GITARATTAN INTERNATIONAL BUSINESS SCHOOL

DELHI-110085

Batch (2016-2021)

ASSIGNMENT OF TAX LAW

Submitted by: ABHISHEK SHARMA

Roll No: 00219103516
Submitted to: LOVINA ROPIA
 CAPITAL RECEIPT V/S REVENUE RECEIPT

WHAT ARE RECEIPTS?

A receipt is a written acknowledgment that something of value has been transferred from one

party to another. In addition to the receipts consumers typically receive from vendors and

service providers, receipts are also issued in business-to-business dealings as well as stock

market transactions. For example, the holder of a futures contract is generally given a delivery

instrument which acts as a receipt in that it can be exchanged for the underlying asset when the

futures contract expires.

A receipt is taxable if it is of the nature of income. But receipts which are of capital nature are

generally not taxable. The basic scheme of income-tax is to tax income not capital, and

similarly to allow revenue expenditure. But this general rule is subject to certain exceptions.

The distinction between the capital receipt and revenue receipt is not rigid and sometimes the

distinction becomes very narrow. Whether a particular receipt is of the nature of income or

capital, is explained below by the following examples:

An amount received on account of sale of trading goods or receipts in respect of circulating

capital or of flowing capital is revenue receipt, for example sale of a motor car by a dealer. On

the other hand a receipt on account of sale of fixed assets is a capital receipt.

An amount received by the way of substitution or addition of an income is a revenue receipt.

For example, A reward received by an employee from his employer in appreciation of his

services. But an amount received in replacement of a source of income is a capital receipt, for

example compensation received for termination of services.

However, such types of receipts are exempt under Income Tax Act, 1961 subject to certain

restrictions and the taxable portion is treated as in lieu of Salary. However, any amount received

whether in lump sum or otherwise from any person after cessation of his employment with that

person is also taxable.1

CAPITAL RECEIPTS

Capital receipts are those receipts which either create a liability or reduce an asset. Capital

Receipts, as mentioned above, are non-recurring in nature. And these sorts of receipts are also

not received every now and then.

From the above definition, it’s clear that a receipt can be called capital receipt if it adheres to

at least one of the following conditions –

 It must create a liability. For example, if a company takes a loan from a bank or a financial

institution, then it would create a liability. That’s why it is a capital receipt in nature. But

if a company received commission for using its expertise in producing a special type of

products for another company, it would not be called a capital receipt because it didn’t

create any liability.

 It must reduce the assets of the company. For example, if a company sell out its shares to

the public, it would help reduce the asset which could create more money in future. That

means it should be treated as capital receipt.

REVENUE RECEIPTS

Revenue Receipts are those receipts which neither reduce the assets of the company nor they

create any liability. They are always recurring in nature and they are earned during the normal

1
https://taxmantra.com/capital-receipts-revenue-receipts-taxability/
course of business. From the definition, it is clear that any type of receipt needs to satisfy one

of the two conditions to be called as revenue receipt –

 First, it must not reduce the assets of the company.

 Second, it must not create any liability for the company.2

DIFFERNCE BETWEEN CAPITAL REVENUE & REVENUE RECEIPT

1. Receipts generated from investing and financing activities are capital receipts, on the other

hand, receipts from operating activities are revenue receipt.

2. Capital Receipts do not frequently occur, as it is non-recurring and irregular. But, revenue

receipts do not occur again and again they are recurring and regular.

3. The benefit of capital receipt can be enjoyed in more than one year, but the benefit of

revenue receipt can be enjoyed only in the current year.

4. Capital Receipts appears on the liabilities side of the Balance Sheet whereas Revenue

Receipts appears on the credit side of the Profit and Loss Account as income for the

financial year.

5. The capital receipt is received in exchange for the source of income. Unlike revenue

received which is a substitution of income.

6. Capital receipt either decreases the value of an asset or increases the value of liability, but

revenue receipt neither increases nor decreases the value of asset or liability.3

2
http://incometaxmanagement.com/Pages/Taxation-System/Capital-&-Revenue.html
3
https://keydifferences.com/difference-between-capital-receipt-and-revenue-receipt.html