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.
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