Amit Bajaj Advocate
A person is required to get his accounts audited u/s 44AB if turnover of business exceeds Rs 100 Lakhs , or In case of Profession Gross Receipts exceed Rs 50 Lakhs. In case of business what should be the meaning of turnover/sales? Should it be Gross sales or net sales? Should it include GST? The meaning of turnover/sales for the purpose of tax audit is discussed as follows:
In the “Guidance Note on Terms used in Financial Statements” published by ICAI, “the expression “Sales Turnover” has been defined as: “The aggregate amount for which sales are effected or services rendered by an enterprises. The term ‘gross turnover/sales’ and ‘net turnover/sales’ are sometimes used to distinguish the sales aggregate before and after deduction of returns and trade discounts”
In the statement issued by ICAI on the CARO the word ‘turnover’ has been defined as under-
“The term ‘turnover’ for the purposes of this clause may be interpreted to mean the aggregate amount for which sales are effected or services rendered by an enterprises”
Whether GST to be included in the sales/turnover: In our opinion same should be included even if the Assessee has not included the same in Profit and Loss account and shown the same as current Liability.
Section 145A of the Income Tax Act,1961 states that purchase , sale and inventory shall be valued by taking into account the amount of any tax, duty, cess or fee . An extract of section 145A is as follows:
“For the purpose of determining the income chargeable under the head “Profits and gains of business or profession”,—
(i) the valuation of inventory shall be made at lower of actual cost or net realisable value computed in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145;
(ii) the valuation of purchase and sale of goods or services and of inventory shall be adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods or services to the place of its location and condition as on the date of valuation;
(iii) the inventory being securities not listed on a recognised stock exchange, or listed but not quoted on a recognised stock exchange with regularity from time to time, shall be valued at actual cost initially recognised in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145;
(iv) the inventory being securities other than those referred to in clause (iii), shall be valued at lower of actual cost or net realisable value in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145:
Provided that the inventory being securities held by a scheduled bank or public financial institution shall be valued in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145 after taking into account the extant guidelines issued by the Reserve Bank of India in this regard:
Provided further that the comparison of actual cost and net realisable value of securities shall be made category-wise.
Explanation 1.—For the purposes of this section, any tax, duty, cess or fee (by whatever name called) under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment.
Explanation 2.—For the purposes of this section,—
(a) “public financial institution” shall have the meaning assigned to it in clause (72) of section 2 of the Companies Act, 2013 (18 of 2013);
(b) “recognised stock exchange” shall have the meaning assigned to it in clause (ii) of Explanation 1 to clause (5) of section 43;
(c) “scheduled bank” shall have the meaning assigned to it in clause (ii) of the Explanation to clause (viia) of sub-section (1) of section 36.”
Therefore , in my opinion , maintaining accounts of GST separately is not correct in terms of section 145A of the I T Act. In that sense , for determining the meaning of the word “sales turnover” GST should also be considered for purpose determining the criteria for getting accounts audited u/s 44AB of the I T Act.
Sales of Scrap: Sales of scrap shown separately under the heading “Miscellaneous Income” will have to be included in the turnover.
Luxury Tax: Similarly a luxury tax collected by a hotelier also a trading receipt in his hand- Pandyan Hotels Ltd. v. CIT  266 ITR 172 (Mad.)
Trade Discount: Trade Discounts can be deducted from sales. Trade Discounts are generally allowed in the sales invoice, therefore the discount allowed in the sales invoice will reduce the sale price and therefore can be deducted from the turnover.
Cash Discount: Cash Discount otherwise than that allowed in a cash memo/sales invoice is in the nature of a financing charge and a revenue receipt and is not related to turnover. Hence the same should not be deducted from turnover.
Commission on sales: Commission on sales included in the sales payable to the consignee/third person should not be deducted from the figure of turnover for the purpose of section 44AB.
Sales Returns: Price of goods returned should be deducted from the figure of turnover even if the returns are from the sales made in earlier years.
Sales proceeds of fixed assets: Sales proceeds of fixed assets would not form part of turnover for the purpose of section 44AB since the fixed assets are not held for resale.
Sales proceed of any investment: Sales proceed of any property held as investment in property will not form part of turnover for the purpose of tax audit. Similarly sale proceeds of any shares, securities and debentures etc. which are held as investment will not form part of turnover. However if shares, securities, debentures, etc are held as stock in trade, the sale proceeds there from will form part of turnover for the purpose of tax audit.
The Views expressed are only Personal Views based upon my studies and interpretation of law.
(Author – Amit Bajaj Advocate, Bajaj & Bajaj Advocates, 128, Sangam complex, Milap chowk, Jalandhar City (Punjab), Email: firstname.lastname@example.org, M +919815243335)
(Republished With Amendments)