Revenue Receipts and Capital Receipts
Revenue Receipts and Capital Receipts
“REVENUE RECEIPTS
AND
CAPITAL RECEIPTS”
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ACKNOWLEDGEMENT ......................................................................................................... 2
HYPOTHESIS ....................................................................................................................... 5
SOURCES OF DATA............................................................................................................ 5
Similarities ........................................................................................................................ 12
CONCLUSION ........................................................................................................................ 16
Income Tax is levied on income of assessee and not an every receipt which he receives. The
method of charging tax on different types of receipt is different. Income tax Act, 1961
provides a separate head “CAPITAL GAINS” for levying tax on capital receipts. Similarly,
while calculating net taxable income of assessee only revenue expenses are allowed to be
deducted out of revenue receipts. This makes the distinction between capital and revenue of
vital importance.
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 which brings money into the business for a long-term.
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.1
A receipt of money is considered as capital receipt when a contribution is made by the
proprietor towards the capital of the business or a contribution of capital to the business by
someone outside the business. Capital receipts do not have any effect on the profits earned or
losses incurred during the course of a year.
1
http://financeaccountingsimplified.com/capital-and-revenue-receipts-and-expenditure/ Accessed on
27/10/2016
2
http://icwai-2011.blogspot.in/2011/05/capital-and-revenue-receipts.html Accessed on 27/10/2016
HYPOTHESIS
i. Both capital and revenue receipts play a vital role in the growth of business.
RESEARCH METHODOLOGY
The researcher depend upon the existing materials like books, case laws, thus the researcher
opted doctrinal method of research. The researcher visited library and refer the primary and
secondary sources available there.
SOURCES OF DATA
The researcher went for primary and secondary sources of data. Secondary sources are all
those work done on primary sources.
The researcher had time limitation as he has to complete this project within one month.
This research will be a source for a further researcher. This research will give him/her the
basic ideas in a very simple manner.
Capital receipts are the income received by the company which is non-recurring in nature.
They are generally part of financing and investing activities rather than operating activities.
The capital receipts either reduce an asset or increases a liability.
Issue of Shares
Issue of debt instruments such as debentures.
Loan taken from a bank or financial institution.
Government grants.
Insurance Claim.
Additional capital introduced by the proprietor.
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.3
Revenue Receipts are the receipts which arise through the core business activities. These
receipts are a part of normal business operations that is why they occur again and again
3
http://www.accountingexplanation.com/capital_and_revenue_receipts.htm Accessed on 24/10/2016
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.
4
Ibid.
Revenue Receipt
1. It has short-term effect. The benefit is enjoyed within one accounting period.
Capital Receipt
1. It has long-term effect. The benefit is enjoyed for many years in future.
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
5
DIFFERENCES BETWEEN CAPITAL RECEIPTS AND REVENUE RECEIPTS available at
https://www.wallstreetmojo.com/capital-receipts-vs-revenue-receipts/ visited on 2/09/2019.
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.
Immaterial Considerations
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
6
[2014] 221 TAXMAN 323
If an article is acquired for the purpose of trade, the profit arising from it is revenue receipt.
Similarities
7
Ibid
The Delhi High Court has observed, that if the money paid related to structure of assessee’s
profit making apparatus and affected the conduct of business, the sum received for
cancellation or variation of agreement, would be a capital receipt.
The Income-tax Act does not define the term “Capital receipt” & “Revenue receipt”. Also, it
has not laid down the criterion for differentiating the capital and revenue receipt.
Yet, it has exempted certain capital receipts from taxation while certain capital receipts have
been taken into ambit of capital receipts chargeable as capital gains.
e. g. w. e. f. 1.4.2000 a new sub- section (1A) has been inserted in section 45 which
provides that notwithstanding anything contained in sub-section (1) (to Sec. 45), where any
person receives at any time during any previous year any money or other assets under an
insurance from an insurer on account of damage to, or destruction of, any capital asset, as a
result of:
(iv) action by an enemy or action taken in combating an enemy (whether with or without a
declaration of war), then, any profits or gains arising from receipt of such money or other
assets shall be chargeable to income-tax under the head “Capital gains”.9
Also, certain revenue receipts have been exempted from taxation under Income-tax Act while
certain receipts have been taken as income chargeable to income-tax.
For example under section 28, certain receipts have been made chargeable to income-tax
under the head “profits and gains of business or profession”.
8
[2014] 221 TAXMAN 323
9
http://www.economicsdiscussion.net/revenue/revenue-and-capital-receipts-of-government-receipts-its-
definition-and-differences/765 Accessed on 1/11/2016
Also the Supreme Court, in CIT Vs. Prabhu Dayal11, has held that the question whether a
particular receipt is capital or income is not one of fact though it is dependant to a very great
extent on the particular facts of each case, the question does involve conclusion of law to be
drawn from those facts.
