CAPITAL RECEIPT AND REVENUE

RECEIPT TAXATION
SUBMITTED TO:-

Ms. Varendyam J. Tiwari

(FACULTY LAW OF TAXATION)

DATE OF SUBMISSION: 16-08 -2016

SUBMITTED BY:-

Prathmendra Hidko
(ROLL NO-111, SEM-V)

HIDAYATULLAH NATIONAL LAW

UNIVERSITY
UPARWARA, NEW RAIPUR (C.G)

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Declaration

I hereby declare that the project work entitled CAPITAL RECEIPT AND REVENUE
RECEIPT TAXATION" is record of an original work done by me under the guidance of
Faculty Member Ms. Varendyam J. Tiwari.

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Acknowledgements:
I feel highly elated to work on the topic CAPITAL RECEIPT AND REVENUE RECEIPT
TAXATION
The practical realization of this project has obligated the assistance of many persons. I
express my deepest regard and gratitude towards Ms. Varendyam J. Tiwari faculty of Law of
Taxation for giving me the opportunity to work on this project. Her invaluable guidance has
been of immense help in understanding and carrying out the nuances of the project.
I take this opportunity to also thank the University and the Vice Chancellor for providing
extensive database resources in the Library and for the Internet facilities provided by the
University.
Some printing errors might have crept in, which are deeply regretted. I would be grateful to
receive comments and suggestions to further improve this project report.

Prathmendra Hidko
Roll no. 111
Section B

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Objectives

To know about capital receipt and revenue receipt.

To distinguish between capital and revenue receipt.
To know its uses in taxation.

Research Methodology
This study has been carried out in a descriptive and analytical manner. Secondary and
published documented data has been collected through various sources and analyzed
accordingly. Many of the available literature and studies have also been consulted and
reviewed to make the study more objective. No field work has been carried out in the
development of this work.

Prathmendra Hidko
Section- B
Semester V

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Contents:

Declaration..2
Acknowledgements.4
Introduction ..6
Capital Receipt and Revenue Receipt....7
1. Classification of Receipt
2. Diff. Between Capital Receipt and Revenue Receipt
Capital Receipt and Revenue Receipt under Taxation........................................10
1. Immaterial Considerations
2. Distinguishing Tests
Conclusion..14
References...15

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Introduction

When the business receives money it is again of two sorts. It may be a long-term receipt, a
contribution by the owner, either to start the business off or to increase the funds available to
it. It might be a mortgage or an which brings money into the business for a long-term, but in
this case it is not the owner of the business but some other investor who is supplying the
money.

On the other hand, the receipt may be a short-term receipt, one which is truly a profit of the
business. It may be rent received, commission received or cash for sale of goods made that
day, or at some previous time.

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CAPITAL RECEIPT AND REVENUE RECEIPT

What is Capital
Capital is the amount of cash and other assets owned by a business.

What are receipts

The materials or transactions associated with the receiving process.

CLASSIFICATION OF RECEIPTS

CAPITAL RECEIPTS
REVENUE RECEIPTS

Capital Receipt:
Receipts which are non-recurring (not received again and again) by nature and whose benefit
is enjoyed over a long period are called "Capital Receipts", e.g. money brought into the
business by the owner (capital invested), loan from bank, sale proceeds of fixed assets etc.
Capital receipt is shown on the liabilities side of the Balance Sheet.
CAPITAL INCOME
Income which does not grow out of or pertain to the running of business proper.
Synonymous to the term CAPITAL GAIN.
Profit realized over and above the cost of the fixed asset is considered as capital income or gain.
Eg. :- Cost of the plant = Rs 10,000 sold for = Rs12, 000 Then, Capital receipt = Rs 12,000 Capital
Gain = 12,000-10,000 = Rs 2,000

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Revenue Receipt:
Receipts which are recurring (received again and again) by nature and which are available for
meeting all day to day expenses (revenue expenditure) of a business concern are known as
"Revenue receipts", e.g. sale proceeds of goods, interest received, commission received, rent
received, dividend received etc.
REVENUE INCOME
Income that arises out of and in the course of the regular business transactions of a concern.
Synonymous to the term REVENUE PROFIT.
For instance, income derived from sale of goods, letting out business property etc.
Eg. :- Goods costing = Rs 20,000 Sold for = Rs 25,000 Revenue receipts = Rs25,000 Revenue
income = 25,000-20,000 = Rs 5,000

Distinction between Capital Receipt and Revenue Receipt:-

Revenue Receipt
1.
2.
3.
4.
5.
6.

