(1) The assessed Corporation was set up by the Ministry of Commerce of the Government of India in 1958 as a government company under the name and style of Indian Handicrafts Development Corporation Ltd. Till the year. 1962-63, She Corporation was known under this name and its expenditure was being met by the Govt. of India by way of grants sanctioned on the basis of budget estimates submitted from year to year. In June 1962, the entire paid up share capital of the Corporation was acquired by the State Trading Corporation from the Government of India. In October, 1962 the Handloom Exports Organisation of the State Trading Corporation was merged with the Indian Handicrafts Development Corporation and the name of the assessed corporation was changed into its present name. For the assessment year 1964- 65, the Corporation's accounts showed a loss of Rs. 1,116.599.00 . The Corporation made a request to the S.T.C. for re-imbursement of the loss which ft was stated was mainly accounted for by the merger of promotional development and servicing activities of the Corporation which were not commercially rewarded. A similar request had also been made in respect of the earlier assessment year. Ultimately sometime in 1965 the government acceeded to the request of the Corporation and the S. T. C. re-imbursed the Corporation in respect of the losses suffered by it for the years in question. For the assessment year 1964-65 the Income-tax Officer held that the losses incurred by the assessed Corporation in its trading activities must be taken to have been wiped of as the same had been re-imbursed by the S.T.C. This conclusion was upheld by the Appellate Assistant Commissioner but on further appeal by the assessed the Appellate Tribunal was of the opinion that the position taken up by the Income-tax authorities was not correct. It was also held by the Tribunal that it was not possible to set off the loss against any accrued right to receive the re-imbursemeat in respect thereof. It was further held by the Tribunal that the total income of the company should be determined after taking into account the expenditure subject to routine in-admissibilities. This order of the Tribunal was accepted by the department and there was no further reference in the matter. For the assessment years 1965-66 the assessed company claimed a loss of Rs. 8,75,3671- In this year also the assessed's loss was re-imbursed by the S.T.C. to the extent of Rs. 6,27,000.00 . The Income-tax Officer was of the view that the entire loss incurred by the assessed having been reimbursed and made good either by the Government or the S.T.C. the assessed's trading activity from the previous year had not resulted in any loss and, thereforee, he completed the assessed year at 'nil' income. The Appellate Assistant Commissioner agreed with the view taken by the Income-tax Officer. The assessed preferred an appeal to the Tribunal. The Tribunal was of the opinion that the amount received from the Government was clearly includible in the total income of the assessed as it was in a sense the grant-in-aid for export efforts In conformity with the earlier order the re-imbursement received by the assessed from the Government it was held that must be taken as a part of the trading accounts and included in the total income as such. On the question of the re-imbursement received from S.T.C. the Tribunal was of the opinion that it would be analogous to sole proprietor introducing additional capital in a business which had been losing or more particularly analogous to a holding company in private sector diverting some of its surplus funds to the subsidiary to enable it to tide over the loss of capital. The contribution made in such circumstances could not be treated as the income of the recipient. The amount of Rs. 6,27,000.00 could not, thereforee, be taken into account as a part of assessed's trading receipts or for that matter as a part of its total income.
(2) The department was dissatisfied with this part of the order of the Tribunal. The Tribunal, thereforee, referred the following question for opinion of this Court :--
'WHETHER on the facts and in the circumstances of the case the Tribunal was legally correct in holding that the amount of Rs. 6,27,000.00 was not includible in the total income of the assessed under the provisions of the Income-tax Act, 1961 ?'
(3) Same question arose for assessment years 1966==67. But the amount involved was Rs. 4,52,000.00 .
(4) Answering the question in affirmative : It was held that the view taken by the Tribunal is the correct view having regard to the facts and circumstances. It was further held that this is clearly a case in which the assessed company had incurred a trading loss and all that has happened is that the S.T.C. having regard to its relation with the assessed company had agreed to discharge the liabilities of the assessed- Corporation and re-imbursed it to the extent of such loss. The case is somewhat analogous to the case of a person agreeing to meet losses incurred by another person in carrying on a business and to discharge the debts incurred by him out of consideration of affection or regard. Such as a father meeting the losses incurred by his son in carrying on a business. It is clear that the losses incurred by the assessed cannot be ignored merely because they have been made up by the holding company. The assessed had clearly incurred a loss and merely because somebody else agreed to recoup the loss, it cannot be said that the losses have ceased to exist.
(5) It was further held that the Tribunal was right in refusing to equate the reimbursement given by the S.T.C. with grants-in-aid given by the Government.
(6) Answering the question in the affirmative and in favor of the assessed the Division Bench held that the Tribunal was correct in holding that these amounts were not includible in the total income of the assessed under the provision of Income-tax Act 1961.