Capital and Revenue Receipts. There are different types of business income whether it is capital receipt or revenue receipt.

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University Degree Business and Administrative studies

1.0        Question 1

There are different types of business income whether it is capital receipt or revenue receipt. The differences between capital and revenue receipt are shown in Table 1 (Veerinderjeet. S, 2008)

Scenario 1:

In my opinion, for the first scenario, the receipt of RM50, 000 is a Revenue Receipt. It is liable to income tax and it is supported by the following case.

In the case of Kelsall Parsons & Co. v CIR, the Court of Session held that the compensation was taxable and the Lord President commented that the sum which appellants received was paid as compensation for the cancellation of the agency contract. That was a contract incidental to the normal course of the appellant’s business and it was to obtain as many business carried on as many contracts of this kind as they could. So the business of the company is not really affected even though any of the agents terminated the contract. (Veerinderjeet. S, 2008)

Mistron Bhd v Cuai Bhd reflected the similar situation in Kelsall case. Cuai Bhd is only one of the supplier among the various suppliers of Mistron Bhd. Mistron Bhd’s business won’t be affected seriously or involve of bankruptcy or ceases matters even though Cuai Bhd terminated the supplier relationship as it not depend on only one supplier. The whole business structure of Mistron Bhd will not be affected. So, the compensation receipt of RM50, 000 is a revenue receipt thus is liable to income tax.

Scenario 2:  

In my opinion, for the second scenario, the receipt of RM8, 000 is a Revenue Receipt. So, it is liable to income tax. It is supported by the following case.

In the case of Dewan Perniagaan Bumiputra Sabah v Ketua Pengarah Hasil Dalam Negeri, the high court held that as the grant was given by the government and primarily for the non-business or non-trading purposes of protecting Bumiputras and achieving the New Economic Policy, it was not meant for the taxpayer ton use in its business. The receipt will be capital receipt and will not be liable to income tax. (Consultant. E, 2004 ; Choong.K.F, 2004)

Similar to Dewan case, Mistron Bhd is qualified for a subsidy scheme initiated by the government for the purposes of helping the retarded person employed by the company but not for trading business purposes. So, the receipt of RM8, 000 will be capital receipt and not liable to income tax.

Scenario 3:

In my opinion, for the last scenario, the receipt of RM25, 000 is a Capital Receipt. So, it is not liable to income tax. It is supported by the following case.

In the case of Californian Oil Products Ltd. V FC of T (52 CLR 28), the taxpayer had been appointed as exclusive distributor and agent the company’s products. The agreement was to run for a period of five years and the agency was the taxpayer’s only business. When the taxpayer agreed to cancel the agreement, its whole businesses ceased and it went into liquidation. The cancelled agreement related to the whole structure of the appellant profit making apparatus and the whole structure of the business was affected by the cancellation of agreement. (Veerinderjeet.S, 2001)

Same situation in California case , Mistron Bhd v Swiss Electronic Company (SEC), SEC is appointed to act as the sole agent to Mistron Bhd, if the agreement is terminated, Mistron Bhd’s whole business structure will be affected as SEC is the only and exclusive agent for the company. Mistron Bhd had to bear a huge business loss. Therefore, the compensation of RM25, 000 will be a capital receipt and not liable to income tax.

2.0        Question 2

In taxation, expenditure is identified into two types, which are capital expenditure and revenue expenditure. Capital expenditures are expenditures which used to create future benefits. For example, it is the amount spent to acquire long-term fixed assets such like building and machinery or add value to the existing fixed assets with a useful life extending beyond the taxable year. Meanwhile, revenue expenditures are the expenditure spent in sales revenue generation or mainly in maintaining a revenue generating assets. For example, routine repairs are considered as revenue expenditures as the amount was charged directly to the account such as Repairs and Maintenance Expense (Choong Kwai Fatt, 2004).

The difference of the expenditures is treated separately in the taxation. According to Chang Min Tat J, it held revenue expenditures are deductible from the gross income under the Section 33 of the Act. There is four attributes for the expenditure to deductible from the gross profit: Outgoings or expenses, wholly and exclusively, incurred and in the production of gross income (Choong Kwai Fatt, 2004).

However, although the Section 33 requirements are satisfied, there are expenses which are prohibited to be deducted under the Section 39 of the Act. Capital expenditures are the expenses prohibited by it (Choong Kwai Fatt, 2004). (Figure 1 show the list of prohibited expenses as provided in s39(1))

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In order to identify the capital and revenue expenditure, there are tests applied: Enduring benefit asset, fixed capital and circulating capital, identifiable asset, business structure versus process and initial expenditure (Choong Kwai Fatt, 2004). (Table 2 show the explanation of the tests)

Scenario 1:

The total amount of RM 100000 which expensed soon as the repair costs after the factory were acquired by the K Sdn Bhd is not deductible in the gross income. The reason is it constituted as the initial repairs on the asset. Due to the initial expenditure test, the expenses would treated as capital expenditure ...

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Capital and Revenue Receipts. There are different types of business income whether it is capital receipt or revenue receipt.
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