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Unit 1: Income Tax: Basic Framework

4. Compensation received on termination of lease or surrender of a Right: Any amount Notes
received as compensation on surrendering a right or termination of any Lease is Capital
Receipt where as any amount received for loss of future income is a revenue receipt. For
instance 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.

Notes Capital and Revenue Receipts in Relation to Business Activities

Profits and gains arising from the various transactions which are entered into the ordinary
course of the business of the tax payers or those which are incidental to or closely associated
with his business would be revenue receipts chargeable to tax.

Examples of these types of receipts are:
profits on purchase and sale of shares by a share broker on his own account;
profits arising from dealings in foreign exchange by a banker or other financial
institutions,

income from letting out buildings owned by a company to its employees etc.
But even in these cases the receipts may be of a capital nature in certain circumstances.
For instance, profit on sale of shares and securities held by a bank as investments would be
of a capital nature. Where profits arise from transactions which are outside the normal
dealing of the assessee, although connected with his business, the taxable nature or otherwise
of the profits would depend upon the fact whether or not the transactions in question
constitutes trading activity.

Examples of Differentiation between Capital Receipts and Revenue Receipts

The following are the few examples of differentiation between capital receipts and revenue
receipts:

1. Taxable income in relation to annuities: Annuities are periodic payments of specified
amounts at regular intervals of time. Annuities are revenue receipts taxable as income in
every case although the payment of the annuity involves the conversion of capital into
income. The contingent or variable nature of the annuity, its amount, periodicity, mode of
payment etc. does not, in any way, affect the taxability of the annuity. An annuity received
by an employee from his present or previous employer would be taxable as his income
from salaries while all other annuities are taxable as income from other sources. Although
annuities are generally annual payments, every annual payment does not represent an
annuity.
For instance annual instalments of capital payments do not constitute annuities. Thus,
when a person sells his business or property and agrees to receive the consideration in
instalments annually or half-yearly, the amounts received by him are merely capital sums
received in instalments and are, therefore, not taxable as annuities. But if the same property
is sold for an annuity payable at regular intervals immediately on sale the property
disappears and the right to get annuity takes place; the annuities received by virtue of the
right acquired on sale would be taxable as income.
On the other hand, a lump sum payment received in commutation of salaries or pension,
even though a capital receipt would be taxable as salary income. Similarly, any amount
received under a policy of insurance would be a revenue receipt if the policy was held by

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