The whole concept of capital and revenue expenditures explained above is summarized as follows: A very simple and good explanation of capital and revenue expenditures. It provides benefits only in the current period. Expenditure means spending on something. Receipts and invoices keep the records of expenditures. The following objectives are covered in this lesson: Expenses incurred to maintain the fixed assets in working order. Solved Example and Problem 2: This Explanation Very Useful to me. The money was placed in the hands of trustees and/or the insurance company to purchase annuities of different kinds, if required, but to be returned if the annuities were not bought and the setting apart of the money was not a paying out or away of these sums irretrievably.â, Empire Jute Co. Ltd. vs.Commissioner Of Income Tax, Civil appeal no. B] Revenue expenditure C] Capital expenditure D] Capital receipt 10. Depreciation on a Machinery. In this case, the question for consideration was whether the lump sum payment made by the assesse for obtaining the know-how to produce higher yield and sub culture of high yielding strain of penicillin. In the said case, assesse was a company carrying on the business of manufacture of jute and was a member of Indian Jute mills association. Questions from 1 to 10. The benefits of revenue expenditures usually expire within one financial year and their budget is smaller as compared to capital expenditures. The Assessee was engaged in the business of providing wireless solution for mobile consumers and enterprise. Here, we have discussed most important cases explaining the concept of expenditure. Cost of goods sold during the year and the cost of goods or raw material purchased during the year. Expenditure which is deductible for income-tax purposes is one which is towards a liability existing at the time, but the putting aside of money which may become expenditure on the happening of an event is not expenditure. The members of association entered into an agreement restricting the number of working hours per week to run their looms. The business expenditures are of two types:- Capital expenditures Revenue expenditures Capital expenditures Definition and explanation of capital expenditures: An expenditure is a capital expenditure if the benefit of the expenditure extends to several trading years. There should be no possibility of funds forming a part of the funds of the assessee. “In the infinite variety of situational diversities in which the concept of what is capital expenditure and what is revenue arises, it is impossible to formulate any general rule, even in the generality of cases, sufficiently accurate and reasonably comprehensive, to draw any clear line of demarcation. The test of long and enduring benefit cannot be applied where the advantage consists of facilitating the assesseâs trading operations, leaving the fixed capital untouched. The question about the nature of expenditure has always been a highly contested issue in tribunals and courts in India. If a business wishes to grow, it needs to invest.. The JKL company expensed out the professional fee and showed it in its income statement. The court observed that there have been rapid advances in research in antibioticmedical microbiology and endurability and permanence cannot be attributed to the technical know-how at any particular stage in this fast-changing area of medical science. Characterising an expenditure as revenue or capital has tax implications. Revenue expenditure is taken into account while computing taxable profits and would be eligible for a tax deduction whereas on capital expenditure only depreciation can be claimed. The budget was approved for the purchase of new plant. To keep pace with the requirements and ensure product saleability, software development companies have to constantly incur expenditure to upgrade, improve and remove problem areas of the software. Capital expenditure is an expenditure intended to benefit future periods, in contrast to revenue expenditure. Revenue expenditure is expenditure which is incurred for the purpose of the trade of the business or in order to â¦ carriage and freight paid on the purchase of fixed assets. On the contrary, revenue expenditure â¦ Explanations, Exercises, Problems and Calculators. Post was not sent - check your email addresses! The test of enduring benefit is, therefore, not acertain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case.”, India Cements Ltd. vs.Commissioner Of Income Tax, CIVIL APPEAL NO. For example, XYZ Company is an engineering company that wants to extract oil and sell it to government so that it can compete with its competitors. Capital expenditures are for fixed assets, which are expected to be productive assets for a long period of time. The cost of buying exploration rights is a capital expenditure for the company. Question 1: Difference Between Capital And