Subvention receipts linked to non-deductible losses were not taxable as trading income under rule 10(ii).

A subvention payment received by a non-resident's foreign associated company was held not to form part of profits taxable in India under rule 10(ii) of the Income-tax Rules, 1962. The Court noted that the payment was linked to reimbursement of losses on doubtful debts and that the Indian Income-tax Act contains no deeming provision treating such receipts as trading receipts, unlike the U.K. provision relied on. Because the underlying losses were not deductible and the receipt merely reimbursed those losses, it could not be characterised as business income or a trading receipt in the absence of a statutory deeming fiction. The receipt was therefore excluded from the taxable computation.

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Issues: Whether a subvention payment received by a non-resident company's foreign associated company was liable to be included in the computation of profits chargeable in India under rule 10(ii) of the Income-tax Rules, 1962.

Analysis: The payment arose under an agreement made with reference to section 20 of the Finance Act, 1953 (U.K.), under which such payments are treated as trading receipts by a special deeming provision. The Court held that the Indian Income-tax Act, 1961 contains no corresponding deeming provision. The payment was made to reimburse losses on doubtful debts, and those losses were themselves not deductible under the Indian Act. A receipt which merely reimburses a non-allowable loss and is intrinsically linked to that loss cannot, in the absence of a deeming provision, be treated as a trading receipt or part of business income. Rule 10(ii) requires computation of the non-resident's income by reference to world profits and receipts, but it does not permit exclusion of items forming part of the total computation merely because they arose outside India or were connected with foreign transactions.

Conclusion: The subvention payment was not liable to be taken into account as part of the profit taxable in India under rule 10(ii); the answer was against the Revenue and in favour of the assessee.

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