Revenue and Capital nature of Incomes and Expenses

30/04/2021 1 By indiafreenotes

Capital Expenditure

Capital Expenditure is that expenditure which is incurred

  • For acquiring or bringing into existence an asset or advantage of an enduring benefit as land, buildings, plant and machinery, furniture and fixtures, office equipment, copyright, etc. Capital expenditure includes not only the purchase price of the fixed asset but also various other expenses incurred in connection with their acquisition. So, brokerage or commission paid in connection with the acquisition of an asset, freight and cartage paid for transportation, installation expenses, and registration charges incurred in connection with purchase of land and buildings are also treated as capital expenditure.
  • For extending or improving a fixed asset or
  • For substantial replacement of an existing fixed asset. The benefit on such expenditure is going to accrue for more than one year.

The examples of capital expenditure include cost of land and building, plant and machinery, furniture and fixtures, etc. Such expenditure normally yields benefits which extends beyond current accounting period

Revenue Expenditure

When the benefit of expenditure is not likely to be available for more than one year, it is treated as revenue expenditure. It is incurred to run the business. It does not increase the capacity of the business. Usually, the benefit is consumed in the period in which it is incurred except in the case of deferred revenue expense. It is taken to the Trading or Profit & Loss account of the concern. Examples: cost of goods purchased, administrative expenses (rent, salary.etc.), manufacturing (oil, fuel, etc,) selling and distribution expenses (discount, advertising, etc.), Depreciation, interest on loan, loss on sale of assets, etc

As the Act does not define the terms “capital expenditure” and “revenue expenditure”, one has to depend upon its natural meaning as well as decided cases:

  • Acquisition of fixed assets v. Routine expenditure:

Capital expenditure is incurred in acquiring, extending or improving a fixed asset, whereas revenue expenditure is incurred in the normal course of business as a routine business expenditure.

  • Several previous years v. One previous year:

Capital expenditure produces benefits for several previous years, whereas revenue expenditure is consumed within a previous year.

  • Improvement v. Maintenance:

Capital expenditure makes improvements in earning capacity of a business. Revenue expenditure, on the other hand, maintains the profit-making capacity of a business.

  • Non-recurring v. Recurring –

Usually capital expenditure is a non-recurring outlay, whereas revenue expenditure is normally a recurring item.

  • Lump sum payment v. Periodic payment –

In order to determine whether an expenditure is capital or revenue in nature, the fact that it is a lump sum payment or periodic payment is not important.

Though the dividing line between a capital and revenue expenditure is real, yet sometimes it becomes difficult to draw. Therefore, the distinction depends on facts and surrounding circumstances of each case.

For computing profits of a business taxable under this Act, only revenue expenses are allowed to be deducted. Hence it becomes essential to distinguish a revenue expenditure from a capital expenditure. The following tests can be applied for this purpose:

(i) Nature of the assets. Any expenditure incurred to acquire a fixed asset or in connection with installation of fixed asset is capital expenditure.


Any expenditure incurred as price of goods purchased for resale along with other necessary expenses incurred in connection with such purchase are revenue expenses.

(ii) Nature of liability. A payment made by a person to discharge a capital liability is a capital expenditure.


An expenditure incurred to discharge a revenue liability is revenue expenditure, e.g., amount paid to a contractor for cancellation of contract to construct a factory building is capital expenditure whereas amount paid by a person—with whom he has entered into contract for supply of goods for a period of 5 years—but he fails to supply goods after 3 years, the compensation will be a revenue expenditure as it is to discharge the revenue liability.

(iii) Nature of transaction. If an expenditure is incurred to acquire a source of income, it is capital expenditure, e.g., purchase of patents to produce picture tubes of T.V. sets.


An expenditure incurred to earn an income is revenue expenditure, e.g., salary of the staff, advertisement expenses, etc.

(iv) Purpose of transaction. If the amount is spent on increasing the earning capacity of an asset, it is capital expenditure, e.g., expenditure incurred for fitting new windows of factory building.


Any expenditure incurred on keeping an asset in running condition is revenue expenditure, e.g., amount spent on protection of fixed assets which have already been acquired.

(v) Nature of payment in the hands of payer. If an expenditure is incurred by an assessee as a capital expenditure, it will remain as capital expenditure even if the amount may be revenue receipt in the hands of receiver, e.g., purchase of motor car by a businessman is capital expenditure in his hands although it is revenue receipt in the hands of car dealer. Similarly, if the nature of payment in the hands of payer is of revenue nature, it will be a revenue expenditure even if it is capital receipt in the hands of receiver.