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Income Tax Laws – I

Notes 3. PQ Company Ltd. instead of receiving royalty year by year received it in advance in lump
sum.
4. An amount of ` 1, 50,000 were spent by a company for sending its production manager
abroad to study new methods of production.
5. Payment of ` 50,000 as compensation for cancellation of a contract for the purchase of
machinery with a view to avoid an unnecessary expenditure.
6. An employee director of a company was paid ` 1, 75,000 as a lump sum consideration for
not resigning from the directorship.

Solutions:

1. Receipt in substitution of a source of income is a capital receipt. Therefore, the amount
received by AB & Co. from CD & Co. for premature termination of an agency contract is
a capital receipt though the same is taxable under Section 28(ii)(c).

2. Sales-tax is the liability of a seller to pay to the Government on the sale of goods made by
him, which is allowed as deduction as revenue expenditure. If any part of Sales-tax is
collected from the buyer of goods that may be treated as a revenue receipt. Thus the sales-
tax collected from the buyer of goods is a revenue receipt.
3. Receipt of lump sum royalty in lieu of future royalties is a revenue receipt, as it is an
income from royalty.
4. Amount spent by a company for sending its production manager abroad to study new
methods of production is revenue expenditure to be allowed as a deduction. Because of the
new knowledge and its exposure the manager will assist the company in improving its
existing methods of production etc.
5. This is a capital expenditure, as any expenditure incurred by a person to free himself from
a capital liability is a capital expenditure. In the given case, the payment of ` 50,000 for
cancelation of the order of purchase of machinery, has helped the assessee to become free
from an unnecessary capital liability.

6. The amount of ` 1, 75,000 received for not resigning from the directorship is a reward
received from the employer. Therefore it is a revenue receipt.

Self Assessment

Fill in the blanks:

11. Income tax Act, 1961 provides a separate head ……………………… for levying tax on
capital receipts.
12. If a receipt is referred to Fixed Asset, it is ……………………….

13. If a receipt is referred to Circulating Asset, it is ……………………….
14. ……………………….are periodic payments of specified amounts occurring at regular
intervals of time.

15. …………………………received from the government would generally be receipts of a
revenue nature since they are intended to supplement the income of the assessee.

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