Profit earned prior to incorporation is not considered a normal trading profit because the company did not legally exist to earn it. Instead, it is treated as a capital profit or capital receipt. Such profits are typically used to write off preliminary expenses or goodwill, rather than being distributed as dividends to shareholders, as they are not generated from ordinary business operations.

A capital profit arises from transactions that are not part of the normal course of business operations, such as the sale of fixed assets at a price higher than their book value. Because this profit is non-recurring and relates to the capital structure of the business, it is classified as a capital profit.