( 1 ) THE State Trading Corporation of India Ltd. was incorporated as a company on 18th May 1956 its entire share capital being subscribed by the Government of India. Its first accounts were closed on 30th June 1957. It started its trading activities to wards the beginning of July, 1956. By a letter dated 21st June 1956 the Government of India Ministry of Commerce and Industry conveyed to the company a sanction of Rs. 2 lacs "as grant-in-aid to the State Trading Corporation of India (Private) Ltd. to enable the corporation to meet the expenditure in connection with its administration. " This letter was caplioned as follow? :

"state Trading Corporation-Initial Establishment and Miscellaneous Expenditure-transfer of funds-sanclicned. "

( 2 ) 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.

( 3 ) 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 30th June 1957 the Income-tax Officer treated the sum of Rs. 2 lac