Summary: The Income Tax Act, 1961, defines “business” as encompassing any trade, commerce, or manufacture, while “profession” pertains to occupations requiring intellectual or manual skill. The distinction between business and profession can be challenging, as demonstrated in cases like CIT Vs. KK Shah, where activities such as operating a nursing home and a drug store were divided between professional and business incomes. Section 2(36) includes professions like legal, medical, engineering, and accountancy, among others. For tax audit purposes under Section 44AB, the definitions of “sales,” “turnover,” and “gross receipts” are crucial. The Act does not define these terms explicitly, but guidance from other statutes and accounting practices provides clarity. Sales and turnover include the total revenue from goods and services, excluding taxes but including discounts and returns. Speculative transactions, derivatives, and delivery-based transactions each have specific rules for determining turnover, which affects tax audit requirements. For example, in speculative transactions, the aggregate of positive and negative differences constitutes turnover, while in delivery-based transactions, the total sale value is considered. Understanding these distinctions and definitions is essential for accurate tax reporting and compliance.
What Amounts Business and Profession: The question as to what is business and what constitute profession is relevant in this regard. Both the terms have been used in a widely differing manner in different circumstances. Therefore, a distinction between the two sometimes be difficult.
Section 2(13) of the Income Tax Act, 1961, defines a business as including “any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.” The term profession on the other hand, is generally understood as referring to an occupation which involve skill controlled by the intellectual skill to of the operator as distinguished from an operation which is substantially the production or sale or arrangement for the production or sale of commodities [CIT Vs. Manmohan Das (1966) 59 ITR 699 (SC)]. In the case of CIT Vs. KK Shah and others (135 ITR 1982) it was laid down that if a doctor husband and his doctor wife were running a nursing home for the person of treating their own patients, such income should be treated as their professional income. However they were also running on business activity such as running a drug store for selling drugs to the patients or to others, admitting patients and charging fee like room fees it may be considered as business activity and that part of income would be business income. Share brokerage, dealing in shares or securities, running nursing home, clearing and shipping agencies, travel agencies, courier business, advertising agency and insurance agency have been held to be business (Unless otherwise provided for any specific purpose).
A question, which may arise, related to an assessee who carries on business as well as a profession at the same time. For determining whether he is covered by section 44AB or not, the two limits should be applied independently.
The word ‘business’ is one of wide import and it means activity carried on continuously and systematically by a person by the application of his labour or skill with a view to earning an income. The expression “business” does not necessarily mean trade or manufacture only – Barendra Prasad Ray v ITO [1981] 129 ITR 295 (SC).
Section 2(36) of the Act defines profession to include vocation. Profession is a word of wide import and includes “vocation” which is only a way of living. – Additional CIT v. Ram Kripal Tripathi [1980] 125 ITR 408 (All). 4.3 Whether a particular activity can be classified as ‘business’ or ‘profession’ will depend on the facts and circumstances of each case.
The expression “profession” involves the idea of an occupation requiring purely intellectual skill or manual skill controlled by the intellectual skill of the operator, as distinguished from an operation which is substantially the production or sale or arrangement for the production or sale of commodities. – CIT v. Ram Kripal Tripathi [1980] 125 ITR 408 (All).
The following have been listed out as professions in section 44AA of the Act:
(i) legal,
(ii) medical,
(iii) engineering or
(iv) architectural profession or
(v) the profession of accountancy or
(vi) technical consultancy or
(vii) interior decoration.
Further under Rule 6F and other professions notified thereunder (Notifications No. 1620 SO-18(E) dated 12.1.77, No. 9102 S.O.2675 dated 25.09.1992 and No.116 SO 385(E), dated 4.5.2001), the following can also be considered as a profession:
(i) Authorised Representative, Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023) 11
(ii) Company Secretary,
(iii) Film Artists/Actors, Cameraman, Director including an assistant director; a music director, including an assistant music director, an art director, including an assistant art director; a dance director, including an assistant dance director; Singer, Story-writer, a screen-play writer, a dialogue writer; editor, lyricist and dress designer,
(iv) Information Technology. (Attention is invited to Notification No. 890(E)/2000 dated 26-9-2000) The following activities have been held to be business:
(i) Advertising agent
(ii) Clearing, forwarding and shipping agents – CIT v. Jeevanlal Lalloobhai & Co. [1994] 206 ITR 548 (Bom).
