CA Kamal Garg
Section 2(91) of the Companies Act, 2013 defines “turnover” to mean the aggregate value of the realisation of amount made from the sale, supply or distribution of goods or on account of services rendered, or both, by the company during a financial year. This definition has used the words “aggregate value of the realisation of amount made” instead of “aggregate value of the realisation of amount made or to be made” and thus has placed a question as to whether such a definition is a trajectory towards cash basis of accounting. The present article discusses the issue in detail in the succeeding paragraphs.
1. Meaning of Turnover – pre Companies Act, 2013:
Before the enactment of the Companies Act, 2013, the expression turnover was used to be defined in Old Schedule VI, and also used to be discussed in Guide to Company Audit issued by the Institute of Chartered Accountants of India (ICAI) in the year 1980, Guidance Note on Terms Used in Financial Statements, and Statement on the Companies (Auditors’ Report) Order, 2003. Let’s peruse the definition contained in these frameworks one by one.
Part II of Old Schedule VI to the 1956 Act, defined the term “turnover” as the aggregate amount for which sales are effected by the company. The Statement on the Companies (Auditors’ Report) Order, 2003 issued by the Institute in April 2004, while discussing the term ‘turnover’ in paragraph 23 states `as follows:
The term, “turnover”, has not been defined by the Order. Part II of Schedule VI to the Act, however, defines the term “turnover” as the aggregate amount for which sales are effected by the company. It may be noted that the “sales effected” would include sale of goods as well as services rendered by the company. In an agency relationship, turnover is the amount of commission earned by the agent and not the aggregate amount for which sales are effected or services are rendered. The term “turnover” is a commercial term and it should be construed in accordance with the method of accounting regularly employed by the company.
Further, the Guide to Company Audit issued by the Institute in the year 1980, while discussing “sales”, stated as follows:
“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.
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.”
In the “Guidance Note on Terms Used in Financial Statements” published by the Institute, the expression “Sales Turnover” 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”.
A careful reading of these above mentioned pronouncements will bring to limelight the very crucial in between expression “……..are effected………by the company/ enterprise”. This clearly shows that the definition of turnover is no where connected with only the aggregate value of realisation of amount made by the company.
2. Turnover under other pertinent laws:
The Central Sales Tax Act, 1956 defines “Turnover” as follows:
“turnover” used in relation to any dealer liable to tax under this Act means the aggregate of the sale prices received and receivable by him in respect of sales of any goods in the course of inter-State trade or commerce made during any prescribed period and determined in accordance with the provisions of the Act and rules made there under.
Further, section 8A(1) of the said Act provides that in determining turnover, deduction of sales tax should be made from the aggregate of sales price.
Section 2(y) of the Competition Act, 2002 states that “turnover” includes value of sale of goods or services.
The Guidance Note on Tax Audit (2014 Edition) issued by the ICAI states that considering that the words “Sales”, “Turnover” and “Gross receipts” are commercial terms, they should be construed in accordance with the method of accounting regularly employed by the assessee (para 5.10).
3. Turnover for the purpose of the Companies Act, 2013:
From the discussions made above, its clear that the expression “turnover” would be dependent upon the following integral factors:
(i). Sales effected or services rendered during the financial year; and
(ii). Method of accounting regularly employed by the company/ enterprise.
3.1. Accounting Standards to be followed under Companies Act, 2013: Section 129(1) of the Companies Act, 2013, states as follows:
The financial statements shall give a true and fair view of the state of affairs of the company or companies, comply with the accounting standards notified under section 133 and shall be in the form or forms as may be provided for different class or classes of companies in Schedule III:
Provided that the items contained in such financial statements shall be in accordance with the accounting standards.
Section 133 of the Companies Act, 2013 provides that the Central Government may prescribe the standards of accounting or any addendum thereto, as recommended by the Institute of Chartered Accountants of India, constituted under section 3 of the Chartered Accountants Act, 1949, in consultation with and after examination of the recommendations made by the National Financial Reporting Authority. Rule 7 of the Companies (Accounts) Rules, 2014, states that:
(1) The standards of accounting as specified under the Companies Act, 1956 shall be deemed to be the accounting standards until accounting standards are specified by the Central Government under section 133.
