Sales, turnover, gross receipts It will be noted that the provision relating to tax audit applies to every person carrying on business...
Sales, turnover, gross receipts
- It will be noted that the provision relating to tax audit applies to every person carrying on business, if his total sales, turnover or gross receipts in business exceed Rs.60 lakhs (100 lakhs from financial year 2012-13) and to a person carrying on a profession, if his gross receipts from profession exceed Rs.15 lakhs (25 lakhs from financial year 2012-13) in any previous year. However, the term "sales", "turnover" or "gross receipts" are not defined in the Act, and therefore the meaning of the aforesaid terms has to be considered for the applicability of the section.
- In the “Guidance Note on Terms Used in Financial Statements”published by the Institute, the expression “Sales Turnover” (Item 15.01)has been defined as under :-“The aggregate amount for which sales are effected or services rendered by an enterprise. The term `gross turnover’ and `net turnover’ (or `gross sales’ and `net sales’) are sometimes used to distinguish the sales aggregate before and after deduction of returns and trade discounts”.
- The Guide to Company Audit issued by the Institute, while discussing “sales”, states as follows : (Page 53 of 4th Edition, 1980)“Total turnover, that is, the aggregate amount for which sales are effected by the company, giving the amount of sales in respect of each class of goods dealt with by the company and indicating the quantities of such sales for each class separately.
- Note(i) The term `turnover' would mean the total sales after deducting therefrom goods returned, price adjustments, trade discount and cancellation of bills for the period of audit, if any. Adjustments which do not relate to turnover should not be made e.g. writing off bad debts,royalty etc. Where excise duty is included in turnover, the corresponding amount should be distinctly shown as a debit item in the profit and loss account.”
Applying the above generally accepted accounting principles,
a few typical cases to arrive at Turnover/Sales amount may be considered:
- Discount allowed in the sales invoice will reduce the sale price and, therefore, the same can be deducted from the turnover.
- cash discount otherwise than that allowed in a cash memo/sales invoice is in the nature of a financing charge and is not related to turnover. The same should not be deducted from the figure of turnover.
- Turnover discount is normally allowed to a customer if the sales made to him exceed a particular quantity. This being dependent on the turnover, as per trade practice, it is in the nature of trade discount and should be deducted from the figure of turnover even if the same is allowed at periodical intervals by separate credit notes.
- Special rebate allowed to a customer can be deducted from the sales if it is in the nature of trade discount. If it is in the nature of commission on sales, the same cannot be deducted from the figure of turnover.
- Price of goods returned should be deducted from the figure of turnover even if the returns are from the sales made in the earlier year/s.
- Sale proceeds of fixed assets would not form part of turnover since these are not held for resale.
- Sale proceeds of property held as investment property will not form part of turnover.
- Sale proceeds of any shares, securities, debentures, etc., held as investment will not form part of turnover. However if the shares, securities, debentures etc., are held as stock-in-trade, the sale proceeds thereof will form part of turnover.
- A question may also arise as to whether the sales by a commission agent or by a person on consignment basis forms part of the turnover of the commission agent and/or consignee as the case may be. In such cases, it will be necessary to find out, whether the property in the goods or all significant risks, reward of ownership of goods belongs to the commission agent or the consignee immediately before the transfer by him to third person. If the property in the goods or all significant risks and rewards of ownership of goods continue to belong to the principal, the relevant sale price shall not form part of the sales/turnover of the commission agent and/or the consignee as the case may be. If, however, the property in the goods, significant risks and reward of ownership belongs to the commission agent and/or the consignee, as the case may be, the sale price received/receivable by him shall form part of his sales/turnover.
- In this context, it would be useful to refer to the CBDT Circular No.452 dated 17th March, 1986, where the Board has clarified the question of applicability of section 44AB in the cases of Commission Agents, Arhatias, etc.
- Share brokers, on purchasing securities on behalf of their customers, do not get them transferred in their names but deliver them to the customers who get them transferred in their names. The same is true in case of sales also. The share broker holds the delivery merely on behalf of his customer. The property in goods does not get transferred to the share brokers. Only brokerage which is being accounted for in the books of account of share brokers should be taken into account for considering the limits for the purpose of section 44AB. However, in case of transactions entered into by share broker on his personal account, the sale value should also be taken into account for considering the limit for the purpose of section 44AB. The case of a sub-broker is not different from that of a share broker.
The term "gross receipts" is also not defined in the Act. It will include all receipts whether in cash or in kind arising from carrying on of the business which will normally be assessable as business income under the Act.
Broadly speaking, the following items of income and/or receipts would be covered by the term "gross receipts in business":
- Profits on sale of a licence granted under the Imports (Control)Order, 1955 made under the Imports and Exports (Control) Act,1947;
- Cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India;
- Any duty of customs or excise re-paid or repayable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1995;
- The aggregate of gross income by way of interest received by the money lender;
- Commission, brokerage, service and other incidental charges received in the business of chit funds;
- Reimbursement of expenses incurred (e.g. packing, forwarding, freight, insurance, travelling etc.) and if the same is credited to a separate account in the books, only the net surplus on this account should be added to the turnover for the purposes of Section 44AB;
- The net exchange rate difference on export sales during the year on the basis of the guiding principle explained in (vi) above will have to be added.
