ASSESSEE AND ASSESSMENT, CAPITAL RECEIPT AND REVENUE RECEIPT

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This article is written by Hari Anand Singh Soni of 3^rd Semester of Iswar Saran Degree College of University of Allahabad, Prayagraj

Abstract

A tax is a financial obligation levied by any government on its citizens or an organization to collect revenue for nation building providing the best facilities and infrastructure. The collected fund is then used to fund different public expenditure programs through various schemes and subsidies which are launched by the government.

To run a nation smoothly and in a systematic manner the government needs money which it acquires in the form of tax. Paying taxes by the eligible citizen is a part of their life and also a sense of duty towards nation building. In a vast and diverse country like India the Central and State government simultaneously plays a significant role in determining the taxes. To facilitate the process of taxation and ensure transparency in the country, the state and central governments have established various policy reforms over the last few years. One of those changes was the implementation of Goods and Services Tax (GST) which eased the tax regime on the sale and deliverance of goods and services in the country.

This paper focuses on the Taxation law in India and the various terms which are under its purview.

Keywords: Various aspects of taxation law in India, Assessment year, previous year, Assessee, Capital receipts and Revenue receipt, difference between capital receipt and revenue receipt, difference between previous year and assessment year

Introduction

Tax law falls within the horizon of public law — i.e., the rules that determines and limits the conditioning and complementary interests of the political community and the members composing it — as distinguished from connections between individualities (the sphere of private law). Transnational Tax law is concentrated with the problems arising when an individual or organization is tested in several nations. Tax law can also be divided into material duty law, which is the analysis of the legal vittles giving rise to the charging of a duty; and formal duty law, which concerns the rules laid down in the law as to assessment, enforcement, procedure, coercive measures, executive and judicial appeal, and other similar matters. The development of Tax law as a comprehensive, general system isn’t an old miracle. Before the middle of the 19th century¹ no general rule of taxation was in any country. In traditional, basically agricultural, societies, government earnings were drawn either from non tax sources (similar as homage, income from the royal disciplines, and land rent) or, to a lower extent, from levies on colorful objects (land levies, sacrifices, customs, and excises). Impositions on income or capital weren’t considered an ordinary means for financing government. They appeared first as exigency measures. The British system² of income taxation which was began in the act of 1799 was a duty system to ease the accelerating fiscal burden of the Napoleonic wars and this system of taxation is considered as one of the oldest systems of taxation in the world. Another reason for the fairly recent development of duty law is that the burden of taxation — and the problem of definite limits to the trying power of public authority — came substantial only with the broadening in the conception of the proper sphere of government that has accompanied the growing intervention of ultra modern countries in profitable, social, artistic, and other matters.

Various concept of Tax law

Revenue receipt³– funds earned by the company due to its overall day to day business operations are called revenue receipt.

These funds collected results in overall increase in the total revenue of the company and since these are recurring in nature so they directly affect the profit and loss of the business.
Revenue receipts are required to be displayed in the income statement of the organization.
The primary feature of revenue receipt is that they do not create any liability for the business nor do they reduce its assets.
It simply denotes goods and services being delivered to the client and in return, income has been received.
It is the source of cash inflow which leads to an increase in the total revenue of the company.

Some common example of revenue receipts are

Discounts received from the creditors or suppliers
Interest earned
Dividend received
Rent received
Commission received
Bad debts recovered
Income from other source

Capital receipt⁴ – These are the cash inflow in business arising from financial (capital) activities and not from operating activities, since these are the funds received by a business which are not revenue in nature and lead to an overall increase in the total capital of a company.

These are receipts which are of occasional nature and not of routine nature

As these funds are generated from non-operating activities of a business so these are not displayed inside the income statement instead, they are shown inside a balance sheet and these ends up increasing the liability or reducing the assets of a company. Receipts of this kind do not affect the overall profit or loss of an organization and are booked on accrual basis.

