What is a receipt?

In the case of business to business transactions, the receipts for purchases of raw materials or trading goods will constitute
business purchases. The receipts act as evidence of purchases and claim for business expenses and filing of monthly and yearly
tax returns.

Different Categories of Receipts

 Regular Receipt: It refers to periodic monetary return which accrues or is expected accrue regularly from definite source. For
eg Salary. Generally all regular receipts are considered as income.
 Casual Receipts: Casual receipts occurs occasionally but still considered as income For eg. Winning from Lottery.
 Revenue Receipt: Revenue Receipt is a regular receipt which arises out of day to day economic activity of the person not
resulting into reduction of asset or creation of liabilities. All revenue receipts are considered as income.
 Capital Receipt: These are receipts received occasionally not from the day-to-day business activities of a company. Most
commonly, they involve selling one's assets or creating liabilities. Generally Capital Receipts are not considered as income
and not charged to tax. However, in certain cases capital receipts are charged to tax under the heading of income from Capital
gains.

The Act contemplates a levy of tax on income and not on capital and hence it is very essential to distinguish between capital and
revenue receipts. Capital receipts cannot be taxed, unless they fall within the scope of the definition of "income" and so the
distinction between capital and revenue receipts is material for tax purposes.

Certain capital receipts which have been specifically included in the definition of income are compensation for modification or
termination of services, income by way of capital gains etc.

It is not possible to lay down any single test as infallible or any single criterion as decisive, final and universal in application to
determine whether a particular receipt is capital or revenue in nature. Hence, the capital or revenue nature of the receipt must be
determined with reference to the facts and circumstances of each case.

Criteria for determining whether a receipt is capital or revenue in nature

The following are some of the important criteria which may be applied to distinguish between capital and revenue receipts.

Fixed capital or Circulating capital: A receipt referable to fixed capital would be a capital receipt whereas a receipt referable to
circulating capital would be a revenue receipt. The former is not taxable while the latter is taxable. Tangible and intangible assets
which the owner keeps in his possession for making profits are in the nature of fixed capital. The circulating capital is one which
is turned over and yields income or loss in the process.

Income from transfer of capital asset or trading asset: Profits arising from the sale of a capital asset are chargeable to tax as
capital gains under section 45 whereas profits arising from the sale of a trading asset being of revenue nature are taxable as
income from business under section 28 provided that the sale is in the regular course of assessee's business or the transaction
constitutes an adventure in the nature of trade.

Capital Receipts vis-a-vis Revenue Receipts: Tests to be applied

(1) Transaction entered into the course of business: Profits arising from transactions which are entered into in the course of the
business regularly carried on by the assessee, or are incidental to, or associated with the business of the assessee would be revenue
receipts chargeable to tax.

(2) Profit arising from sale of shares and securities: In this case motive for purchasing shares will decide its nature.

 If the motive was to acquiring a controlling interest or obtaining directorship the profit will be considered as capital
receipt.
 If the motive is to trade the profit / loss can be considered as revenue receipt / loss
 If motive is speculative activity then profit / loss will be in revenue nature but still will be dealt separately.

(3) A single Transaction – Can it Constitute business: A non-recurring activity of Purchase and Sale can result into Profit.
Normally a income required recurring activity however a Bulk Purchase and Bulk Sale can be termed as business activity and will
be taxed as Regular Business Income.

(4) Liquidated Damages: Damages received which are directly or indirectly linked to with the procurement of capital asset which
lead to delay into coming into existence of the profit making apparatus is a capital receipt.

(5) Compensation on termination of agency/service contract: Ideally it is considered as capital receipt but it is charged to tax
as income from business or other sources or Profits in the lieu of salary as the case may be.

(6) Gifts: Gifts are generally considered to be Capital Receipt however it is charged to tax under certain situations.
APPLICATION OF INCOME OR DIVERSION BY OVERRIDING TITLE

Concept of Application of Income

Application of Income refers to the allocation or expenditure of income after it has been earned by the assessee. The essential
aspect of this concept is that the income in question is first earned by the assessee and only then is it applied towards fulfilling an
obligation or making a payment. As such, the income is part of the total income of the assessee and is subject to taxation.

Definition of Application of Income

Under the Income Tax Act, 1961, Application of Income is not explicitly defined, but its principles are derived from the general
understanding of income taxation. Income is generally understood to be taxable when it is received or deemed to be received by
the assessee. Once income is earned, any subsequent application or expenditure of that income does not affect its taxability.

