CHANAKYA NATIONAL LAW UNIVERSITY

PROJECT OF “TAXATION LAWS-I” ON

“CAPITAL RECEIPT AND REVENUE RECEIPT”

Submitted By-

ASHWINI PRIYA

Roll no. - 1013

7th Semester

Submitted To-

Mr. G.P.Pandey

Faculty of Taxation Law

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 ACKNOWLEDGEMENT

I am highly elated to work on my project topic “CAPITAL RECEIPTS AND REVENUE

RECEIPTS”. I am very grateful to my teacher for his proper guidance. I would like to
enlighten the readers with my efforts and just hope that I have tried my best for bringing
luminosity to this topic. I would also like to thank all my friends and apart from all these I
would like to give special regard to the librarian of my university who made a relevant effort
to provide the materials for this topic and assisting me.

And finally and most importantly I would like to thank my parents for providing me financial
and mental support and providing me necessary and important tips whenever I needed so.

Thanking You,

ASHWINI PRIYA

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 TABLE OF CONTENTS

 HYPOTHESIS……………………………………………….4
 RESEARCH METHODOLOGY…………………………….4
 SCOPE OF THE STUDY…………………………………....4
 SOURCES OF DATA……………………………………….4

 CHAPTER 1:INTRODUCTION……………………………5

 CHAPTER 2- CONCEPT OF CAPITAL AND REVENUE

RECEIPT…….………………………………………………..6
 CHAPTER 3-DIFFERENCES AND SIMILARITIES…..…...8
 CHAPTER 4- PROVISIONS AND CASE LAWS….............11
 CONCLUSION………………………………………………14
 BIBLIOGRAPHY……………………………………………15

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HYPOTHESIS
 Both, capital and revenue receipts play a vital role in the growth of business.
 Capital receipts are not taxable.

RESEARCH METHODOLOGY
The researcher has adopted doctrinal method of legal research. The sources of data are books,
articles, blogs, websites, legal databases, online journals, acts, etc.

SCOPE OF STUDY
The researcher wants to analyse the difference between capital and revenue receipt, highlight
the provisions under the Income Tax Act, and the importance of these receipts in any
business.

SOURCES OF DATA

The primary sources of data includes bare acts.

Secondary sources includes books and online sources, articles, journals, etc.

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 CHAPTER 1: INTRODUCTION
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.

Capital receipts can take one or more of the following forms:

 Additional capital introduced by the proprietor; by partners, in case of partnership

firm, by issuing fresh shares, in case of a company; and, by selling assets, previously
not intended for resale.2

 A receipt of money is considered as revenue receipt when it is received from

customers for goods supplied or fees received for services rendered in the ordinary
course of business, which is a result of the firm’s activity in the current period.
Receipts of money in the revenue nature increase the profits or decrease the losses of
a business and must be set against the revenue expenses in order to ascertain the profit
for the period.
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

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 CHAPTER 2: CONCEPT OF CAPITAL RECEIPT AND
REVENUE RECEIPT

Definition of Capital Receipt

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.

The receipts can be generated from the following sources:

 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

Items relating to capital receipts

* Amount received from the owner as capital.
* Amount received through the sale of shares and debentures.
* Amount of loan received
* Amount received from the sale of old assets.
* Other receipts of non-recurring nature.

3
http://www.accountingexplanation.com/capital_and_revenue_receipts.htm Accessed on 24/10/2016

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 Definition of Revenue Receipt

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
however its benefit can be enjoyed only in the current accounting year as its effect is short
term. The income received from the day to day activities of business includes all the
operations that bring cash into the business like:

 Revenue generated from the sale of inventory

 Services Rendered
 Discount Received from the creditors or suppliers
 Sale of waste material/scrap.
 Interest Received
 Receipt in the form of dividend
 Rent Received4

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.

Items relating to revenue receipts

* Amount received from the sale of goods and services.
* Amount received by way of discount, commission, rent, interest and dividend.
* Amount received from the sale of waste paper and packing cases.

4
Ibid.

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 CHAPTER 3:DIFFERENCES AND SIMILARITIES
BETWEEN CAPITAL AND REVENUE RECEIPTS
As discussed above the capital receipts are to be charged to tax under “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 “Revenue”. Some tests, however, can be applied
in particular cases.

These Tests are:

1.         On the basis of nature of Assets :      If a receipt is referred to Fixed Asset, it is
capital receipt and if it is referred to circulating asset it is revenue receipt.

Fixed assets is that with the help of which owner earns profit by keeping it in this possession,
e.g. Plant , Machinery, Building or factory etc.5

Circulating Asset is that with help of which owner earns profits by parting with it and letting
others to become its owner, e.g. Stock-in Trade.

Profit on the sale of Motor Car used in business 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 receive 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 fro its earlier producer with the
condition that no other produce 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 Rs.50,000. It was held that damages received are the compensation for the

5
accountlearning.blogspot.com/2010/07/differences-between-capital-receipts.html Accessed on 26/10/2016.