Examples of Capital receipts are

Sale of an equipment– Since money received by the sale of equipment is classified as capital receipts because it reduces the assets of the company and its being occasional and non-routine activity.
Insurance claim received for loss of machinery
Borrowings
Loan from Banks
Issuance of Debentures

Difference between Capital receipt and Revenue receipt

Basis	Capital receipt	Revenue receipt
Meaning	Funds received by a business which are not revenue in nature and result in overall increase in total capital of company.	Funds received by the company due to the result of its core business activity.
Appears in	Balance Sheet	Trading and Profit & Loss Account
What is nature	Non-Recurring In nature	Recurring in nature
When are they received?	Not received during normal course business.	Received during normal course of business.
Year of Benefit	The company can reap the benefits in present as well as future year.	Benefits can be reaped by the company in present year only.
Capitalization	It will be capitalized.	It will not be capitalized.
Need	Essential in working capacity and business expansion.	Enabling the existing working capacity of business.
Matching concept	Not matched with the capital expenditure.	Linked with the revenue expenditure to know the profit or loss for the financial year.
Amount	Generally large	Comparatively meager
Creation of liability or reduction of asset	Either they enable the reduction of assets or create liability.	Neither facilitate in creation of liability nor reduction of assets.
Future obligation	It is probable that a future obligation arises to return the amount.	No future obligations exist to return the amount.
Reserve Funds	Government cannot create reserve fund to save capital receipt.	By creating reserve funds the government can save revenue receipt.

Capital Receipts vs. Revenue Receipts – under the ‘Income Tax Act.’

The Capital Receipts are to be charged to tax under the head “Capital Gains” and Revenue Receipts are Taxable under other heads, it is of vital importance to understand which receipt is a capital receipt and which one is a revenue receipt.

Bodiless Considerations⁵

In deciding whether a particular receipt is of a capital or earnings type, the following considerations are considered to be immaterial and not going to decide or change the character or nature of the receipt.

Receipt in lump sum or in Instalments. Whether any income is received in lump sum or in instalments, it’ll not make any difference as regards its nature, e.g., a jobholder is to get a payment of 1,000p.m. rather of this he enters into an agreement to get a sum of 36,000 in lump sum to serve for a period of three years. The receipt where it’s yearly remuneration or lump sum for 3 years is a revenue receipt. It has been decided in so numerous court cases that a lump sum receipt may be an item of revenue nature and a periodic receipt reoccurring over many years may be a capital receipt. therefore, whether a receipt is a periodic receipt or a single receipt is immaterial for the purposes of determining its nature. (Rajah Manyain Meenak and Shammav.C.I.T.(1956) 30 1.T.R. 286).
Nature of receipt in the hands of beneficiary- Whether a receipt is capital or revenue will be determined in the hands of the persons entering similar income. No attention will be paid towards the source from which the quantum is coming. payment indeed if paid out of capital by a new business will be it revenue receipt in the hands of jobholder.
Magnitude of receipt- The magnitude of the receipt, whether big or small, cannot decide the nature of the receipt although the size of a receipt in a transaction isn’t an entirely inapplicable consideration. A receipt of 10,000 may be of revenue nature whereas a receipt of only ‘1,000 may be a capital receipt. Supreme Court has presided in a case Divenchav.C.I.T.(48 1.T.R. 222), that the magnitude of a receipt is immaterial for the purpose of determining its nature.
Name given by parties and treatment in books of accounts- What name the beneficiary or payer of the receipt has given in the books of accounts or with what name he has called a particular transaction, all similar considerations are immaterial to decide the nature of the receipt. A capital payment by a dealer may be a revenue receipt in the hands of the recipient. The character of the receipt shall be decided by considerations other than by what name the parties call it. (Divenchav.C.I.T.). The nature of the receipt will be determined in the hands of the person receiving similar income.
Payment made out of capital- No attention will be paid towards the source from which quantum is coming. payment indeed paid out of capital by a new business will be a revenue receipt in the hands of the employee. It was also decided in a case that if a receipt is made out of capital, the receipt may also be a capital receipt. However, payments given to him by his trustees out of the corpus would be capital receipts, if a recipient is beneficially entitled not only to the income but also to the capital. (Brodie’s Trusteesv.I.R. 25T.C. 13, 16).

