SALES, TURNOVER & GROSS RECEIPTS
The initial test is to see if the total sales, turnover or gross receipts in business or profession during the previous year, as the case may be exceed the prescribed limit under section 44AB.
However, the term “sales”, “turnover” or “gross receipts” are not defined in the Act, and 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) of the income Tax Act, 1961 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 assesse.
The following meaning of the term “sales”, “turnover” or “gross receipts” should also 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 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(91) of the Companies Act, 2013 defines “Turnover” as follows:
“Turnover” means 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;”
The Statement on the Companies (Auditors’ Report) Order, 2003 issued by the Institute of Chartered Accountants of India (ICAI) 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.
Although, Schedule III of the Companies Act, 2013 has replaced the Revised Schedule VI of the Companies Act, 1956 in the year 2014, guidance given herein above with respect to meaning of the term “turnover”is still relevant.
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 sales tax and excise duty are 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, the Excise duty and / or sales tax recovered are credited separately to Excise duty or Sales 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.
Few typical cases may also be considered:
A. Discount allowed in the sales invoice will reduce the sale price and, therefore, the same can be deducted from the turnover.
B. 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.
C. 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.
D. 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.
E. 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.
F. Sale proceeds of fixed assets would not form part of turnover since these are not held for
G. Sale proceeds of property held as investment property will not form part of turnover.
H. 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-intrade, the sale proceeds thereof will form part of turnover.
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.
The following items of income and/or receipts would be covered by the term “gross receipts in business”:
The following items would not form part of “gross receipts in business” for purposes of section 44AB:
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.
Whether out of pocket expenses received by a professional should form part of his gross receipts for purposes of this section or not?
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.
IN CASE OF SHARE BROKERS
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.
In other words, share brokers buy and sell securities on behalf of their client. Thus Brokerage income received on purchase and sale of such securities shall form part of Turnover.
IN AGENCY BUSINESS
Amount of commission earned by the agent and not the aggregate amount for which sales are effected or services are rendered.
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 CASE OF SHARES, SECURITIES & DERIVATIVES
The turnover or gross receipts in respect of transactions in shares, securities and derivatives may be determined in the following manner.
> 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 transaction the difference amount is ‘turnover’. In the case of an assessee undertaking speculative transactions there can be both positive and negative differences arising by 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 paid 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.
In other words, Aggregate of both positive and negative differences arising from the difference between purchase and sale transactions should be considered as Turnover.
> Derivatives, futures and options: Such transactions are completed without the delivery of shares or securities. These are also squared up by payment of differences. The contract notes are issued for the full value of the asset 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 The turnover in such types of transactions is to be determined as follows:
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.
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