All India Bar Examination (AIBE) 3-III Previous Year Question Papers with Answers

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79.

A is a brokerage firm that helps businesses buy and sell real estate. They receive Rs. 25,00,000/- as commissions from their clients. They also receive Rs. 75,00,000/- from sale of their office. Which of the following statements is the most accurate application of the principle below ?


Principle :

Receipts that arise out of the normal course of an assessee's business are called 'revenue receipts' and the receipts that are not from the assessee's regular course of business are 'capital receipts'.

A: The monies from the commission are capital receipts and the money from the sale of A's office is a revenue receipt.
B: The monies from the commissions are revenue receipts, but the money from the sale of office is a capital receipts.
C: The monies from the commission as well as the money from the sale of A's office are revenue receipts.
D: The monies from the commissions as well as the money from the sale of A's office are capital receipts.
E: The monies from the commissions are revenue receipts, but the money from the sale of A's office is neither a capital receipt nor a revenue receipt.

The answer is: B

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Explanation

The correct option is B: The monies from the commissions are revenue receipts, but the money from the sale of office is a capital receipt.

Explanation:

According to the principle, receipts that arise out of the normal course of an assessee's business are called 'revenue receipts' and the receipts that are not from the assessee's regular course of business are 'capital receipts'. Revenue receipts are recurring and affect the profit and loss of the business, while capital receipts are non-recurring and do not affect the profit and loss of the business.

In this case, A is a brokerage firm that helps businesses buy and sell real estate. They receive Rs. 25,00,000/- as commissions from their clients. This is a revenue receipt, as it arises from the normal course of A's business and is a regular source of income for them. It also affects their profit and loss for the financial year.

They also receive Rs. 75,00,000/- from sale of their office. This is a capital receipt, as it does not arise from the normal course of A's business and is not a regular source of income for them. It also does not affect their profit and loss for the financial year, as it is a one-time transaction involving a fixed asset.

Therefore, the monies from the commissions are revenue receipts, but the money from the sale of office is a capital receipt.

The other options are incorrect because:

Option A is incorrect because it reverses the correct classification of the receipts. The monies from the commission are revenue receipts, not capital receipts, and the money from the sale of office is a capital receipt, not a revenue receipt.

Option C is incorrect because it classifies both receipts as revenue receipts, which is wrong. The money from the sale of office is not a revenue receipt, but a capital receipt.

Option D is incorrect because it classifies both receipts as capital receipts, which is wrong. The monies from the commission are not capital receipts, but revenue receipts.

Option E is incorrect because it classifies the money from the sale of office as neither a capital receipt nor a revenue receipt, which is wrong. The money from the sale of office is a capital receipt.