Privy Council (PC) in the case Minister of National Revenue Vs. Cantherine Spooner12,
has held that the question whether a particular sum reed, is of the nature of an annual profit or
gain or is of a capital nature does not depend upon the language in which the parties have
chosen to describe it. It is necessary in each case to examine the circumstances and see what
the sum really is.
Also, PC has held, in CIT Vs. Sir Kameshwar Singh13, that whether a particular item or
receipt is taxable or not depends upon the nature of the recipients business.
The Supreme Court in Commissioner of Income-tax & Excess Profits Tax Act Vs. South
India Pictures Ltd.14 has observed that it is well recognised that the problem of
discriminating between an income receipt and a capital receipt and between an income
disbursement and a capital becomes one of much refinement.
The Bombay High Court in CIT Vs. Mahindra And Mahindra Ltd.15 has observed that a
receipt is not taxable if it is referred to fixed capital. It is taxable as a revenue item when it is
referred to circulating capital or stock-in-trade. The fixed capital is what the owner turns to
profit by keeping it in his own possession. Circulating capital is what he makes profit of by
parties with it and letting it change its masters.
10
(1999) XI SITC 109 (SC)
11
(1971) 82 ITR 804
12
(1933) 1 ITR 299
13
(1935) 3 ITR 305
14
(1956) 29 ITR 910
15
(1973) 91 ITR 130
Also the Supreme Court in CIT Vs. Kamal Behari lal Singha17 has observed that it is now
well settled that in order to find out whether a receipt is a capital receipt or a revenue receipt.
One has to see what it is in the hands of the receiver and not its nature in the hands of
the payer. In other words, the nature of the receipt is determined entirely by its character in
the hands of the receiver and the source from which the payment is made has no bearing on
the question. Where an amount is paid which, so far as the payer is concerned, is paid wholly
or partly out of capital, and the receiver receives it as income on his part, the entire receipt is
taxable in the hands of the receiver.
The Rajasthan High court, in Eklingji Trust Vs. CIT18, has held that some principles that
can be deducted from the various decisions for determining whether a particular amount
received by the assessee is capital or revenue in nature, are:
(1) the fact that a certain payment is measured by the estimated annual yield or profits does
not make the payment an income receipt,
(2) the fact that the receipt is a periodic receipt or a single receipt is immaterial for the
purpose of determining its nature; an income receipts is not necessarily recurring, nor a
capital receipt necessarily recurring, nor a capital receipt necessarily single;
(3) the name given to a transaction by the parties concerned does not necessarily decide the
nature of the transaction. In such a situation, the question always is what is the real character
of the payment, not what the parties call it.
16
( 1970) 78 ITR 58
17
(1971) 82 ITR 460
18
(1986) 53 CTR (Raj) 40
In general, Capital Receipts and Revenue Receipts play a vital role in the growth of a
business. Whether a particular receipt is capital or income from business has frequently
engaged the attention of the courts ( Kettlewell Bullen & Co. Ltd. Vs. CIT )19There 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 )20. 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.
The onus in upon the income-tax authorities to show that there exist facts or circumstances
which would make payment an income ( Maharaja Chintamani Saran Nath Sah Deo Vs.
CIT)21
Where the deposit of money is directly linked with the purchase of plant & machinery, any
income earned on such deposit is incidental to acquisition of asset and therefore capital in
nature (CIT vs. Karnal Co-operative Sugar Mills Ltd.)22
The decided cases as cited above give a clear depiction of capital and revenue receipts. Also,
the hypothesis of the researcher holds true that both capital and revenue receipts play a very
vital role in any business. Moreover capital receipts are not chargeable under income tax.
19
(1964) 53 ITR 261 (SC)
20
(1958) 34 ITR 877
21
(1971) 82 ITR 464 (SC)
22
(2000) 14 SITC 578 (SC)
PRIMARY SOURCE:
BARE ACT
SECONDARY SOURCES:
BOOKS
WEBSITES
i. http://financeaccountingsimplified.com/capital-and-revenue-receipts-and-expenditure/
Accessed on 2/09/2019
iv. accountlearning.blogspot.com/2010/07/differences-between-capital-receipts.html
Accessed on 2/09/2019.
v. http://incometaxmanagement.com/Pages/Taxation-System/Capital-&-Revenue.html
Accessed on 2/09/2019
vi. http://keydifferences.com/difference-between-capital-receipt-and-revenue-
receipt.html Accessed on 2/09/2019
vii. http://www.economicsdiscussion.net/revenue/revenue-and-capital-receipts-of-
government-receipts-its-definition-and-differences/765 Accessed on 2/09/2019