- Hire charges of cold storage;
- Liquidated damages;
- Insurance claims - except for fixed assets;
- Sale proceeds of scrap, wastage etc. unless treated as part of sale or turnover, whether or not credited to miscellaneous income account;
- Gross receipts including lease rent in the business of operating lease;
- Lease rent or interest on financing in the business of finance lease ; and
- Hire charges and instalments received in the course of hire purchase.
The following items would not form part of "gross receipts in business"for purposes of section 44AB.
- Sale proceeds of fixed assets;
- Sale proceeds of assets held as investments;
- Rental income unless the same is assessable as business income;
- Dividends on shares except in the case of an assessee dealing in shares;
- Income by way of interest unless assessable as business income;
- Reimbursement of customs duty and other charges collected by a clearing agent;
- In the case of a recruiting agent, the advertisement charges received by him by way of reimbursement of expenses incurred by him;
- In the case of a travelling agent, the amount received from the clients for payment to the airlines, railways etc. where such amounts are received by way of reimbursement of expenses incurred on behalf of the client. If, however, the travel agent is conducting a package tour and charges a consolidated sum for transportation, boarding and lodging and other facilities, then the amount received from the members of group tour should form part of gross receipts, and
- In the case of an advertising agent, the amount of advertising charges recovered by him from his clients provided these are by way of reimbursement. But if the advertising agent books the advertisement space in bulk and recovers the charges from different clients, the amount received by him from the clients will not be the same as the charges paid by him and in such a case the amount recovered by him will form part of his gross receipts.
- Thus the principle to be applied is that if the assessee is merely reimbursed for certain expenses incurred, the same will not form part of his gross receipts. But in the case of charges recovered, which are not by way of reimbursement of the actual expenses incurred, they will form part of his gross receipts.
Other Important points
- Out Of Pocket Expenses included or Not: In the case of a professional, the expression "gross receipts" in profession would include all receipts arising from carrying on of the profession. A question may, however, arise as to whether the out of pocket expenses received by him should form part of his gross receipts for purposes of this section. Normally, in the case of solicitors, advocates or chartered accountants, such out of pocket expenses received in advance are credited in a separate client's account and utilised for making payments for stamp duties, registration fees, counsel's fees, travelling expenses etc. on behalf of the clients. These amounts, if collected separately either in advance or otherwise, should not form part of the "gross receipts".
- If, however, such out of pocket expenses are not specifically collected but are included/collected by way of a consolidated fee, the whole of the amount so collected shall form part of gross receipts and no adjustment should be made in respect of actual expenses paid by the professional person for and/or on behalf of his clients out of the gross fees so collected. However, the amount received by way of advance for which services are yet to be rendered will not form part of the receipts, as such advances are the liabilities of the assessee and cannot be treated as his receipts till the services are rendered.
- Carrying on business and engaged in business at the same time: A question may arise in the case of an assessee carrying on business and at the same time engaged in a profession as to what are the limits applicable to him under section 44AB for getting the accounts audited. In such a case if his professional receipts are, say, rupees17 lakhs but his total sales, turnover or gross receipts in business are, say, rupees 32 lakhs, it will be necessary for him to get his accounts of the profession and also the accounts of the business audited because the gross receipts from the profession exceed the limit of rupees 15 lakhs (however limit has increased to 25 lakhs from financial year 2012-13) . If however, the professional receipts are, say, rupees 14 lakhs and total sales turnover or gross receipts from business are, say, rupees 47 lakhs it will not be necessary for him to get his accounts audited under the above section, because his gross receipts from the profession as well as total sales, turnover or gross receipts from the business are below the prescribed limits.
- Carrying on more than on business activities on different or same trade name: It may, however, be noted that in cases where the assessee carries on more than one business activity, the results of all business activities should be clubbed together. In other words, the aggregate sales, turnover and/or gross receipts of all businesses carried on by an assessee would be taken into consideration in determining whether the limit of Rs.60 lakhs(100 lakhs from financial year 2012-13) as laid down in this section has been exceeded or not. However, where the business is covered by section 44B or 44BB or 44BBA or 44BBB, turnover of such business shall be excluded. Similarly when the business is covered by sections 44AD, 44AE and the assessee opts to be assessed under the respective sections on presumptive basis, the turnover thereof shall be excluded. So far as a partnership firm is concerned, each firm is an independent assessee for purposes of Income-tax Act. Therefore, the figures of sales of each firm will have to be considered separately for purposes of determining whether or not the accounts of such firm are required to be audited for purposes of section 44AB.
- Limit is to be assessed each year: It must also be understood that the issue whether the turnover exceeds Rs.60 lakhs (100 lakhs from financial year 2012-13) in the case of business or the gross receipts exceed Rs.15 lakhs (25 lakhs from financial year 2012-13) in the case of profession is to be determined in each year independent of the results obtained in the preceding year or years.Further, this section applies only if the turnover exceeds the prescribed limit according to the accounts maintained by the assessee. If the Assessing Officer wants the assessee to get his accounts audited in cases where the figures of turnover as appearing in the books of account of the assessee do not exceed the prescribed limits, he has no option but to pass an order under section 142(2A) directing the assessee to get his accounts audited from a particular chartered accountant as may be nominated by the Commissioner of Income-tax or the Chief Commissioner of Income-tax.