Question

(Payments received as compensation for physical injuries)

Choose one of the exclusions from gross income that we discussed or that is in the book. (Payments received as compensation for physical injuries)

Explain why you think Congress excluded this item from gross income, thus exempting it from taxation.

Are there any gross income items that you believe should not be included in taxable income? Explain your answer.

Answer 1

A. Any compensation, claim or subsidy received shall be an item either of Capital nature or of Revenue nature.

1. Capital nature item

• It shall be deducted or reduced from the Cost of Assets or Written Down Value of Assets. Depreciation as per taxation law shall be provided on net value so derived after making such deduction or reduction.

2. Revenue nature item

• It shall be included in taxable income only when the actual expenses for which compensation or claim or subsidy is received is considered as expenditure and charged to revenue while calculating taxable income.

In this case, the expenses incurred for physical injuries may not be considered while calculating taxable income and therefore Congress would have excluded compensation received for physical injuries from taxable income.

B. Gross income items that should not be included in taxable income

1. Income which is specifically exempt

2. Capital receipt which is not taxable

3. Compensation, claim or subsidy received which is an of capital nature and reduced from Cost of Asset / Written Down Value of Assets

4. Foreign income which may not be taxable depending upon your residential status

5. Any income received on behalf of any other person and it is included in taxable income of such other person