The value of free raw materials received by a company is not income under Section 10(3) of the Income-tax Act, 1961, as it is casual and non-recurring and does not fall under any of the exceptions provided therein.

1. This case is of its own type. There is no precedent which governs it. It presents a fairly ticklish problem and has to be settled on first principles. The assessee is an Indian company with German collaboration. This company set up a factory for fabrication, manufacture and sale of hosiery needles. The West German collaborators are M/s. Gheodor Groz & Soehne and Ernst Beckert. The first accounting year of this company ended on 31st March, 1961. The present controversy relates to the assessment year 1962-63, the account year ending 31st March, 1962.

2. The relevant facts are that the assessee-company entered into an agreement with the collaborators. Under this agreement, the collaborators had to supply the machinery and were to get shares in the company. In the invoice dated 4th April, 1961, for machinery costing Rs. 9,45,545 there is no mention of any other material. But, along with the machinery "working-in-material" was supplied, but its value was not indicated in the invoice. An objection was raised by the Customs authorities and a the invoice. An objection was raised by the Customs authorities and a separate invoice was sent by the collaborators indication the value for the separate invoice was sent by the collaborators indicating the value for the purpose of customs duty. They also wrote to the Income-tax Officer stating that the materials had been supplied to the company free of cost. The material supplied consisted of raw materials and knitting needles in various stages of manufacture. This material, according to the collaborators, was supplied to facilitate expeditious starting of production by the company. This material was treated by the company as stock-in-trade. After it was processed it was sold like any other goods manufactured by the company and the sale-proceeds were credited to the sales account. The cost of the machinery received was debited to the capital account, but no book entries were made with regard to the materials at that time. On 30th September, 1961, the amounts representing the value of materials were debited and credited to gift accounts. On 31st March 1962, the amount was credited to the capital reserve account debiting the gift accounts. It is, therefore, clear that this material was received free of cost and was taken by the assessee in its stock account. The total value of this material is Rs. 74,448.

3. Before the Income-tax Officer, the assessee claimed that these materials were received as gift from the German collaborators and as such could not be dealt with in the revenue account as stock-in-trade. In the alternative, it was claimed that although the material was received free of cost, the company could debit its value to the trading account as cost of that material. The Income-tax Officer rejected the assessees contention and held that the material was received by the assessee during the course of business from the German collaborators and formed part of its stock and its sale-proceeds would be revenue receipts in the hands of the assessee-company. As no expense had been incurred by the assessee to acquire this material, the Income-tax Officer did not accept the assessees claim that the trading account could be debited with the amount of Rs. 74,448, the value of the material.

4. The assessee preferred an appeal to the Appellate Assistant Commissioner claiming that the amount of Rs. 74,448 could not be treated as its income. In fact, the effect of the order of the Income-tax Officer was that the amount of Rs. 74,448 representing the value of the material was treated as income of the assessee. The Appellate Assistant Commissioner rejected the appeal with the following observations :

"From the above fact it is clear that the receipt of the materials was incidental to the business of manufacture of hosiery needles started and carried on this year. Their receipt, manufacture and sale were an integral part of this business. Neither at the time of the receipt nor at any later stage