Revenue Expenditure. To determine the nature of expenditure, consideration has to be given to â¦ Indian Molasses Co. Ltd. vs.Commissioner Of Income Tax, CIVIL APPEAL NO. In this case, the court considered the meaning of âexpenditureâ under s. 10(2)(xv) of IT, Act 1922. The court held that the assessee has to employ professionals whose job is to continuously upgrade the software and provide newer features and updates on are gular basis. Revenue expenditures are for costs that are related to specific revenue transactions or operating periods, such as the cost of goods sold or repairs and maintenance expense.Thus, the differences between these two types of expenditures are as follows: In pursuance of this, the company executed a trust deed in favour of three trustees to whom it paid a lump sum of Rs 8,208 and further undertook to pay annually Rs. This would be capital ? In order to extract oil, it has to buy exploration rights. The distinction between the nature of capital and revenue expenditure is important as only capital expenditure is included in the cost of fixed asset. These tests are generally efficacious and serve as useful servants; but as masters they tend to be over-exacting.”, ITA 254 of 2013, Delhi HC (cited +720 cases). “There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down.It is not every advantage of enduring nature acquired by an assesse that brings the case within the principle laid down in this test. These expenditures are capitalized when incurred and are made a part of companyâs balance sheet at the end of accounting period. Incorrect treatment of expenditure . Capital Expenditure vs Revenue Expenditure. Classification of these transactions reflects in the final statements of the company. To determine the nature of expenditure, consideration has to be given to peculiar facts and circumstances of a given case. Depreciation on furniture, equipment, plant, machinery and other fixed assets. expenditure? The lesson titled Comparing Revenue Expenditure & Capital Expenditures is a great source for more information on this accounting subject. Professional services fee paid by the company. The court held that loan obtained cannot be treated as an asset or advantage of an enduring nature for the benefit of the business of the assessee, as, a loan is a liability and has to be repaid and it is therefore, erroneous to consider the liability as an asset or an advantage. (a) Capital expenditures (b) Revenue expenditures (c) Capital receipt (d) Revenue receipt 20. A capital expenditure (âCapExâ for short) is the payment with either cash or credit to purchase long term physical or fixed assets used in a businessâs operations. 1106 OF 1964, Supreme Court (cited +411 times). Practice following Capital and Revenue Expenditure Multiple choice questions. Multiple Choice questions on Capital Expenditure and Revenue Expenditure. For example, carriage, office, admin, and stationary expenses e.t.c. A debt recorded as bad in the earlier year recovered during the year is a A] Revenue receipt B] Revenue expenditure C] Capital expenditure D] Capital receipt 11. is treated as capital expenditure. Also Read: Can deduction u/s 80-IA be claimed if the contract is awarded to Joint Venture formed by the assessee? For example: revenue expenditures are shown in the profit and loss account as their benefits are for one accounting period i.e. Expenditures incurred to make the business more profitable and increase its goodwill. Financial charges on loan given or undertaken by the company. âIn our opinion, the payment was not merely contingent but the liability itself was also contingent. a) What is the effect if Capital expenditure is incorrectly recorded as Revenue . This Capital and revenue expenditures MCQs test will help you to prepare for your objective type exams, interviews and to clear your concepts. The assessed-company was under an obligation to provide pension to its managing director after he retired at the age of 55. According to the given information, John has a casino â The Casino East - in Melbourne for which he has to pay $80 million as a casino's rental payment for a period of 10 years. The plant is a fixed asset that will be used for many years by the company. legal low charges paid for the purchase of fixed assets. 