♦ Section 145A of Income Tax Act, 1961
‘145A. Method of accounting in certain cases.—Notwithstanding anything to the contrary contained in section 145, the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head “Profits and gains of business or profession” shall be—
(a) in accordance with the method of accounting regularly employed by the assessee; and
(b) further 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 to the place of its location and condition as on the date of valuation.
Explanation.—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’.
On reading the above:-
1. Scope of Sec. 145A is limited to determination of income chargeable to the head Profit and gains of business and profession (“PGBP”). Hence, it can be safely said that implication stated in Sec 145A is limited to the head “PGBP”, but does not extent to the entire act.
2. Sec 145A is for determination of only income chargeable to tax, but not for determination of tax rate, thresholds etc. However, in the absence of any other definition of “turnover/ gross receipts” provided in the Act, it leads to different perspectives and interpretations. Further, it can be said the determination of income chargeable includes the aspects of determination of tax rate, threshold etc.
3. It should be kept in mind that during computation of income under the head “PGBP” the expense of indirect tax (to the extent paid before filing of return) is allowed to be reduced from the turnover.
Opinion: The turnover/ gross receipts should include indirect taxes only in the limited scenario of computation of income, but not for determination of tax rates, threshold limits etc.
♦ Case law and Guidance note
Case laws stating that turnover/gross receipts should include indirect taxes:-
1. Hon,ble supreme court case of Chowranghee Sales Bureau Pvt. Ltd.
2. Jonnalla Narashimharao & Co. V. CIT (1993)[SC 200ITR588]
3. CIT V. T. Naggi Reddy (1993) [SC 1200 ITR 253]
Guidance stating that turnover/ gross receipts should not include indirect taxes:-
1. Guidance note by ICAI (click here to open)
On the analysis of the aforementioned, the caselaws supporting that turnover/ gross receipts should include indirect taxes can be differentiated from guidelines not including indirect taxes on the basis that inclusion was limited scenario of computation of income, but not for determination of tax rates, threshold limites etc.
♦ Key takeaways
Under the given facts and situation, it would be appropriate to ignore the amount of GST while calculating the gross turnover or gross receipts because of following reasons:
> Section 145A begins with “For the purpose of determining the income chargeable under the head “Profits and gains of business or profession” which limits the scope of the section.
> If GST recovered from customer is credited to Current Liability Accounts and payments to the authority are also debited to the said separate account, making it not actually received as turnover.
> Inclusion of GST in the turnover would inflate the tax effect on the assessee, i.e., presumptive income shall also be computed on the component of GST which is never treated as income of the assessee.