Example of Application of Income

To better understand the concept, consider the example of Mr. A, who is liable to pay alimony to his ex-wife, Ms. B. If Mr. A
instructs his employer, Mr. C, to directly pay Rs. 2,000/- per month to Ms. B from his salary, this amount would still be
considered part of Mr. A’s taxable income. The reason for this is that Mr. A has earned the income first and only after earning it,
he applies it to fulfill his obligation to Ms. B. Therefore, this amount remains within the scope of Mr. A’s taxable income.

Concept of Diversion of Income

Diversion of Income is a contrasting concept where income is diverted before it is earned by the assessee. In this case, the income
never actually becomes the income of the assessee, as it is transferred to another person or entity through an overriding title before
it can be claimed by the assessee. Because the income is diverted at the source, it is not included in the total income of the
assessee and is therefore not taxable in their hands.

Definition of Diversion of Income

Similar to Application of Income, the concept of Diversion of Income is also not explicitly defined in the Income Tax Act, 1961.
However, it is well-established through various judicial decisions. The core principle of Diversion of Income is the presence of an
overriding title that causes the income to be redirected before it reaches the assessee.

Example of Diversion of Income

Consider the case of M/s ABC, a partnership firm where A and his two sons B and C are partners. According to the partnership
deed, after the death of Mr. A, 20% of the firm’s profits are to be paid to Mrs. D, the wife of Mr. A and mother of B and C. After
Mr. A’s death, this 20% of profit is diverted to Mrs. D before it becomes part of the firm’s income. As a result, this amount is not
included in the taxable income of the firm, M/s ABC.

SECTION 4. CHARGE OF INCOME-TAX.—

(1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that
rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the
levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person:
Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other
than the previous year, income-tax shall be charged accordingly.

(2) In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it
is so deductible or payable under any provision of this Act.

The charging section is the backbone of the Act, it lays down the provisions as to what are taxable and at what rates; income of
which period is taxable and in whose hands. Accordingly, the section provides that:

(a) Income tax shall be charged at the rate or rates prescribed in the Finance Act for the relevant previous year,

(b) the charge of tax is on various persons specified u/s 2(31),

(c) the income sought to be taxed is that of the previous year and not of the of assessment year,

(d) the levy of tax on the assessee is on his total or taxable income computed in accordance with and subject to the appropriate
provisions of the Income Tax Act, including provisions for the levy of additional Income-tax.

Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other
than the previous year, income-tax shall be charged accordingly.

SECTION 5. SCOPE OF TOTAL INCOME.—

(1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income
from whatever source derived which—

(a) is received or is deemed to be received in India in such year by or on behalf of such person; or

(b) accrues or arises or is deemed to accrue or arise to him in India during such year; or

(c) accrues or arises to him outside India during such year:

Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of section 6, the
income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a
profession set up in India.

(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all
income from whatever source derived which—

(a) is received or is deemed to be received in India in such year by or on behalf of such person; or

(b) accrues or arises or is deemed to accrue or arise to him in India during such year.

Explanation 1.—Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this
section by reason only of the fact that it is taken into account in a balance sheet prepared in India.

Explanation 2.—For the removal of doubts, it is hereby declared that income which has been included in the total income of a
person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the
basis that it is received or deemed to be received by him in India.

Scope of total income has been defined on the basis of Residential status

(A) Resident and Ordinarily Resident Assessee

According to Sub-section (1) of Section 5 of the Act the total income of a resident and ordinarily resident assessee would consist
of:

(i) income received or deemed to be received in India during the accounting year by or on behalf of such person;
(ii) income which accrues or arises or is deemed to accrue or arise to him in India during the accounting year;
(iii) income which accrues or arises to him outside India during the accounting year.

It is important to note that under clause (iii) only income accruing or arising outside India is included. Income deemed to accrue or
arise outside India is not includible.

(B) Resident but Not Ordinarily Resident In India

Proviso to section (1) of section 5 the total income in case of resident but not ordinarily resident in India

(i) income received or deemed to be received in India during the accounting year by or on behalf of such person;
(ii) income which accrues or arises or is deemed to accrue or arise to him in India during the accounting year;
 (iii) income which accrues or arises to him outside India during the previous year if it is derived from a business
controlled in or a profession set up in India.

(C) Non-Resident

Sub-section (2) of Section 5 provides that the total income of a non-resident would comprise of:

(i) income received or deemed to be received in India in the accounting year by or on behalf of such person;
(i) income which accrues or arises or is deemed to accrue or arise to him in India during the previous year.

Explanation 1. - Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this
section by reason only of the fact that it is taken into account in a balance sheet prepared in India.

Explanation 2. - For the removal of doubts, it is hereby declared that income which has been included in the total income of a
person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the
basis that it is received or deemed to be received by him in India.