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CMA Intermediate · Direct and Indirect Taxation · Basic Concepts, Basis of Charge and Capital and Revenue Receipts

Sundaram Textiles Ltd sold a factory building it had used for its business for many years and made a surplus over its book value. Under the usual tax approach to capital and revenue receipts, how is this surplus generally classified?

The surplus is a capital receipt because the factory building is a fixed asset used to carry on the business, not stock-in-trade. Sale of such an asset is a realisation of capital, so the surplus falls under capital gains and not business income.

  1. ARevenue receipt, because it arose in the course of a business
  2. BCapital receipt, because it arises from the transfer of a fixed capital assetCorrect
  3. CRevenue receipt, because the amount received is large
  4. DCapital receipt, but only if the sale price is below the original cost

Explanation

A factory building is a fixed asset, part of the profit-making structure and not stock-in-trade. Its sale is a capital receipt and the surplus is dealt with under capital gains. Classifying it as revenue because it arose during business ignores the nature of the asset. Size of the amount is not the test.

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