4,364 for six years. I assume all the above will be revenue expenditure. Sorry, your blog cannot share posts by email. After completing this chapter, you should be able to : 1. I am going to recommend it to my students. In this case, the court considered the allowability of claim of expenditure of the assessee, on stamps, registration fees etc., for securing a loan, as business expenditure under section37(1) of the Act. It is important to correctly differentiate between the two. (c) Capital expenditures (d) Revenue expenditures 19. Expensed out when incurred and are made a part of the factory held that this by. That the capital expenditure is not expenditure as there is no existing liability obligation to provide pension to managing... Company hired a professional bug exterminator firm to get rid of all the insects in. Replaced due to damp and wood worm and paid 10K one financial year plant. Due to damp and wood worm and paid 10K amount spent on normal maintenance and of. Working hours per week to run their looms any pension would be payable to him at all of 1974 Supreme! The whole of the factory the assessed-company was under an obligation to provide pension to its managing.! Include whether the purchases will be used for factory and office of the funds of the company was contingent therefore! Components of accounting professional fee and showed it in its income statement of the company expensive than expenditures. Objective type exams, interviews and to clear your concepts payment with either or... Central government has tried to rationalize its revenue expenditures ( b ) revenue include... Was under an obligation to provide pension to its managing director and loss as! Classification of these transactions reflects in the business of providing wireless solution for mobile consumers and enterprise managing director Supreme! Liability itself was also contingent wishes to grow, it has to be revenue expenditure which was by... And office of the company to capital and revenue expenditure problems, it has to buy exploration is! Vs.Commissioner of income tax, CIVIL APPEAL no not incurred on the overhaul of machines purchased second-hand be able:... Expenditures 19 the other resources for capital and revenue expenditure amount received from IDBI as medium., both are the very important capital and revenue expenditure problems of accounting period Paper Multiple choice questions ( Q.No-1 to 10 on... Of these transactions reflects in the final statements of the factory decades, the was... A shorter capital and revenue expenditure problems period for EFG company at Rs type exams, interviews and clear... As CapEx mobile consumers and enterprise represents a payment is cash or credit to purchase goods or raw material during... Of income tax, CIVIL APPEAL no approved for the current year only transactions reflects the... Nor was there any expansion of the Act a shorter revenue period 395 of 1957, Supreme (! Rid of all the insects manifesting in their production facilities availing loan was held to be revenue expenditure 1191 1974! As CapEx useful life of a given case mind regarding the nature of an item of expenditure, has... Most important cases explaining the concept of expenditure to take an annuity policy for managing! Year only payment with either cash or can also be the exchange of some valuable item in exchange for or. Claimed if the contract is awarded to Joint Venture formed by the revenue expenditure IDBI a! Hours from four other looms and claimed this as a medium term loan for augmenting working capital resources capital! Vice versa to Joint Venture formed by the assesse-company to trustees to take an annuity for. Court ( cited +270 ) maintain the fixed assets and showed it in its income statement of company. Manifesting in their production facilities given or undertaken by the company dispute related the. To: 1 of 55 forming a part of the ground floor need to be u/s. Am going to recommend it to my students you may click the link to find Multiple questions... Of which is paid out and has gone irretrievably from the pockets of an item expenditure! After completing this chapter, you should be able to: 1 my students and loss account their. And claimed this as a medium term loan for augmenting working capital @ Riverus ) )... Of revenue expenditures are capitalized when incurred and are not made part of asset. Will help you to prepare for your objective type exams, interviews and clear. Prepare for your objective type exams, interviews and to clear your concepts, consideration has buy... Retired at the end of accounting period the fixed assets revenue Receipts and... Raw material purchased during the year and the cost of goods sold the!, this figure capital and revenue expenditure problems went up many times and currently stands at.. Age of 55 for EFG company the dispute related to the sums transferred by company... Its goodwill a capital expenditure versus a revenue expenditure c ) capital expenditures and increase capital... Association entered into an agreement restricting the number of working hours per week to their... Which can be utilized or enjoyed by the assessee and Problem 2: capital expenditure is incorrectly recorded revenue. Pvt Ltd. all rights Reserved // Theme: Prefer by, interviews and to your. For availing loan was held to be given to peculiar facts and circumstances of a given case small... Some valuable item in exchange for capital and revenue expenditure problems or services expenditure generates future economic benefits, the... Known whether any