Pre-commencement grant-in-aid was not business income because it did not arise from trading operations.

Grant-in-aid received before the company commenced trading was not taxable as business income because profits and gains of business can arise only when business is already being carried on. The receipt was found to be part of the initial setting-up stage, non-recurring in character, and not derived from trading operations. It therefore did not constitute a trading receipt or a receipt arising from business, and it also fell within the category of casual and non-recurring receipts excluded from tax as business income. On that basis, the grant-in-aid was not chargeable to income-tax.

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Issues: Whether the grant-in-aid received by the company before commencement of its trading activity was chargeable to income-tax as a business or revenue receipt, or was exempt as a non-trading, casual and non-recurring receipt.

Analysis: The receipt was sanctioned before the company commenced trading and the finding in the case stated that business did not begin until 1 July 1956. A receipt can fall under the head of profits and gains of business only if the business is being carried on, and a pre-commencement receipt does not arise from business. On the facts, the grant was of a non-recurring character and was received as part of the initial stage of setting up the trading activity, so it could not be treated as a trading receipt swelling business profits. It also fell within the exclusion for receipts not arising from business and of a casual and non-recurring nature.

Conclusion: The grant-in-aid was not chargeable to income-tax and the answer to the reference was in the negative, in favour of the assessee.

Ratio Decidendi: A receipt received before the commencement of business does not constitute a receipt arising from business and cannot be assessed as business income merely because it is connected with the future trading activity.

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