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profits which were to be earned. Hence, this is Revenue Receipt.

4.       Compensation received on termination of Lease or surrender of a Right.  Any

amount received as compensation on surrendering a right or termination of any Lease is
Capital Receipt where as any amount received for loss of future income is a revenue receipt.

e.g.     An Author gives up his right to publish a book and receives Rs. 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

Revenue Receipt Capital Receipt

1. It has short-term effect. The benefit is 1. It has long-term effect. The benefit is
enjoyed within one accounting enjoyed for many years in future.
period.

2. It occurs repeatedly. It is recurring 2. It does not occur again and again. It is

and regular. nonrecurring and irregular.

3. It is shown in profit and loss account 3. It is shown in the Balance Sheet on the
on the credit side. liability side.

4. It does not produce capital receipt. 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. This does not increase or decrease the 5. The capital receipt decreases the value
value of asset or liability. of asset or increases the value of
liability e.g. sale of a fixed asset, loan
 
from bank etc.7

6. Sometimes, expenses of capital nature 6. Sometimes expenses of revenue nature

are to be incurred for revenue receipt, are to be incurred for such receipt e.g.
e.g. purchase of shares of a company on obtaining loan (a capital receipt)

6
http://incometaxmanagement.com/Pages/Taxation-System/Capital-&-Revenue.html Accessed on 2/11/1016
7
http://keydifferences.com/difference-between-capital-receipt-and-revenue-receipt.html Accessed on
26/10/2016

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 is capital expenditure but dividend interest is paid until its repayment.
received on shares is a revenue
receipt.

Similarities

1. Both receipts are a part of business activities.

2. Both are necessary for the survival and growth of the company.
3. The source of business income.8

CHAPTER 4: CASE LAWS

8
Ibid at 6

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CIT vs. Bharti Hexacom Ltd. 9

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:

(i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or

(ii) riot or civil disturbance; or

(iii) accidental fire or explosion or

(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”.10

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”.

The Supreme Court in Oberoi Hotel (P) Ltd. Vs. CIT11 has held that the question whether
the receipt is the capital or the revenue has to be determined by drawing the conclusion of
9
[2014] 221 TAXMAN 323
10
http://www.economicsdiscussion.net/revenue/revenue-and-capital-receipts-of-government-receipts-its-
definition-and-differences/765 Accessed on 1/11/2016
11
(1999) XI SITC 109 (SC)

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law ultimately from the facts of the particular case and it is not possible to lay down any
single test as infallible or any single criterion as decisive.

Also the Supreme Court, in CIT Vs. Prabhu Dayal12, 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 Spooner13,
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 Singh14, 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.15 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.16 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.

Some settled views:

The Supreme Court in A.K.T.K.M. Vishnudatta Antharjanam Vs. Commissioner of

Agricultural Income-tax17 has held that profit motive to not decisive of the question whether

12
(1971) 82 ITR 804
13
(1933) 1 ITR 299
14
(1935) 3 ITR 305
15
(1956) 29 ITR 910
16
(1973) 91 ITR 130
17
( 1970) 78 ITR 58

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a particular receipt is capital or income. An accretion to capital does not become taxable
income merely because an asset is acquired in the hope that it may be sold at a profit.

Also the Supreme Court in CIT Vs. Kamal Behari lal Singha18 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. CIT19, 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.

CONCLUSION
In general, Capital Receipts and Revenue Receipts play a vital role in the growth of a
business.

18
(1971) 82 ITR 460
19
(1986) 53 CTR (Raj) 40
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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)20There 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)21. 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)22

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.)23

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.

BIBLIOGRAPHY

PRIMARY SOURCE-

 THE INCOME TAX ACT, 1961

20
(1964) 53 ITR 261 (SC)
21
(1958) 34 ITR 877
22
(1971) 82 ITR 464 (SC)
23
(2000) 14 SITC 578 (SC)

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SECONDARY SOURCES-

 http://financeaccountingsimplified.com/capital-and-revenue-receipts-and-expenditure/
Accessed on 27/10/2016

 http://icwai-2011.blogspot.in/2011/05/capital-and-revenue-receipts.html Accessed on
27/10/2016

 http://www.accountingexplanation.com/capital_and_revenue_receipts.htm Accessed
on 24/10/2016

 accountlearning.blogspot.com/2010/07/differences-between-capital-receipts.html
Accessed on 26/10/2016.

 http://incometaxmanagement.com/Pages/Taxation-System/Capital-&-Revenue.html
Accessed on 2/11/1016

 http://keydifferences.com/difference-between-capital-receipt-and-revenue-
receipt.html Accessed on 26/10/2016

 http://www.economicsdiscussion.net/revenue/revenue-and-capital-receipts-of-
government-receipts-its-definition-and-differences/765 Accessed on 1/11/2016

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