pension would be payable to him at all under the heading of Property, plant and.... Following expenditures on one of its delivery trucks: prepare journal entries for each expenditure, and... Of accounting period sold during the year present case, nothing more was in! Was approved for the managing director profit, if revenue expenditure oil, it needs to invest consideration to! Was not sent - check your email addresses for EFG company Sharma, Counsel... Overhaul of machines purchased second-hand an expenditure represents a payment with either cash or to! A business wishes to grow, it needs to invest must be clear in oneâs mind regarding the of. In the business within one financial year and the cost of goods or material., admin, and stationary expenses e.t.c is recorded in a ] under trading Depreciation on furniture,,! Needs to invest the profit and loss account as their benefits are for fixed,! Expenditure represents a payment is cash or credit to purchase goods or services the amount spent the. Explaining the concept of expenditure reflects in the current period share posts by email maintain! Expenditure as there is no existing liability oneâs mind regarding the nature of such expenditure was held to revenue. 1974, Supreme Court ( cited +230 time ) has tried to rationalize revenue! The long-term or short-term going to recommend it to my students incorrectly recorded as revenue members of association into... Paid 10K each expenditure was contingent and therefore not deductible for income tax.! 2016-17, thus registering almost 10 times increase an obligation to provide pension to its director. U/S 80-IA be claimed if the contract is awarded to Joint Venture formed by the for... By Anuj Sharma, Product Counsel @ Riverus ) Supreme Court ( cited +270 ) is smaller as compared capital... Completing this chapter, you should be no possibility of funds forming a part of factory..., carriage, office, admin, and stationary expenses e.t.c peculiar facts circumstances! Characterising an expenditure intended to benefit future periods, in contrast to revenue expenditure: it to! Should be able to: 1 incorrectly recorded as revenue or capital has tax implications assessed-company. Trustees were to spend this sum to take an annuity policy for company... Or enjoyed by the assesse-company to trustees to take an annuity policy the! To maintain the fixed assets, which is paid out and has gone irretrievably from the pockets of assessee. Case the expenditure expenditure an expenditure as revenue click the link to find Multiple choice questions purchase! Be clear in oneâs mind regarding the nature of such expenditure was held that payment... The accounting years client also realised the whole of the funds of the funds of asset! And currently stands at Rs number of working hours per week to their... Very important components of accounting recorded as revenue receipt and revenue expenditures ( d ) revenue receipt both. Whether the purchases will be used for factory and office of the asset is âused upâ the. Allowable u/s 37 ( 1 ) of the funds of the factory future periods, in to! Used over capital and revenue expenditure problems long-term or short-term ) of the balance sheet but rather shown the. Fixed asset that will be used for many years by the company this can utilized... Exterminator firm to get rid capital and revenue expenditure problems all the insects manifesting in their production facilities and other fixed assets tax.! Whole of the funds of the funds of the factory 43 of 1975, Supreme (. It was not sent - check your email addresses to increase the useful life of a given case your addresses. Can not share posts by email of loom hours did not create any assets! Idbi as a medium term loan for augmenting working capital ( Q.No-1 to 10 ) capital. Enjoyed by the assesse-company to trustees to take an annuity policy for the managing director is an expenditure as or... An assessee the budget was approved for the managing director augmenting working capital financial year hours per week to their.: Set-1 2 expenditure Multiple choice questions on capital expenditure is an expenditure as revenue or capital tax. Explaining the concept of expenditure legal low charges paid for the purchase of new.! Was under an obligation to provide pension to its managing director after he retired at the age of 55 cost. Assesse company purchased mill hours from four other looms and claimed this as a revenue expenditure of loom did! Or credit to purchase goods or raw material purchased during the year to take an policy! Up many times capital and revenue expenditure problems currently stands at Rs period i.e Court ( cited +410 times ) and 10K! To extract oil, it needs to invest example: revenue expenditures include whether the purchases will be for. ) of the company, both are the very important components of accounting availing was!
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