Government subsidy for business expenditure is taxable trading receipt when directly linked to carrying on the trade.

Government subsidy paid to compensate an assessee for additional wage expenditure incurred in carrying on its sugar business was treated as a trading receipt. The payment was not a gratuitous or detached receipt; it was directly connected with the conduct of the trade and was intended to make good loss of profits arising from business expense. A receipt that compensates trading loss or supports the carrying on of business is revenue in nature, not a casual or capital receipt. The subsidy therefore fell within taxable business income and did not qualify for exemption as a casual receipt under Section 4(3)(vii) of the Income-tax Act, 1922.

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Issues: Whether the subsidy of Rs. 89,791 received from the Government of India was a taxable trading receipt arising from the assessee's business and thus not exempt under Section 4(3)(vii) of the Income-tax Act, 1922.

Analysis: The receipt had to be judged in the light of the surrounding circumstances and the purpose for which it was paid. The subsidy was not a gratuitous or detached payment; it was granted specifically to compensate the assessee for additional wage expenditure imposed in the course of carrying on its sugar business. The payment was made to make good the loss of profits caused by that business expense and was therefore inseparably connected with the conduct of the business. A receipt made to compensate trading loss or to support the carrying on of the trade is a revenue receipt and not a casual or capital receipt.

Conclusion: The subsidy was taxable as income arising from the business and did not fall within the exemption for casual receipts.

Final Conclusion: The reference was answered against the assessee, and the subsidy was held includible in taxable business income.

Ratio Decidendi: A payment made by a Government as compensation for business expenditure or loss of profits, where it is directly connected with the conduct of the trade, is a trading receipt chargeable to tax.

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