Time of receipt- The nature of the receipt has to be determined at the time when it’s took and not latterly when it has been appropriated by the recipient.
Quality of receipt- Whether the income is received willingly or under a legal obligation, it’ll not make any difference as regards its nature.

Distinguishing Tests⁶

It’s truly delicate to draw a line of separation between capital receipts and revenue receipts. Indeed the courts have institute it delicate to lay down some points of distinction on the base of which a capital receipt may be distinguished from a revenue receipt. Some tests, still, can be applied in particular cases. These tests are

1. On the bedrock of nature of assets. However, it’s capital receipt and if it’s referable to circulating asset it’s revenue receipt, if a receipt is preferable to fixed asset.

Fixed asset is that with the help of which holder earns gains by keeping it in his possession, e.g., factory, instrument, structure or manufactory, etc.
Circulating asset is that with the help of which possessors earn profit by parting with it and letting others to become its proprietor, e.g., stock- in- trade.
Circulating asset is asset which is turned over and while being turned over yields profit or loss whereas fixed asset is one on which the proprietor earns profit by keeping it in his own possession.
Profit on the sale of motor car used in business by an assessee is capital receipt whereas the profit earned by an automobile dealer, dealing in cars, by selling a car is his revenue receipt.

2. Termination of source of income. Any sum entered in compensation for the termination of source of income is capital receipt, e.g., compensation received by a jobholder from its employer on termination of his services is capital receipt.

3. Amount received in replacement of income. Any sum entered in replacement of income is revenue receipt, e.g., ‘A’ company bought the right to produce a film from its earlier director with the condition that no other stage director will be given these rights. Latterly it’s found that the rights for producing this film had formerly been vended. The ‘A’ company claimed damages and was awarded 60,000. It was held that damages admitted are the compensation for the gains which were to be earned. Hence this is revenue receipt.

4. Compensation received on termination of lease. Where a sum is received as compensation for termination of a lease, it’s capital receipt because it’s termination of source of income.

5. Compensation on rendition of a right. Any quantum received as compensation on surrendering a right is capital receipt whereas any quantum received for loss of unborn income is a revenue receipt. An author gives up his right to publish a book and receives as compensation. It’s capital receipt but if he receives it as advance royalty for 5 years it’s revenue receipt.

6. Tests as to the purpose of keeping an article. However, if sold latterly on, will bring unproductive receipt but if the same sculpture is sold by an art dealer it’ll be his revenue receipt, if a person purchases a piece of sculpture to keep as decoration piece in his house.

7. Still, the profit arising from its revenue receipt, if an article is acquired for the purpose of trade.

C. Capital Receipts⁷

The entourages are some important exemplifications of capital bills decided by courts

1. Salami or Nazrana received for grant of endless lease.=

2. Compensation received for loss of right to unborn remuneration.

3. Compensation received from the employer for loss of employment due to unseasonable termination of service.

4. Price received on sale of know- how.

5. Damages received by a jobholder who’s incorrectly dismissed or a payment received by a jobholder in lieu of notice.

6. Quantum received by the assessee for digging and removing earth from his land for slipup- timber.

7. Donation received by electric supply company from consumers for installation of service lines (excess of amount over cost of installation).

D. Revenue Receipts⁸

1. Lump sum royalty received in advance.

2. A “pugree” received by the proprietor of the house property from tenant.

3. Damages awarded by a court to a company for breach of contract by another company.

4. A passenger is injured in a railway accident and is temporarily impaired therefore losing income for a short period. Any receipt as compensation shall be a revenue receipt.

5. But if the passenger is permanently impaired, the compensation received would have been a capital receipt.

Assessee– Section 2(7) of the Income tax Act, 1961 defines about the ‘assessee’, a person by whom any tax or any sum of money is payable which includes

Every person in respect to whom any proceedings under this act has been taken for the assessment of his income or assessment of fringe benefit or of the income of any other person in respect of which he is assessable, or of the loss sustained by him or by such other person, or of the amount of refund due to him or to such other person.
Every person who is deemed to be an assessee under the provision of this act
Every person who is deemed to be an assessee in default under the provision of this act

Types of Assessees⁹

Normal assessee
Representative assessee
Deemed assessee
Assessee in default

Normal assessee– An assessee who is liable to pay taxes on the income earned is called normal assessee.

