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Income Tax Laws – I

Notes Self Assessment

State whether the following statements are true or false:
6. Entry 82 of List I to the Eighth Schedule of the Constitution of India confers power on
Parliament to levy taxes on income other than agricultural income.
7. Income is a periodical monetary return with some sort of regularity.
8. Income arises either on receipt basis or on accrual basis.

9. There exists a difference between temporary and permanent income under the Income Tax
Act.
10. Gifts of personal nature do not constitute income subject to maximum of ` 50,000 received
in cash.

1.3 Concept of Capital and Revenue Receipts

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. Particularly while calculating business profit or professional gain only revenue receipts
and revenue expenses are considered. This makes the distinction between capital and revenue of
vital importance. For this distinguish, capital and revenue items can be divided in to three
sub-parts:

1. Capital Receipts vs Revenue Receipts
2. Capital Expenses vs Revenue Expenses
3. Capital Losses vs Revenue Losses

1.3.1 Capital Receipt vs Revenue Receipts

As stated 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. These tests are:

1. On the basis of nature of assets: If a receipt is referred to Fixed Asset, it is capital receipt
and if it is referred to as circulating asset than it is revenue receipt. Fixed assets is that with
the help of which owner earns profit by keeping it in this possession, like. Plant, Machinery,
Building or factory etc. Circulating Asset is that with help of which owner earns profits by
parting with it and letting others to become its owner, e.g. Stock-in Trade. 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 like. ‘A’ company purchased the right to produce a Film from its earlier
producer with the condition that no other produce 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 ` 50, 000. It was held that damages received are the
compensation for the profits which were to be earned. Hence, this is Revenue Receipt.

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