(2) Till the National Financial Reporting Authority is constituted under section 132 of the Act, the Central Government may prescribe the standards of accounting or any addendum thereto, as recommended by the Institute of Chartered Accountants of India in consultation with and after examination of the recommendations made by the National Advisory Committee on Accounting Standards constituted under section 210A of the Companies Act, 1956.
3.2 Accounting Standard on Revenue notified under Companies (Accounting Standards) Rules, 2006: With respect to above (Section 210A of the Companies Act, 1956), the Central Government has notified AS 1 to AS 29 under Companies (Accounting Standards) Rules, 2006, w.e.f. 7th December, 2006. The following are the relevant extracts from AS 9 on Revenue Recognition in respect of the expression “turnover” vis-à-vis method of accounting regularly employed by the companies.
Accounting Standard – 9 issued by ICAI and notified by Central Government (supra) states that revenue is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods, from the rendering of services, and from the use by others of enterprise resources yielding interest, royalties and dividends. Revenue is measured by the charges made to customers or clients for goods supplied and services rendered to them and by the charges and rewards arising from the use of resources by them. In an agency relationship, the revenue is the amount of commission and not the gross inflow of cash, receivables or other consideration.
The amount of revenue arising on a transaction is usually determined by agreement between the parties involved in the transaction. When uncertainties exist regarding the determination of the amount, or its associated costs, these uncertainties may influence the timing of revenue recognition.
A key criterion for determining when to recognise revenue from a transaction involving the sale of goods is that the seller has transferred the property in the goods to the buyer for a consideration. The transfer of property in goods, in most cases, results in or coincides with the transfer of significant risks and rewards of ownership to the buyer (para 6.1 of AS 9).
Revenue from service transactions is usually recognised as the services performed, either by the proportionate completion method or by the completed service contract method (para 7 of AS 9)
As per Para 10 of this Statement, revenue from sales or service transactions should be recognised when the requirements as to performance are satisfied, provided that at the time of performance it is not unreasonable to expect ultimate collection. If at the time of raising of any claim it is unreasonable to expect ultimate collection, revenue recognition should be postponed.
3.3. Books of accounts, etc. to be kept on accrual basis by the Companies: Section 128(1) of the Companies Act, 2013 provides that every company shall prepare and keep at its registered office books of account and other relevant books and papers and financial statement for every financial year which give a true and fair view of the state of the affairs of the company, including that of its branch office or offices, if any, and explain the transactions effected both at the registered office and its branches and such books shall be kept on accrual basis and according to the double entry system of accounting. Further, as per AS 1 of the Companies (Accounting Standards) Rules, 2006, “accrual” is one of the fundamental accounting assumption underlying the preparation and presentation of financial statements. AS 1 state that Revenues and cost are accrued, i.e., they are recognised when they are earned or incurred. Actual receipt or payment is not necessary. In other words, the accounts are maintained on ‘mercantile system’ only.
In J. K. Industries Limited & Others vs. Union of India  80 SCL 283 (SC), it was also laid down by the Apex Court that the object behind insistence on compliance with the AS and true and fair accrual is the presentation of accounts in a manner which would reflect the true income/profit. One has, therefore, to look at the entire scheme of the Act. The provisions of the Act together with the Rules framed by the Central Government constitute a complete scheme. Without the Rules, the Act cannot be implemented.
Though the definition of “turnover” as provided by Section 2(91) of the Companies Act, 2013 gives a firsthand impression that cash basis of accounting is being oriented but a careful and harmonious reading of the other provisions existing in the Act as well as the pronouncements made by ICAI, made it amply clear that intention of legislature is not to orbit such kind of basis. MCA clarification in this regard though would add the required coherence with the scheme of the newly enacted law.
(The above article is contributed by CA Kamal Garg having professional and academic interests in IFRS, Accounts, Auditing and Corporate Laws arenas. He can be approached at email@example.com)