CAPITAL AND REVENUE

Its highly necessary to distinguish between capital and revenue teme orchesire alcome tax.
While calculating net taxable ineme of assessee only revenuse taxed under slowed to be
deducted out of revenue incepts. Capital receipts are also taxed under special head 'capital
gains' at special rates.
The process of dividing the tems into revenue and capital items of reclines to senditure is a
difficult task. The Income Tax Act does not provide any guirinciples and juicia between them.
Therefore we a A depend on the accounting principles and judicial decisions to make a
distinction between capital and revenue items.
CAPITAL AND REVENUE RECEIPTS
To decide whether a receipt is of capital or revenue, the following factors are to be taken into
account.
1. Receipt in Lump sum or in Instalments: The mode of receipt, that is, whether it is
received in lump sum or installment does not make any difference as regards the
original nature of the receipt. For example, if an employee receives his salary in lump
sum for a period of one year instead of receiving it monthly is treated as a revenue
receipt, as if it were received monthly.
2. Source of Receipt: The source of receipt of an income is another immaterial
consideration to decide a receipt between capital and revenue. The nature of receipt is
actually determined when it receives in the hands of the person receiving such income.
For example, salary even paid out of capital of a newly started business will be a revenue
receipt in the hands of employees of that concern.
3. Magnitude of Receipt: The magnitude of the receipt whether big or small, cannot
decide the nature of receipt. For example, in certain cases a receipt of only $1,000 may
be a capital receipt, where as a receipt of <10,000 may be a revenue receipt.
4. Name of receipts: The name given by the payer or recipient to a particular receipt is
another immaterial consideration to decide the nature of receipt as capital or revenue.
A capital payment by a dealer may be a revenue receipt in the hands of the recipient.
5. Time of Receipt: The time of receipt is an important consideration to decide the nature
of the receipt. The nature of such receipt has to be determined at the time when it is
received and not afterwards when it has been appropriated by the recipient.
Distinguishing Tests
capital and revenue receipts.
Following are some of the important tests, which are usually applied to distinguish between
1. A receipt obtained at the disposal of circulating capital and stock in trade is a is a capital
receipt.
revenue receipt. On the other hand a receipt out of the disposal of a capital asset
Fixed capital is used in the business in order to make profit and to increase the earning
capacity of the business. The amount invested in building, plant and machinery are examples
for fixed capital. Circulation capital is circulated in the business and it always turn over in the
business in one form to the other. Stock, debtors, cash etc. are examples.
1. Receipt in substitution of income is of capital nature while the amount that substitutes
income itself shall be revenue in nature. For example compensation for a loss of
agency is a capital receipt where as the amount received for breach of business
contract shall be a revenue receipt.
2. Any sum received in compensation for the termination of a source of income is a
capital receipt. For example the compensation received by an employee from his
employer on termination of his service is capital receipt.
3. If any amount is received for surrender of certain rights under agreement, it is a capital
receipt. If the sum is received in the nature of compensation for loss of future profits, it
is revenue receipt.
4. If a person holds any asset as a permanent investment, profits arising from its transfer
will be capital in nature. But if it is a trading asset, profits resulting from its transfer
will be a revenue receipt.
 5. Assistance /subsidy granted to enable the assesse to run the business more profitably,
the receipt is a revenue receipt. Assistance /subsidy granted to enable the assesse to
set up a new unit or to expand an existing unit the receipt is a capital receipt.
Examples of Capital Receipts
1. Compensation received for the loss of future profits.
2. Surplus realized by partners up on sale of real properties received by them consequent
on the dissolution of the firm.
3. Compensation received by a railway passenger in the event of death or permanent
disablement in an accident.
4. Profits on sale of technical know how.
5. Compensation received by one partner of a partnership from another partner for giving
up all his rights in the partnership.
6. Compensation received for the suspension of export license.
Examples of Revenue Receipts
1. Lump sum received in consideration of reduction in remuneration.
2. Compensation received for premature termination of contract.
3. Lump sum royalty received in advance
4. Damages awarded by a cout to a company for breach of contract by another
5. Pension Whether feevet in ume sum on commutation or by way of regular
Capital and Revenue Expenses
I is also necessary to distinguish between capital and revenue expenses for tax. Folowing
Only revenue expenses are allowed to deduct for computing profits of a business. Following
tests are apie enses are lowed to daduatuarexpendiure is a capital expencture or revenue
expenditure.
1. Any expenditure incurred to acquire a fixed asset or its installation expenses is a
capital expenditure.
2. Revenues expenditure is incurred in the normal course of business as a routine
business expenditure. Any expenditure incurred to buy goods for resale purposes is
revenue expenditure.
3. Any payment made to discharge a capital liability is a capital expenditure. On the other
hand an expenditure incurred to meet a revenue liability is revenue expenditure.
4. If expenditure is incurred to acquire a source of income is capital expenditure.
5. If the expenditure is incurred to increase the earning capacity of an asset, is a capital
expenditure. On the other hand, any expenditure incurred to maintain and keep an
asset in good working condition is revenue expenditure.
Examples of Capital Expenditure
1. Cost of reconstructing, refurnishing etc. of a business building.
2. Expenses incurred in connection with litigation relating to utilization of capital asset
for business.
3. Expenditure incurred for fitting new windows to the factory building.
4. Expenses incurred for erecting temporary structures.
5. Payment made by the assessee with a view to keep his competitor out of his business
field.
6. The price paid for the purchase of copyrights.
7. Amount paid to acquire manufacturing technique, drawings and material specification.
8. Price paid for the purchase of partners share.
9. Payment made for the acquisition of goodwill.
Examples of Revenue Expenditure
1. Payment made for use of trade marks and patents.
2. Expenses incurred for the protection of the capital asset of the business.
3. Expenses incurred in finding out customers.
4. The amount of rebate to customers in accordance with the normal business practices.
5. Expenditure incurred for raising loans such as stamp duty, registration fee etc.
6. Any tax imposed by the local authority for business.
 7. Expenditure incurred on maintaining a office establishment.
Revenue Losses and Capital Losses
It is also necessary to distinguish between revenue losses and capital losses. Capital losses
are dealt with capital gains where as revenue losses are treated as business losses and are
treated under the head profits and gains of business or profession. Revenue loss is type of
loss, which is incurred on the sale of goods or by the destruction of stock or non-recovery of
an amount due from persons who were to pay the amount. On the other hand capital losses
are incurred in connection with capital asset.
Difference between Revenue expenditure and Capital expenditure
1. Capital expenditure is incurred in acquiring or extending or improving a fixed asset,
where as revenues expenditure is incurred in the normal course of business as a
routine business expenditure.
2. Capital expenditure produces benefits for several previous years, where as revenue
expenditure is consumed with in a previous year.
3. Capital expenditure makes improvements in earning capacity of a business. Revenu
expenditure maintains the profit making capacity of a business.
4. Capital expenditure is a non recurring expenditure. Revenue expenditure is a recurring
expenditure.