Revenue or Capital: How Receipts Are Classified for Income Tax Purposes
This article explains how a receipt is classified as revenue or capital under the Income-tax Act, 1961, where the Act gives no definition of either, and when a capital receipt is nevertheless brought to tax.
The classification fixes the head of income, whether the amount is taxed at all, the rate, and the deductions and set-offs available. It is also a regular source of disputes and reassessment, so a practitioner needs a working method before drafting an agreement or taking a return position.
Q&A
1. Does the Act define a revenue receipt or a capital receipt?
No. The Act does not define either term. The concepts have come from judicial decisions, and the Act applies them through its charging provisions. Section 4 charges tax on total income, and only what falls within the definition of income is brought to tax. As a result, a revenue receipt is generally taxable unless exempt, while a capital receipt is outside the charge unless the Act specifically includes it.
2. What marks a receipt as revenue?
A revenue receipt typically arises in the ordinary course of a business, profession or employment, tends to recur, leaves the fixed capital structure untouched, and forms part of the profit-making process. Sale proceeds of goods, professional fees, interest and rent from house property are common examples. These are taxed under heads such as Income from House Property, Profits and Gains of Business or Profession, and Income from Other Sources.