Representative assessee– when a situation occurs that a person is liable to pay taxes for the income and loss incurred by the third party such a person is known as representative assessee.

This mostly happens when the person on whose behalf tax is paid is residing in some other country and is physically not available so he employs someone to pay on his behalf.

Deemed assessee- when the responsibility is assigned to the deemed person by the legal authorities of paying taxes such individual is called deemed assesses. Deemed assessee can be

When a deceased person who has expired without writing a will then deemed authority can be on legal heir or eldest son
The executor or a legal heir of the property of the deceased person.

Assessee in default- The person will be called Assessee in default if according to Income Tax act he fails to pay income tax to the government or does not file his income tax return.

Salami/Premium¹⁰

Salami is a single time payment made for the acquisition of the rights of the Lessor by the Lessee to enjoy the benefits granted to him by the lease, in other words it can be inferred that it is the single time amount paid to the owner in advance which is not considered as rent and such income is non-taxable.

The court in case of ‘Board of Agricultural Income Tax, Assam vs. Smt Sindurani Chadhurani, defined Salami as

‘It is single non-recurring character and payment prior to the creation of tendency. It is the consideration paid by tenant for being let into possession and can be neither rent nor revenue but is a ‘Capital Receipt’ in the hands of landlord.’

Previous Year(PY)¹¹

The term previous year is defined in Section3 of Income Tax Act, 1961

The financial year immediately preceding the assessment year is called ‘previous year.’ It is the year on which a person earns income and such incomes become taxable in the assessment year.

According to Income Tax Act, 1961 the income which a person has earned in a financial year is taxable in the following financial year. So the financial year on which a person has received income is called as the previous year.

In an obvious instance Previous year is a period of 12 months but it can be shorter than that too in case when there is newly setup business or profession, the previous year in such instance will have a duration of less than 12 months, initiating from the date of beginning the business and ending on 31st March of that financial year.

It is an established rule that assessment of income of the previous year takes place in the immediately following financial year. However, there are certain cases when the income of the previous year is assessed in the same year. These are:

Income of non-resident shipping company (Section 172 of the Act)
Person who are leaving India (Section 174 of the Act)
Bodies established for short duration (Section 174A of the Act)
Those persons who are trying to alienate their assets (Section 175 of the Act)
Business or professions which are discontinued (Section176(1) of the Act)

Assessment Year (AY)¹²

Assessment year is dined in Section 2 sub-section9 of the Income Tax Act, 1961, which informs it as duration of 12 months starting from 1st of April every year.

Assessment Year- As the name suggests, it is the year in which income of the person is assessed, i.e. verified, and taxed. Here the word ‘person’ covers

1. Individual

2. Hindu Undivided Family (HUF)

3. Association of Persons (AOP)/Body of Individual (BOI)

4. Partnership Firm

5. Local Authority

6. Company or Any artificial juridical person.

So the financial year to which the income belongs is regarded as the previous year, and the immediately succeeding financial year in which the income of the assessee is valued, the income tax return is filed, the tax liability is calculated and becomes due for payment, is termed as the assessment year.

Moreover, the due date for filing an income tax return for the previous year, in the assessment year will be:

For individuals/AOP/BOI/HUF who need not an audit of their account is 31^st July
For Companies, Partner (working) of a firm or individuals whose accounts need to be audited under any law is 31^st September
For those businesses which require Transfer Pricing report is 30^th November

Difference between Previous Year and Assessment Year

Basis	Previous Year	Assessment Year
Meaning	Financial year in which assessee takes money is called previous year	It is financial year in which income earned in previous year is taxable and this year starts from 1^st April.
What it is all about	It is the year concerning the income on which tax is levied.	Year on which income tax liability of previous year arises
Duration	Its term can be for 12 or less than 12 months	Its term is always for 12 months