Capital and Revenue Receipt
There are two types of receipts in Income Tax. They are Capital Receipts and Revenue Receipts. It is very difficult to make the distinction between these two kinds of receipts. However, the following rules may be applied in making the distinction between them.
They are:-
1. Fixed and Circulating Capital
2. Source of income and income itself
3. Compensation against fixed asset and trading asset and
4. Motive in an isolated transaction.
1. Fixed and Circulating Capital :
The receipt on account of a fixed capital is a capital receipt.
Eg:- Sale proceeds of machinery by a textile mill, is a capital receipt to the company because machinery is a fixed asset in the case.
The receipt on account of circulating capital is a revenue receipt.
Eg:- sale proceeds of machinery by a dealer in machinery is a revenue, because machinery is a circulating asset in his case.
2. Source of income and income itself :
A receipt in substitution of source of income is a capital receipt.
Eg:- Compensation for loss of employment is a capital receipt as it is in lieu of source of income.
A receipt in substitution of the income itself is a revenue receipt.
Eg:- Compensation for temporary disablement is a revenue receipt, as it is for loss of income during the period of temporary disablement.
3. Compensation against fixed asset and trading asset :
Compensation recevied against fixed asset is a capital receipt. Whereas compensation received against a trading asset is a revenue receipt.
4. Motive in an isolated transaction :
If the property purchased is held as an investment to earn income, the receipt from sale of such property is a capital receipt.
If any property is purchased with motive of selling it at aprofit and the receipt by ale of such property is a revenue receipt.
Moreover, capital receipts are exemped from tax, unless they are expressely taxable, whereas revenue receipts are taxable unless they are expressely exempted from tax. So, the distinction between capital receipts and revenue receipts is vital for income tax purposes.
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