CAPITAL AND REVENUE

Importance of distinction between capital and revenue.
                        While calculating the taxable income one most know the difference between the revenue and capital .If he does not know then he can not calculate the real taxable income due to the following reasons:
     1:Income tax is imposed on revenue receipts.
     2:Income tax is not levied on capital  receipts.
     3:When we want to determine the profits of a business or profession it is the revenue expenditure, which is deducted from the trading receipts.
     4:Deducation from capital receipts is not allowed. Keeping in view the above reasons one person must be capable to distinguish between revenue and capital expenditure and then he should determine the profits of the business.
   EXPENDITURE ON OPENING THE BUSINESS:
                        While estabilishing the new business all the expenses are called Capital Expenditure.
    EXAMPLE
             1:Purchase of land.
             2:Construction of building.
             3:Purchase of machinery.
             4:Fee paid to the manager.
             5:Govt, Fee paid to obtain the licence etc.

   Period of Benefit
           When we want to determine the nature of expenditure we also calculate the period of benefit.
          a:If expenditure gives a continuous benefit to the business. It will be called capital expenditure.
          b:On the other hand if the period of benefit is less then one year it will be treated as revenue expenditure