CHANAKYA NATIONAL LAW UNIVERSITY, PATNA

PROJECT OF “TAXATION LAWS-I” ON

“REVENUE RECEIPTS
AND
CAPITAL RECEIPTS”

SUBMITTED TO: SUBMITTED BY:

DR. G.P.PANDEY VIVEK KUMAR MISHRA

FACULTY OF TAXATION LAW Roll No.- 1576

TAX LAW – I REVENUE RECEIPTS AND CAPITAL RECEIPTS 1

 ACKNOWLEDGEMENT

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

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

VIVEK KUMAR MISHRA

TAX LAW – I REVENUE RECEIPTS AND CAPITAL RECEIPTS 2

Table of Contents

ACKNOWLEDGEMENT ......................................................................................................... 2

CHAPTER 1: INTRODUCTION .............................................................................................. 4

OBJECTIVES OF THE STUDY ........................................................................................... 5

HYPOTHESIS ....................................................................................................................... 5

RESEARCH METHODOLOGY ........................................................................................... 5

SOURCES OF DATA............................................................................................................ 5

LIMITATIONS OF THE STUDY ......................................................................................... 5

SCOPE OF THE STUDY ...................................................................................................... 5

CHAPTER 2: CONCEPT OF CAPITAL RECEIPT AND REVENUE RECEIPT .................. 6

Definition of Capital Receipt ................................................................................................. 6

Definition of Revenue Receipt................................................................................................... 6

CHAPTER 3:DIFFERENCES AND SIMILARITIES BETWEEN CAPITAL AND

REVENUE RECEIPTS ............................................................................................................. 8

Distinction between Capital Receipt and Revenue Receipt:- ................................................ 8

Revenue Receipt ................................................................................................................. 8

Capital Receipt ................................................................................................................... 8

Immaterial Considerations ..................................................................................................... 9

Distinguishing Tests ............................................................................................................. 10

Similarities ........................................................................................................................ 12

CHAPTER 4: CASE LAWS.................................................................................................... 13

CONCLUSION ........................................................................................................................ 16

TAX LAW – I REVENUE RECEIPTS AND CAPITAL RECEIPTS 3

 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

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

TAX LAW – I REVENUE RECEIPTS AND CAPITAL RECEIPTS 4

 a business and must be set against the revenue expenses in order to ascertain the profit
for the period.

OBJECTIVES OF THE STUDY

The objectives of the study to

i. To study the concept of capital receipt.

ii. To study concept of revenue receipt.

HYPOTHESIS

The researcher come with the hypothesis that:-

i. Both capital and revenue receipts play a vital role in the growth of business.

ii. The Capital receipts are not taxable.

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.

LIMITATIONS OF THE STUDY

The researcher had time limitation as he has to complete this project within one month.

SCOPE OF THE STUDY

This research will be a source for a further researcher. This research will give him/her the
basic ideas in a very simple manner.

TAX LAW – I REVENUE RECEIPTS AND CAPITAL RECEIPTS 5

 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

1. Amount received from the owner as capital.
2. Amount received through the sale of shares and debentures.
3. Amount of loan received
4. Amount received from the sale of old assets.
5. Other receipts of non-recurring nature.

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

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

TAX LAW – I REVENUE RECEIPTS AND CAPITAL RECEIPTS 6

 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

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

4
Ibid.

TAX LAW – I REVENUE RECEIPTS AND CAPITAL RECEIPTS 7

 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.

Distinction between Capital Receipt and Revenue Receipt5:-

Revenue Receipt

1. It has short-term effect. The benefit is enjoyed within one accounting period.

2. It occurs repeatedly. It is recurring and regular.

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

4. It does not produce capital receipt.

5. This does not increase or decrease the value of asset or liability.

6. 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.

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

5
DIFFERENCES BETWEEN CAPITAL RECEIPTS AND REVENUE RECEIPTS available at
https://www.wallstreetmojo.com/capital-receipts-vs-revenue-receipts/ visited on 2/09/2019.

TAX LAW – I REVENUE RECEIPTS AND CAPITAL RECEIPTS 8

 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.

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

TAX LAW – I REVENUE RECEIPTS AND CAPITAL RECEIPTS 9

 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
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. [Brodie’s 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

TAX LAW – I REVENUE RECEIPTS AND CAPITAL RECEIPTS 10

which a capital receipt may be distinguished from a revenue receipt. Some tests, however,
can be applied in particular cases.6 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
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
[2014] 221 TAXMAN 323

TAX LAW – I REVENUE RECEIPTS AND CAPITAL RECEIPTS 11

 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.

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.7

7
Ibid

TAX LAW – I REVENUE RECEIPTS AND CAPITAL RECEIPTS 12

 CHAPTER 4: CASE LAWS

CIT vs. Bharti Hexacom Ltd. 8

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”.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

TAX LAW – I REVENUE RECEIPTS AND CAPITAL RECEIPTS 13

The Supreme Court in Oberoi Hotel (P) Ltd. Vs. CIT10 has held that the question whether
the receipt is the capital or the revenue has to be determined by drawing the conclusion of
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 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

TAX LAW – I REVENUE RECEIPTS AND CAPITAL RECEIPTS 14

Some Settled Views:

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

Agricultural Income-tax16 has held that profit motive to not decisive of the question
whether 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 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

TAX LAW – I REVENUE RECEIPTS AND CAPITAL RECEIPTS 15

 CONCLUSION

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)

TAX LAW – I REVENUE RECEIPTS AND CAPITAL RECEIPTS 16

 BIBLIOGRAPHY

PRIMARY SOURCE:

BARE ACT

1. THE INCOME TAX ACT, 1961

SECONDARY SOURCES:

BOOKS

i. Kailash Roy, Taxation Laws

ii. Dr. Vinod Singhania & Kapil Singhania, Direct taxes: law & practice

WEBSITES

i. http://financeaccountingsimplified.com/capital-and-revenue-receipts-and-expenditure/
Accessed on 2/09/2019

ii. http://icwai-2011.blogspot.in/2011/05/capital-and-revenue-receipts.html Accessed on

2/09/2019

iii. http://www.accountingexplanation.com/capital_and_revenue_receipts.htm 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

TAX LAW – I REVENUE RECEIPTS AND CAPITAL RECEIPTS 17