Capital income and Revenue income under taxation law

Capital income and Revenue income

1)      Introduction:

Definition of income

“Income means money received, especially on a regular basis, for work or through investments”

Or

“Money that an individual or business receives in exchange for providing a good or service or through investing capital”

Income is consumed to fuel day-to-day expenditures. In businesses, income can refer to a company's remaining revenues after all expenses and taxes have been paid. In this case, it is also known as "earnings". Most forms of income are subject to taxation.

Income vs Revenue

Many people mistake “income” and “revenue” as the same thing. However, there are many small differences between the two financial concepts.

Both “income” and “revenue” are financial and business terms. Their meanings closely resemble each other because they are often used in the same context. Both concepts are applicable in accounting and economic disciplines.

“Revenue,” for instance, is the total amount of money that a business earns by doing its activities. These activities include selling a product or a service, but it can also be earned by an indirect means. Indirect business revenue can be gained if a business has placed money in investments.

On the other hand, “income,” also known as “net profit,” is the money left for a business after it subtracts costs and expenses from its revenue. Costs and expenses include the operational costs (salaries and wages, upkeep of machinery, security, expenses for raw materials, to name a few), depreciation, and capital. Costs can be categorized into many types (usually in tandem) that include fixed and variable costs, direct and indirect costs, and lastly, product and period costs. Income can also be categorized as positive or negative. Positive income means there is more revenue or less expenses while negative income accounts for a low revenue or high expenses.

Under section 2 (29) of income tax ordinance 2001

(29) ―income includes any amount chargeable to tax under this Ordinance, any amount subject to collection [or deduction] of tax under section 148, [150, 152(1), 153, 154, 156, 156A, 233,  233A and], sub-section (5) of section 234, [any amount treated as income under any provision of this Ordinance] and any loss of income but does not include, in case of a shareholder of a company, the amount representing the face value of any bonus share or the amount of any bonus declared, issued or paid by the company to the shareholders with a view to increasing its paid up share capital;

2)      Capital Income:

Definition of capital

“Wealth in the form of money or other assets owned by a person or organization or available for a purpose such as starting a company or investing”

Or, “Money invested in a business to generate income”

Capital Income: Cash or goods used to generate income by investing in business or other property.

Example: Investment in shares and gain on sale of asset.

The term “Capital Income” means an income which does not grow out or pertain to the running of the business proper.

Capital Profit

·        Cost of the Building – 1,00,000/-

·        Selling Price of the Building – 1,50,000/-

·        Capital Profit = 50,000/- 

Which implies profit realized over and above the cost of the fixed asset should be considered as Capital Profit.

Capital income is the money invested by the owners or other investors that is used to set up a business or buy additional equipment.

3)      Revenue Income:

Definition of revenue

The income generated from sale of goods or services, or any other use of capital or assets, associated with the main operations of an organization before any costs or expenses are deducted.

Revenue Income: which is earned or generated by sales of goods or services.

“Revenue Income means an income which arises out of and in the course of regular business transactions of a concern”

Revenue Profit

·        Cost Price of Plant = 1,00,000/-

·        Book Price of Plant (After Depreciation)= 70,000/-

·        Selling Price = 1,20,000/-

·        Profit = 1,20,000 – 70,000 = 50,000/-

So here Profit has two components namely Capital Profit + Revenue Profit = 20,000 + 30,000

Revenue Profit

“The profit realised over and above the book value of the asset till it does not exceed the original cost of the asset should be taken as revenue profit”

Revenue income is the money that comes into the business from performing its day-to-day-function, like selling goods or providing a service.

4)      What are included in income:

1)      Profits or gains

2)      Income from exports

3)      Income from imports

4)      Winning income

5)      Any loss of income

5)      What are not included in income:

1)      The amount representing any face value of any bonus shares.

2)      Amount of any bonus declared issued or prayed by company to its share holders.

6)      Difference between capital income and revenue income:

Following are the differences between capital income and revenue income;

A)    Sale of asset

Any amount which is received by the sale of fixed asset is capital income.

And,

Any amount which is received by floating asset is called revenue income.

B)    Substitution of income

Any amount received in substitution of a sources of income is a capital income.

And,

Any amount which is received in substitution of income alone is called revenue income.

C)    Surrender of rights

If any amount which is received against completely surrendering his right of ownership, copyright, trade mark etc, is called capital income.

And,

Any amount which is received against surrendering of his right of ownership for a short period is called revenue income.

D)    Lump-sum income

Any amount being received in installments is called capital income.

And,

Any amount which is received in lump sum is called revenue income.

7)      Conclusion:

There are different kinds of income. Income means profit which is chargeable to tax under income tax ordinance 2001.