# Concept of Capital and Revenue Receipts

Income tax is charged on income. To know what is income, you must distinguish receipts along five contrasting axes. Master these pairs — they recur throughout the syllabus.

## 1. Regular Receipt vs. Casual Receipt

Regular Receipt	Casual Receipt
Income expected to flow in regularly from a defined source — e.g., salary, rent	Irregular/one-time earnings — e.g., lottery, crossword-puzzle winnings

Key point: Even casual receipts are taxable income under the Act. "Casual" does not mean "exempt."

## 2. Revenue Receipt vs. Capital Receipt

Revenue Receipt	Capital Receipt
Earnings from regular business/activity	Receipts from sale of a fixed asset / capital base
Generally taxable	Generally not income…

…BUT the Act specifically brings certain capital gains (profit on transfer of capital assets like land, jewellery) into the charge of tax. So "capital receipt is not income" is a general rule with statutory exceptions.

## 3. Net Receipt vs. Gross Receipt

Net Receipt = total earnings minus allowable expenses incurred to earn that income. Income is taxed on a net basis.
Gross Receipt = total inflow before expenses. The Act specifies which expenses are deductible. Some presumptive schemes compute income as a percentage of gross receipts.

## 4. Due Basis vs. Receipt Basis

Due (Accrual) Basis: income is taxed when earned, even if not yet received.
Receipt Basis: income taxed only when actually received — e.g., interest on compensation/enhanced compensation is taxed only on receipt.
The taxpayer's method of accounting (cash vs. mercantile) governs which basis applies.

## 5. Application of Income vs. Diversion of Income (very important)

This pair decides who pays tax.

Application of Income	Diversion of Income
Income first reaches the taxpayer, who then applies it to discharge an obligation	Income is diverted before it reaches the taxpayer, due to an overriding obligation/title
Voluntary or self-imposed obligation	Overriding charge at source
Taxpayer IS taxed	Taxpayer is NOT taxed (it never became his income)

The test: Does the obligation attach to the source of income (diversion — overriding title) or only to the income after it has accrued/reached the assessee (application)?

> Note (ICAI SM): The detailed tests to determine whether a receipt is capital or revenue are given in ICAI Study Material Pages 1.33–1.35 (2025 Edition — applicable for May 26 / Sept 26 / Jan 27).

Worked example

### Example 1

Q. Under a court decree, before income from a property reaches X, ₹50,000 must be paid to his brother as a charge created on the property itself. Is X taxed on this ₹50,000?

A. No. Because the ₹50,000 is paid under an overriding title/charge on the source before the income reaches X, it is a diversion of income. It never becomes X's income, so X is not taxed on it.

### Example 2

Q. Y earns business income of ₹5,00,000 and, out of it, voluntarily gives ₹50,000 to his son under his own arrangement. Who is taxed on the ₹50,000?

A. Y is taxed on the full ₹5,00,000. The ₹50,000 is an application of income — the income first reached Y and he then chose to spend it. A self-imposed obligation does not reduce taxable income.

### Example 3

Q. Mr. A wins ₹1,00,000 from a crossword puzzle — a one-time, irregular receipt. Is it taxable?

A. Yes. Even a casual receipt is taxable income under the Act. Such winnings are charged under Income from Other Sources (at the special rate applicable to winnings).

⚠️ Common exam mistakes

Assuming all capital receipts are non-taxable — capital gains on transfer of capital assets are specifically charged to tax.
Assuming casual/one-time receipts (lottery, puzzle winnings) are exempt — they are taxable income.
Confusing application of income with diversion: the deciding factor is whether the obligation overrides title at the SOURCE (diversion, not taxed) or merely applies AFTER income reaches the assessee (application, taxed).
Taxing interest on compensation on accrual basis — it is taxable only on RECEIPT basis.

Reference:

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