(iii) Couriers
(iv) Insurance agent
(v) Nursing home
(vi) Stock and share broking and dealing in shares and securities – CIT v. Lallubhai Nagardas & Sons [1993] 204 ITR 93 (Bom)
(vii) Travel agent.
Sales, turnover, gross receipts: The Income Tax Act does not define the term ‘sales’ and turnover. The guidance note issued by the Institute of Chartered Accountants of India (2023) on the subject suggest that:
However, the terms “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. 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 this 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. The Central Goods and Services Act, defines ‘Turnover’ as under: Section 2(112) ‘turnover in State’ or ‘turnover in Union territory’ means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis) and exempt supplies made within a State or Union territory by a taxable person, exports of goods or services or both and Inter State supplies of goods or services or both made from the State or Union territory by the said taxable person but excludes central tax, State tax, Union territory tax, integrated tax and cess. The term “Turnover” has been defined under Section 2(91) of the Companies Act, 2013 as follows: “2(91) turnover means gross amount of revenue recognized in the profit and loss account from the sale, supply, or distribution of goods or on account of services rendered, or both, by a company during a financial year;” In the “Glossary of 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”. The term “turnover” is a commercial term and it should be construed in accordance with the method of accounting regularly employed by the company. 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 enterprise. If GST or any other tax is included in the sale price, no adjustment in respect thereof should be made for considering the quantum of turnover. Trade discounts can be deducted from sales but not the commission allowed to third parties. If, however, GST or any other indirect tax recovered are credited separately to GST or other tax account (being separate accounts) and payments to the authority are debited in the same account, they would not be included in the turnover. However, sales of scrap shown separately under the heading ‘miscellaneous income’ will have to be included in turnover.
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. Section 145(1) provides that income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” should be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. The method of accounting followed by the assessee is also relevant for the determination of sales, turnover or gross receipts in the light of the above discussion. Applying the above generally accepted accounting principles, a few typical cases may be considered:
(i) Discount allowed in the sales invoice will reduce the sale price and, therefore, the same can be deducted from the turnover.
(ii) Cash discount other 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.
(iii) 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.
(iv) 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.
(v) 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.
(vi) Sale proceeds of fixed assets would not form part of turnover since these are not held for resale.
(vii) Sale proceeds of property held as investment property will not form part of turnover.
(viii) 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.
CIRCULAR NO. 452, DATED 17.3.1986:
Subject: Section 44AB of the Income-tax Act, 1961- Clarification regarding applicability in the cases of Commission Agents, arahtias etc.
1. Section 44AB of the Income-tax Act, 1961, as inserted by the Finance Act, 1984, casts an obligation on every person carrying on business to get his accounts audited, if his total sales, turnover or gross receipts, as the case may be, exceed Rs.40 lakhs (substituted by Rs. 1 crore by Finance Act, 2012 w.e.f. A.Y. 2013-14) in any previous year relevant to the assessment year commencing on 1.4.1985 or any subsequent assessment year.
2. The Board have received representations from various persons, trade associations, etc., to clarify whether in cases where an agent effects sales/turnover on behalf of his principal, such sales/turnover have to be treated as the sales/turnover of the agent for the purpose of Section 44AB of the Income-tax Act, 1961.
3. The matter was examined in consultation with the Ministry of Law. There are various trade practices prevalent in the country in regard to agency business and no uniform pattern is followed by the commission agents, consignment agents, brokers, kachha arhatias and pacca arhatias dealing in different commodities in different parts of the country. The primary necessity in each instance is to ascertain with precision what are the express terms of the particular contract under consideration. Each transaction, therefore, requires to be examined with reference to its terms and conditions and no hard and fast rule can be laid down as to whether an agent is acting only as an agent or also as a principal.
4. Board are advised that so far as kachha arhatias are concerned, the turnover does not include the sales effected on behalf of the principals and only the gross commission has to be considered for the purpose of Section 44AB. But the position is different with regard to pacca Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023) 306 arhatia. A pacca arhatia is not, in the proper sense of the word, an agent or even del credre agent. The relation between him and his constituent is substantially that between the two principals.
On the basis of various Court pronouncements, following principles of distinction can be laid down between a kachha arhatia and a pacca arhatia:
(1) A kachha arhatia acts only as an agent of his constituent and never acts as a principal. A pacca arhatia, on the other hand, is entitled to substitute his own goods towards the contract made for the constituent and buy the constituent’s goods on his personal account and thus he acts as a principal as regards his constituent.
(2) A kachha arhatia brings a privity of contract between his constituent and the third party so that each becomes liable to the other. The pacca arhatia, on the other hand, makes himself liable upon the contract not only to the third party but also to his constituent.
