Capital Receipt and Revenue Receipt: Distinguished
In taxation and accounting, receipts are broadly classified into two categories: Capital Receipts and Revenue Receipts. Understanding the distinction is crucial for determining tax liability and proper accounting treatment.
What is a Capital Receipt?
Capital Receipts are receipts that are non-recurring and result in either an increase in liabilities or a decrease in assets. They are not part of the regular business income and are usually related to the financial structure of the business.
- They are not earned during the normal course of business operations.
- Generally not taxable unless specifically included under the Income Tax Act.
- Examples: Loans, sale of fixed assets, capital subsidy from the government.
What is a Revenue Receipt?
Revenue Receipts are recurring receipts arising from the normal course of business or profession. These receipts affect the profit or loss of the entity and are generally taxable.
- Earned through operational activities.
- Usually taxable under the head 'Income from Business or Profession'.
- Examples: Sales income, interest income, commission, rent received.
Key Differences Between Capital Receipt and Revenue Receipt
| Basis | Capital Receipt | Revenue Receipt |
|---|---|---|
| Nature | Non-recurring | Recurring |
| Source | Not from normal business operations | From core business activities |
| Impact on Profit & Loss | Not credited to P&L Account | Credited to P&L Account |
| Taxability | Generally not taxable (unless specified) | Generally taxable |
| Examples | Loan proceeds, sale of fixed assets | Sales revenue, service income |
Judicial Interpretation
In Padmaraje R. Kadambande v. CIT (1992) 195 ITR 877 (SC), the Supreme Court held that capital receipts are not income unless specifically taxed under a provision of the law. The distinction plays a vital role in assessing correct taxable income.
Conclusion
Understanding the distinction between capital and revenue receipts is fundamental in taxation law. While capital receipts relate to financial restructuring, revenue receipts arise from income-generating activities and are mostly subject to tax.
Posted by Pavan Law Chambers | June 2025
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