 333, payments were made to the Dock Company by the Unemployment Grants Committee. It was held by the House of Lords that the amounts were not received as part of the profits or gains of the trading business of the Dock Company. The Government Department concerned has paid the sums in question under a power to grant assistance in carrying out the approved scheme? to relieve un-employment. It was held that this was not a receipt which had anything to do with trade.'
'INPretoria-Pietersburg Railway Company Ltd. V. Elwood, 6 Tax Cas. 508. a Railway Company had constructed a railway under a concession granted by the Government of the South African Republic. After the war of 1901-3, the Company's undertaking was taken over by the British Government, but, the Government did so afterpayment 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 share capital of the company. It, is, thereforee, a compenstaion in lieu of profits and, thereforee, taxable as a revenue receipt. The present case cannot be treated on a parallel with that case, because under the Indian Income-tax Act, 1922, there must be a business before there can be a business receipt. If during the course of the running of that business, some intervening event occurrs by which the assessed received compensation for losses of business profits, it will also be a business receipt. On the other hand, if the receipt is received by the assessed before he starts business, then different consideration arise on the express language of Section of the Act.'
(11) The Judgment reported as Blake V. Imperial BrazUlian Railway, Tax Cas. 58 and Ntiamis Guaranteed State Railway Co. V. Wyatt, 2 Tax Cas. 584, have also been referred to, but, they again refer to payments made while a business was being run. In Higgs V. Wrightson already referred to, grants were paid to Dairy farmers which were treated as revenue receipts. The reason for this was that the ploughing grant as it was called was paid to meet the expenses of ploughing which was a revenue receipt. Similarly, in Ostime V. Ponlypridd and Rlwndda Joint Water Board, 28 Tax Cas. 261 certain sums received by the Board from its constituent members were treated as trading receipts. They were so treated because the assistance was given in order to be utilised in the business carried on by the Board and to enable it to meet its trading obligations.
(12) It would be difficult to distinguish these cases if the payment had been received by the assessed Company in the present case after it had started its trading activities. The only line of distinction, thereforee, arises from the facts of the present case.
(13) Mr. Sharma, learned counsel for the assessed company has referred to the decision of the Supreme Court in Commissioner ofincometax, Madras V. Express Newspapers Ltd. : 53ITR250(SC) . The company which had been carrying on publishing business went into voluntary liquidation and made a profit on the sale of its writtendown assets. It was held that such profits were not taxable when no business was being carried on. That seems to be the position in the present case. The amount in question was received by the assessed company before it started its trading activity. On this aspect of the case, Mr. Kirpal has pointed out that the Income-tax Officer treated the accounting year of the company to start on 18th May, 1956 and ending on 30th June, 1957 and thus, business was carried enduring the accounting year in which the amount in question was sanctioned in favor of the assessed company. However, the Income-tax Officer has expressly pointed out that no trading activity was earned on till 1st July, 1966. The Indian Income-tax Act, 1922, in Section 10(1) provides:-
'THEtax shall be payable by an assessed under the head 'Profits and gains, profession or vocation' in respect of the profit or gains of any business, profession or vocation carried on by him.'
(14) Mr. Sharroa stresses the fact that a business must be carried on before there can be any profit or gain 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 assessed 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 connection with the business which is later on to be carried on by the assessed. Hence, the sum involved in the present case can only be treated as a trading receipt if by some means the commencement of the trading activity or business of the assessed company can be shown to have been from a date earlier than 21st June, 1956. On this question, there is a finding contained in the -statement of the case that the business did not start till 1st July, 1956. Hence, it would follow that this receipt must be treated as a receipt before the commencement of the business.
(15) Mr. Sharma has referred to Jansatta Karyala v. Commissioner of Income-tax Gujarat : 54ITR792(Guj) , to show that an expenditure incurred by a printing concern for buying printing types was not a business expenditure when it was incurred before the business was started although the same assessed was allowed this expense as a business expense in subsequent years after the business had started. The test for determining whether an expenditure was for business or not was stated thus :-
'WASit for running the business or was it one concerning the instrument for earning profits?'
(16) Tested this way, any expenditure incurred before a business started its trading activity, would not be one for running the business, but one for bringing the capital asset into existence. Viewed similarly the receipt by the State Trading Corporation of a grant-in-aid from the Government of India for meeting its administrative expenses has to be treated as one enabling the trading activity of the assessed company being conducted and thus, enabling that trading activity to commence. As stated by the Gujarat High Court :-
'IT is thus clear that whereas a question might arise where the expenditure is incurred while the business is going on and is not incurred either for the extension of the business or for - substantial replacement of its equipment, whether such expenditure is capital or revenue expenditure, no such question can arise in the case of expenditure incurred as and by way of initial outlay.'
(17) This statement seems to be apposite also to the case of a receipt received by an assessed before the business has actually started. Such a receipt is also by way of initial outlay for the purpose of conducting the business which has to come into being subsequently. It is, thereforee, a receipt granted for the purpose of bringing into existence an asset or advantage of enduring benefit; the asset in this case being the business or trading activity itself.
(18) In Groz-Beckert Saboo Ltd. v. Commissioner of Income-tax, Patiala the Punjab and Haryana High Court held that certain raw material and semi-finished goods received by the assessed company from its West German collaborators did not represent a revenue receipt. The said goods were in fact sold by the assessed 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-Tix Act, 1922. The Court observed :-
'WEasked Mr. Awasthy, learned counsel for the department, as to what would be the position if instead of raw materials, a gift in cash had l)een 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 lie termed as income. It would partake of proceeds of the nature contemplated by section 10(3) of the Act. thereforee, the mere circumstance that instead of cash, gift of raw material is made can make no difference.'
(19) The grant-in-aid in question in the present case is of a non-recurring nature. It also cannot bs treated as a receipt arising from business for the simple reason that it was received before the business or trading activity of the assessed company started. It is, thereforee, exempt from taxation. The result of this analysis would be that the amount in question would either be exempt from taxation because Section 4(3)(vii) provides :-
'ANYincome, profits or gains falling within the following classes shall not be included in the total income of the person receiving them: (vii) Any receipts not being capital gains chargeable according to the provisions of section 12B and not being receipts arising from business or the exercise of a profession, vocation or occupation, which are of a casual and non-recurring nature or are not by way of addition to the remuneration of an employee.'
(20) The grant-in-aid received by the assessed company was received prioi to the commencement of the business and, thereforee, cannot be said to arise from business; moreover, it was casual and non-recurring in nature. Alternatively, it would be not taxable because it was received by the company before it commenced its business and hence. was not chargeable under Section 10(1). The sum cannot, thereforee. be treated as an amount which went to swell the profits of the assessed company.
(21) In view of this conclusion, it is unnecessary to deal with the alternative question as to whether the amount would not be taxable because it is treated as a capital reserve by the assessed company with intimation to the Government of India. It is conceivable that even a revenue receipt may, in certain circumstances, be converted into a capital receipt by subsequent agreement between the payer of the amount and the receiver of the same.
(22) In the circumstances, the answer to the question referred to us has to be in the negative in favor of the assessed and against the Depart ment. As the question appears to have arisen for the first time before us in this form and there seems to be no reported decision covering the cases, the parties are left to bear their own costs.