UNIVERSITY OF THE SOUTHERN CARIBBEAN

Andrews University Extension of Affiliation Programs

P.O. Box 175, Port of Spain
Trinidad West Indies

Assignment 2.2: Distinction between income and Capital Receipts

An Assignment
Prepared in Partial Fulfilment
For the Requirements of the Course
ACCT 361 Individual Taxation (BLENDED) 1st Semester 2015-16 -

INSTRUCTOR: Dr. Raghavalu Ramella, MA.,MDBA.,MBA., M.Phil, Ph. D

By
Kerwin Alexander,
Id # 2007110062

Date: September 22, 2015

Approval_______________

Assignment 2.2: Distinction between income

and Capital Receipts

Assignment 2.2: Distinction between income

and Capital Receipts
Explain the distinction between income and capital receipts in the
Commonwealth Caribbean context based on the class text bookIncome Tax Law in the Commonwealth Caribbean by Claude H
Denbow.- Chapter 2- The Construction and Scope of taxing statutes
and other readings. Post this assignment in a *.doc format using
the link for Assignment 2.2
The distinction as per income or revenue receipts versus capital receipts is vitally essential as
only revenue receipts are taxable according to income tax ordinance. We can note from the tree
and fruit analogy that income receipt is circulatory in nature and are typically derived from
those assets which flows or must leave the owner in other to result in the owner earning a profit
such as stock-in-trade. Capital receipt on the other hand are like the tree, they are fixed assets
that help the owner earn profits by keeping it in his possession (and providing fruits): for
instance plant and machinery (Income Tax Managment, 2015).
The fruit and the tree is the basic test to distinguish income from capital receipts, as once receipts
occur from a source still being intact (like the tree), it is income whereas the amount received as
compensation for the loss of the source or tree would be capital receipts. In the latter the source
itself gets eliminated in the process of it yielding a receipt (Lal & Vashisht, 2008).
We should note that each case as to whether receipts constitute the income or capital must be
taken on a case by case basis with the facts and circumstances particular to each case accounted
for (Lal & Vashisht, 2008).
Sometimes it become complicated to differentiate the capital and revenue receipts but the
following tests may be used to distinguish between capital and revenue receipts which are based
on several decided cases (Income Tax Managment, 2015). These include:

1. Where the receipts are proceeds from the sale of the business These are typically
capital in nature as the tree is disposed of. We should note however that proceedings from
sales of stock-in-trade or fruits from the carrying on of the business during the time of
winding up would lead to taxable amounts.
2. Money paid for loss of contract which destroys recipients profit-making apparatus
These are capital receipts as they are money paid to compensate for the loss of an asset
that forms part of the profit making apparatus of the taxpayer and are therefore not
taxable
3. Money paid in lieu of trading receipts are of revenue in nature and therefore taxable
The rule fundamental principle here is that the payments made as replacement or
substitute for trading receipts which would have been revenue in nature, then such
payments are of revenue in nature. For instance compensation for non-performance of a
contract,

compensation

for

tort

to

taxpayer,

and

statutory

payments

(Studypointss.blogspot.com, 2013).
4. Test Motive Behind: We should also ascertain the motive behind the transaction made
that brought in the receipts to determine if it is capital or revenue receipt. Motive will
declare that amount is a capital receipt or revenue receipt.

References
Denbow, C. (2007). Income Tax Law in the Commonwealth Caribbean. West Sussex: Tottel.
Income Tax Managment. (2015). Captial and Revenue. Retrieved from Incometaxmanagement.com:
http://incometaxmanagement.com/Pages/Taxation-System/Capital-&-Revenue.html
Lal, B., & Vashisht, N. (2008). Income Tax and Central Sales Tax Law and Practice (29th ed.). India:
Dorling Kindeersley.
Studypointss.blogspot.com. (2013, March 2013). Study Poinuts. Retrieved from
Studypoints.blogspot.com: http://studypoints.blogspot.com/2013/03/what-is-difference-betweencapital.html