Law:

Section:

Section 28(i) of the Income-tax Act, 1961 [Corresponding to section 10(1) of the Indian Income-tax Act, 1922] - Business income - Chargeable as - Assessment year 1958-59 - Whether if an assessee receives a sum before he starts business, it cannot be treated as a business receipt - Held, yes - Assessee, Government company received Rs. 2 lakhs as grant-in-aid prior to commencement of business to meet expenditure in connection with its administration - Whether grant-in-aid could not be treated as receipt arising from business as it was received before business or trading activity of assessee company started - Held, yes - Whether, therefore, grant-in-aid was not chargeable to tax under section 10(1) of 1922 Act - Held, yes FACTS The assessee, a Government company received Rs. 2 lakhs as grant-in-aid to meet the expenditure in connection with its administration. 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 30-6-1957, the ITO 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 profits. The AAC held that as the grant-in-aid had sanctioned before the assessee started its trading activities, it was a non-returnable and non-trading receipt from its only shareholder for a specific purpose, and therefore, the receipt was not taxable. The Tribunal upheld the AAC's order, 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 1922 Act. On reference : HELD If an assessee incurs expense before commencement of business, it cannot be treated as business expenses, and, similarly, if the receives a sum…

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