It has short-term effect. The benefit is enjoyed within one accounting period.
It occurs repeatedly. It is recurring and regular.
It is shown in profit and loss account on the credit side.
It does not produce capital receipt.
This does not increase or decrease the value of asset or liability.
Sometimes, expenses of capital nature are to be incurred for revenue receipt,
e.g. purchase of shares of a company is capital expenditure but dividend
received on shares is a revenue receipt.

Capital Receipt
1.
It has long-term effect. The benefit is enjoyed for many years in future.

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2.
It does not occur again and again. It is nonrecurring and irregular.
3.
It is shown in the Balance Sheet on the liability side.
4.
Capital receipt, when invested, produces revenue receipt e.g. when capital is
invested by the owner, business gets revenue receipt (i.e. sale proceeds of
goods etc.).
5.
The capital receipt decreases the value of asset or increases the value of
liability e.g. sale of a fixed asset, loan from bank etc.
6.
Sometimes expenses of revenue nature are to be incurred for such receipt e.g.
on obtaining loan (a capital receipt) interest is paid until its repayment.

Capital Receipts are the income generated from the non-operating sources, which are having
a long term effect. On the other hand, Revenue Receipts are the major source of income of
the enterprise, without which a business may not survive for a long time.
For a successful business both receipts play a prominent role as they both compliments each
other. To distinguish between these two receipts you need to focus on the nature and intention
of the receipts, which will help you in segregating the two.

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CAPITAL RECEIPT AND REVENUE RECEIPT UNDER

TAXATION

The Capital Receipts are to be charged to tax under the head Capital Gains and Revenue
Receipts are Taxable under other heads, it is of vital importance to understand which receipt
is a capital receipt and which one is a revenue receipt.

Immaterial Considerations
In deciding whether a particular receipt is of a capital or revenue type, the following
considerations are considered to be immaterial and not going to decide or change the
character or nature of the receipt.

1. Receipt in lump sum or in Instalments. Whether any income is received in lump

sum or in instalments, it will not make any difference as regards its nature, e.g., an
employee is to get a salary of 1,000 p.m. Instead of this he enters into an agreement to
get a sum of 36,000 in lump sum to serve for a period of three years. The receipt
where it is monthly remuneration or lump sum for 3 years is a revenue receipt. It has
been decided in so many court cases that a lump sum receipt may be an item of
revenue nature and an annual receipt recurring over few years may be a capital
receipt. Thus, whether a receipt is a periodic receipt or a single receipt is immaterial
for the purposes of determining its nature. [Rajah Manyain Meenak and Shamma v.
C.I. T. (1956) 30 1. T.R. 286].
2. Nature of receipt in the hands of recipient. Whether a receipt is capital or revenue
will be determined in the hands of the persons receiving such income. No attention
will be paid towards the source from which the amount is coming. Salary even if paid
out of capital by a new business will be it revenue receipt in the hands of employee.
3. Magnitude of receipt. The magnitude of the receipt, whether big or small, cannot
decide the nature of the receipt although the size of a receipt in a transaction is not an
entirely irrelevant consideration. A receipt of 10,000 may be of revenue nature
whereas a receipt of only 1,000 may be a capital receipt. Supreme Court has ruled in
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a case Divencha v. C.I. T. (48 1. T.R. 222), that the magnitude of a receipt is
immaterial for the purpose of determining its nature.
4. Name given by parties and treatment in books of accounts. What name the
recipient or payer of the receipt has given in the books of accounts or with what name
he has called a particular transaction, all such considerations are immaterial to decide
the nature of the receipt. A capital payment by a dealer may be a revenue receipt in the
hands of the recipient. The character of the receipt shall be decided by considerations
other than by what name the parties call it. [Divencha v. C.I. T.]. The nature of the
receipt will be determined in the hands of the person receiving such income.
5. Payment made out of capital. No attention will be paid towards the source from
which amount is coming. Salary even paid out of capital by a new business will be a
revenue receipt in the hands of the employee. It was also decided in a case that if a
receipt is made out of capital, the receipt may also be a capital receipt. If a recipient is
beneficially entitled not only to the income but also to the capital, payments given to
him by his trustees out of the corpus would be capital receipts. [Brodies Trustees v.
I.R. 25 T.C. 13, 16].
6. Time of receipt. The nature of the receipt has to be determined at the time when it is
received and not afterwards when it has been appropriated by the recipient.
7. Quality of receipt. Whether the income is received voluntarily or under a legal
obligation, it will not make any difference as regards its nature.

