A receipt is taxable if it is of the nature of income. But receipts which are of capital nature are generally not taxable. The basic scheme of income-tax is to tax income not capital, and similarly to allow revenue expenditure. But this general rule is subject to certain exceptions.

The distinction between the capital receipt and revenue receipt is not rigid and sometimes the distinction becomes very narrow. Whether a particular receipt is of the nature of income or capital, is explained below by the following examples –

An amount received on account of sale of trading goods or receipts in respect of circulating capital or of flowing capital is revenue receipt, for example sale of a motor car by a dealer. On the other hand a receipt on account of sale of fixed assets is a capital receipt, for example, amount received on sale of a motor car by a person who is not a car dealer.

An amount received by the way of substitution or addition of an income is a revenue receipt. For example – a reward received by an employee from his employer in appreciation of his services. But an amount received in replacement of a source of income is a capital receipt, for example compensation received for termination of services.

However, such types of receipts are exempt under Income Tax Act, 1961 subject to certain restrictions and the taxable portion is treated as “Profit in lieu of Salary”. However, any amount received whether in lump sum or otherwise from any person after cessation of his employment with that person is also taxable.

• An amount received as a compensation for loss of future profit under an agreement is a revenue receipt. But an amount received in consideration of the surrender of certain rights under an agreement is a capital receipt, because such rights are capital assets which have been given up.

• A pension received by a former employee is a revenue receipt as it is in the nature of compensation of past services. But a lump sum amount received as commuted pension is a capital receipt being in the nature of compensation for surrendering the right to pension. Such commuted amount of pension is exempt subject to certain limits.

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