License Agreement: Receipt of Fees
We are in receipt of fees , when we assign or license the use of something which belongs to us. Whether, the receipt of these fees will be termed as capital receipts or revenue receipts? How it will be taxed under the provisions of Income Tax Act,1961?
When the receipt is with respect to a fixed asset, it is a capital receipt and when it is with respect to a circulating asset it is a revenue receipt. These assets are differentiated based on how one earns profit from the same, if you earn profit by keeping the asset in your possession and using it for your business it’s a fixed asset, and if you earn profits by regularly selling those assets then it’s a revenue receipt. There is actually nothing in the Income-Tax Act laying down any legal criterion for distinguishing between capital and revenue receipts so it depends on the facts of individual cases apart from a list of assets laid down not to be considered as capital assets. The asset in question has not been mentioned but if the same has been licensed for someone else to use, this suggests that the asset is capital in nature. The general rule under the Income tax Act is that, all revenue receipt are taxable unless a receipt is specifically exempted and all capital receipts are exempt from taxation unless there is a provision to tax it. Gifts and loans etc are in the nature of capital receipts not attracting tax. But capital receipts which come under capital gains as mentioned in Sec. 45 of Income Tax Act, 1961 will be taxed. Licensing of a capital asset should generally be included as capital gains under Sec 45 of the Act, however it cannot be said so definitely without knowing the exact nature of the receipt and the asset associated with it.