What is the difference between capital receipts and revenue receipts and discuss those test which are applied
From the income tax point of view it is necessary to know the difference between capital and revenue receipts. Because only revenue receipts are taxed according to income tax ordinance. While capital receipts are not taxed. When it become very difficult for the assessee to differentiate the capital and revenue receipts. These are brought into the courts. However following tests may be used to distinguish between capital and revenue receipts.
(1). Sale On Asset :-
Any amount which is received by selling the fixed asset like building, land machinery etc. and kept to earn profit. It will be called the capital receipt on the other hand if floating asset like stock in trade is sold, such receipt will be called revenue receipt.
Example 1 : Suppose a company sells the building, the amount received will be called capital receipts.
Example 2 : If a company sells the stock in trade, the amount received will be called revenue receipts.
(2). Substitution Source Of Income :-
Income received by the assessee from the employer is called revenue receipt. While the amount from the new or substituted source is called capital receipt.
Example : Mr. Alfa is manager in the factory. He receives Ten thousand Rupees as a salary. It is a revenue receipt.
Example : Mr. Alfa has been retired by the company. The company had also paid him 1 million Rupees to establish a new source. It is capital receipt.
(3). Sale Of Right :-
If any person surrenders his right permanently the amount he receives will be treated as capital receipt. On the other hand if any person surrenders his right for the particular period the amount he receives will be called revenue receipt.
Example : Poet Gulzar has wrote the book. He surrenders his right of publishing in favor of the publisher permanently and receives 1 million Rupees. Such amount will be treated as capital receipt on the other hand if he surrenders his right only one edition and receives 1 Lakh rupees. It will be a revenue receipt.
(4). Test Motive Behind :-
The motive behind the transaction must be tested while distinguish the capital and revenue receipt. Motive will declare that amount is a capital receipt or revenue receipt.
Example : Mr. Saif purchases the shares of a company to resell at profit. The amount received by the sale is a revenue receipt.
Example : If Mr. Saif purchases the shares to earn profit but after some time he is in need of money. So he sells the shares fulfill the need the amount received by him will be treated as capital receipt.
(5). Period Of Receipt :-
Period of receipt is not considered while distinguishing the capital and revenue receipts.
Example : Mr. Vikram sold his land on installments. The amount received monthly or annually will be also treated as capital receipt. Because he has completely surrendered his right.
Example : Mr. Shukla received 2 years advance salary in lump sum. It is revenue receipt.
(6). Receipt Judgment :-
While making the judgment of receipt one should know that payment is made due to the services of recipient for the employer. If so, then it should be considered as revenue receipt.
Example 1 : Mr. Shan received a fee and drafted a business deal. His income will be a revenue receipt.
Example 2 : If any person receives bonus from his employer, it is also a revenue receipt.
Example 3: Mr. Sam is a property dealer and earns commission. His income will be also treated as revenue receipt.
Example 4 : Mr. Singh was an army officer. He was injured in the war and was declared disable. He received 1 million Rupees. It will be treated as capital receipt.
Example 5 : Mr. Tony was insured person who died. His family received half million Rupees from insurance company. Such receipt is capital receipt.
Example 6 : Mr. Sameer received the 3 years rent of his building in advance from sony. It is a capital receipt.