(3) Though the kachha arhatia does not communicate the name of his constituent to the third party, he does communicate the name of the third party to the constituent. In other words, he is an agent for an unnamed principal. The pacca arhatia, on the other hand, does not inform his constituent as to the third party with whom he has entered into a contract on his behalf.
(4) The remuneration of kachha arhatia consists solely of commission and he is not interested in the profits and losses made by his constituent as is not the case with the pacca arhatia.
(5) The kaccha arhatia, unlike the pacca arhatia does not have any dominion over the goods.
(6) The kaccha arhatia has no personal interest of his own when he enters into a transaction and his interest is limited to the commission agent’s charges and certain out of pocket expenses whereas a pacca arhatia has a personal interest of his own when he enters into a transaction. Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
(7) In the event of any loss, the kachha arhatia is entitled to be indemnified by his principal as is not the case with pacca arhatia. 5. The above distinction between a kachha arhatia and pacca arhatia may also be relevant for determining the applicability of Section 44AB in cases of other type of agents. In the case of agents whose position is similar to that of kachha arhatia, the turnover is only the commission and does not include the sales on behalf of the principals. In the case of agents of the type of pacca arahtia, on the other hand, the total sales/turnover of the business should be taken into consideration for determining the applicability of the provisions of Section 44AB of the Income-tax Act.
How turnover or gross receipts in respect of transactions in shares, securities and derivatives may be determined:
(a) Speculative transaction: A speculative transaction means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. Thus, in a speculative transaction, the contract for sale or purchase which is entered into is not completed by giving or receiving delivery so as to result in the sale as per value of contract note. The contract is settled otherwise and squared up by paying out the difference which may be positive or negative. As such, in such a transaction, the difference amount is ‘turnover’. In the case of an assessee undertaking speculative transactions, there can be both positive and negative differences arising from settlement of various such contracts during the year. Each transaction resulting into whether a positive or negative difference is an independent transaction. Further, amount paid on account of negative difference is not related to the amount received on account of positive difference. In such transactions, though the contract notes are issued for full value of the purchased or sold asset, the entries in the books of account are made only for the differences. Accordingly, the aggregate of both positive and negative differences is to be considered as the turnover of such transactions for determining the liability to audit vide section 44AB.
(b) Derivatives, futures and options: Such transactions are completed without actual delivery of shares or securities or commodities etc. These are squared up by receipts/payments of differences. The contract notes are issued for the full value of the underlined shares or securities or commodities etc. purchased or sold but entries in the books of account are made only for the differences. The transactions may be squared up any time on or before the striking date. The buyer of the option pays the premia. The turnover in such types of transactions is to be determined as follows (This is only and only for the purpose of computing ‘turnover’ for tax audit):
(i) The total of favourable and unfavourable differences in case of squared off transactions shall be taken as turnover.
(ii) Premium received on sale of options is also to be included in turnover. However, where the premium received is included for determining net profit for transactions, then such net profit should not be separately included.
(iii) In respect of any reverse trades entered, the difference thereon, should also form part of the turnover.
(iv) In case of an open position as at the end of the financial year (i.e., trades which are not squared off during the same financial year), the turnover arising from the said transaction should be considered in the financial year when the transaction has been actually squared off.
(v) In case of delivery based settlement in a derivatives transaction, the difference between the trade price and the settlement price shall be considered as turnover. Further, in the hands of the transferor of underlying asset, the entire sale value shall also be considered as business turnover where the underlying asset is held as stock in trade.
(c) Delivery based transactions: Where the transaction for the purchase or sale of any commodity including stocks and shares is delivery based, whether intended or by default, the total value of the sales is to be considered as turnover.
(a) Further, an issue may arise whether such transactions of purchase or sale of stocks and shares undertaken by the assessee are in the course of business or as investment. The answer to this issue will depend on the facts and circumstances of each case taking into consideration the nature of the transaction, frequency and volume of transactions etc. For this, attention is invited to the following judgments where this issue has been considered.
(i) CIT v. P.K.N. and Co Ltd (1966) 60 ITR 65 (SC)
(ii) Saroj Kumar Mazumdar v. CIT (1959) 37 ITR 242 (SC)
(iii) CIT v. Sutlej Cotton Mills Supply Agency Ltd. (1975) 100 ITR 706 (SC) (iv) G. Venkataswami Naidu & Co. v. CIT (1959) 351TR 594 (SC).
Ref. Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023)
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