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Unit 1: Income Tax: Basic Framework

in the rate of exchange of currencies would be receipts of a revenue nature taxable as Notes
income in cases where the foreign currencies are held as stock in trade by the assessee
(e.g. a bank or a dealer in the foreign exchange). Where the foreign currencies are held as
capital assets representing the assessee’s investments the profit or loss would be on capital
account.

Did u know? Exceptions where capital receipt are taxable
Although the general principle of law is to tax only revenue receipts as income, there are
three exceptions to this rule under which capital receipts are also taxable as income, viz.:

(i) Any compensation received for termination of employment or modification of the
terms of employment would fall within the meaning of a profit in lieu of salary and
consequently taxable as salary income. [Section 17(3)(i)]
(ii) Any compensation received for termination of managing agency or other contractual
relationship in relation to the management of whole or substantially the whole of
the affairs of a company or the modification of the terms and conditions relating
thereto would be taxable as income from business. [Section 28(ii)(a and b)]

(iii) Any compensation or other payment due to or received by any person for the
termination or the modification of the terms of any other agency held by him in
India in relation to the business of any other person would also be taxable as income
from business regardless of the nature of the agency business. [Section 28(ii)(c)].

1.3.2 Capital Expenses vs. Revenue Expenses

To distinguish a Revenue Expenditure from a Capital Expenditure, the following tests can be
applied for this purpose:
1. Nature of the Assets: Any expenditure incurred to acquire a Fixed Assets or in connection
with installation of Fixed Assets is Capital Expenditure. Whereas any expenditure incurred
as price of goods purchased for resale along with other necessary expenses incurred in
connection with such purchase are Revenue Expense.
2. Nature of Liability: A payment made by a person to discharge a capital liability is a capital
expenditure. Whereas an expenditure incurred to discharge a revenue liability is Revenue
Expenditure, like Amount paid to a contractor for cancellation of contract to construct a
factory building is capital expenditure.
3. Nature of Transaction: If expenditure is incurred to acquire a source of income, it is
Capital Expenditure for instance like purchase of patents to produce picture tubes of T.V.
sets. Whereas expenditure incurred to earn an income is revenue expenditure, e.g. salary
to staff, advertisement expenses, etc.
4. Nature of Payment in the Hands of Payer: If expenditure is incurred by an assessee as a
Capital Expenditure, it will remain a capital expenditure even if the amount may be
revenue receipt in the hands of receiver, such as purchase of Motor Car by a businessman
is capital expenditure in his hands although it is revenue receipt in the hands of car dealer.

1.3.3 Capital Losses vs Revenue Losses

Distinction has to be made between revenue losses and capital losses of the business because
under the provisions of this Act Capital Losses are dealt with under the Chapter “Capital Gain”

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