Distinguishing Tests
It is very difficult to draw a line of demarcation between capital receipts and revenue receipts.
Even the courts have found it difficult to lay down some points of distinction on the basis of
which a capital receipt may be distinguished from a revenue receipt. Some tests, however,
can be applied in particular cases. These tests are:1. On the basis of nature of assets. If a receipt is referable to fixed asset, it is capital
receipt and if it is referable to circulating asset it is revenue receipt. Fixed asset is that
with the help of which owner earns profits by keeping it in his possession, e.g., plant,
machinery, building or factory, etc. Circulating asset is that with the help of which
owners earn profit by parting with it and letting others to become its owner, e.g.,
stock-in-trade. Circulating asset is asset which is turned over and while being turned
over yields profit or loss whereas fixed asset is one on which the owner earns profit
by keeping it in his own possession. Profit on the sale of motor car used in business

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by an assessee is capital receipt whereas the profit earned by an automobile dealer,

dealing in cars, by selling a car is his revenue receipt.
2. Termination of source of income. Any sum received in compensation for the
termination of source of income is capital receipt, e.g., compensation received by an
employee from its employer on termination of his services is capital receipt.
3. Amount received in substitution of income. Any sum received in substitution of
income is revenue receipt, e.g., A company purchased the right to produce a film
from its earlier producer with the condition that no other producer will be given these
rights. Afterwards it is found that the rights for producing this film had already been
sold. The A company claimed damages and was awarded 40,000. It was held that
damages received are the compensation for the profits which were to be earned.
Hence this is revenue receipt.
4. Compensation received on termination of lease. Where a sum is received as
compensation for termination of a lease, it is capital receipt because it is termination
of source of income.
5. Compensation on surrender of a right. Any amount received as compensation on
surrendering a right is capital receipt whereas any amount received for loss of future
income is a revenue receipt. An author gives up his right to publish a book and
receives 1,00,000 as compensation. It is capital receipt but if he receives it as advance
royalty for 5 years it is revenue receipt.
6. Tests as to the purpose of keeping an article. If a person purchases a piece of
sculpture to keep as decoration piece in his house, if sold later on, will bring causal
receipt but if the same sculpture is sold by an art dealer it will be his revenue receipt.
If an article is acquired for the purpose of trade, the profit arising from it is revenue receipt.

EXAMPLES AND ILLUSTRATIONS

Capital Receipts
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The followings are some important examples of capital receipts decided by courts
1.

Salami or Nazrana received for grant of permanent lease.

2.

Compensation received for loss of right to future remuneration.

3.

Compensation received from the employer for loss of employment due to premature

termination of service.
4.
5.

Price received on sale of know-how.

Damages received by an employee who is wrongly dismissed or a payment received

by an employee in lieu of notice.

6.

Amount received by the assesses for digging and removing earth from his land for

brick- making.
7.

Contribution received by electric supply company from consumers for installation of

service lines (excess of amount over cost of installation).

Revenue Receipts
1.

Lump sum royalty received in advance.

2.

A pugree received by the owner of the house property from tenant.

3.

Damages awarded by a court to a company for breach of contract by another

company.
4.

A passenger is injured in a railway accident and is temporarily disabled thus losing

income for a short period. Any receipt as compensation shall be a revenue receipt.

Conclusion

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Whether a particular receipt is capital or income from business has frequently

engaged the attention of the courts (Kettlewell Bullen & Co. Ltd. Vs. CIT (1964) 53
ITR 261 (SC)). There is nothing in the income-tax Act laying down any legal criterion
for distinguishing between capital and revenue receipts, nor does any definite and
clear criterion emerge from English or Indian decisions on the subject. It depends
upon the facts or each case which must be considered for determining whether a
particular payment should be held to be chargeable as income under the Income-tax
Act or not. (B. Guha & Co. Vs. CIT (1958) 34 ITR 877 (Punj-Del. Bench). It is well
settled that the words of the statute, when there is doubt about their meaning, are to be
understood in the sense in which they best harmonise with the subject of the
enactment and the object which the legislature has a view.

References
Web references
1. VK Gupta taxation of charitable trust available at <http://vipca.net/wpcontent/uploads/2015/07/taxation-of-charitable-trust
2. http://www.carkgupta.com/image/Trusts-DrRaviGupta.
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Book referred
1. Dr. Girish Ahuja & Dr. Ravi Gupta, Systematic approach to Income Tax, Bharat Law

House, New Delhi (13th ed., 2013).

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