Work in progress cannot be treated as a part of turnover

Work in progress is never a part of the turnover. Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 and penalty issue u/s 271B of the Income Tax Act ,1961

During the assessment year 2011-12 the turnover of the assessee was Rs. 639706.00 and work in progress was Rs. 16559480.00.

Work in Progress is not part of the turnover as stated in various court judgments  Assessee was not liable to get the accounts audited by a chartered accountant as the sales, services, turnover or gross receipts were less than Rs. 60 Lacs, therefore, he was not liable to get his accounts audited as defined in section 44AB of the Income Tax act, 1961.The definition of Sales, Turnover or gross receipts has been explained in the following manner.

What is the turnover for the purpose of determining the threshold?

The important questions that may be coming in your mind are:

• What is the meaning of turnover/sales?
• Is it Gross sales or Net Sales?
•  Does it include VAT, Sales tax, excise duty, Etc.?

To answer all the above mentioned questions One has to refer the “Guidance Note on Terms used In Financial Statements” published by the ICAI. Here the expression “Sales Turnover” is defined as:

“The aggregate amount for which sales are effected  or services rendered by an enterprise. 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”

Further, in the statement issued by the ICAI on the Companies (Auditors’ Report) Order 2003 the word ‘turnover’ has been defined as- “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”

‘Turnover’ in case of broker: It was held in CIT Vs. Hasmukh M. Shah[2003] 85 ITD 99 (Ahd.) That The transactions by a share broker of sale or purchase of shares on behalf of parties can not amount to ‘sale turnover or receipt’ of share broker himself Within the meaning of section 44AB.

Will Work-in progress(WIP) form part of ‘Turnover’:

It was held in CIT Vs. B.K Jhala & Associates [1999] 69 ITD 141 (Pune) that the value of work in progress In case of the assessee engaged in construction of Shop and/or flats would NOT constitute ‘turnover’ VAT, Sales tax, excise duty Should be included even if Assessee has not included The same in Profit and Loss account and shown the Same as current Liability. The opinion about Inclusiveness of VAT, Sales tax, excise duty in ‘Turnover’ is based on Section 145A of Income-tax Act, 1961.

 Sales, turnover, gross receipts

 It will be noted that the provision relating to tax audit applies to every person carrying on business, if his total sales, turnover or gross receipts in business exceed the prescribed limit (Rs. 60 lakhs for the A.Y. 2011-12) and to a person carrying on a profession, if his gross receipts from profession exceed the prescribed limit (Rs.10 lakhs for the A.Y. 2011-12) in any previous year. However, the term “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.

 In the “Guidance Note on Terms Used in Financial Statements “published by the Institute, the expression “Sales Turnover” (Item 15.01) 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”.

The term “Gross Turnover” & 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 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.

Note (i) The term ‘turnover’ would mean the total sales after deducting there from 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.”

 The “Statement on the Amendments to Schedule VI to the Companies Act, 1956” issued by the Institute (Page 14, 1976 edition)(now replaced with Guidance Note on Revised Schedule VI of the Companies Act, 1956) while discussing the disclosure requirements relating to `turnover’ stated as follows:-

“As regards the value of turnover, a question which may arise is with reference to various extra and ancillary charges. The invoices may involve various extra and ancillary charges such as those relating to packing, freight, forwarding, interest, commission, etc. It is suggested that ordinarily the value of turnover should be disclosed exclusive of such ancillary and extra charges, except in those cases where because of the accounting system followed by the company, separate demarcation of such charges is not possible from the accounts or where the company’s billing procedure involves a composite charge inclusive of various services rather than a separate charge for each service .In the case of invoices containing composite charges, it would not ordinarily be proper to attempt a demarcation of ancillary charges on a proportionate or estimated basis. For example, if a company makes a composite charge to its customer, inclusive of freight and dispatch, the charge so made should accordingly be treated as part of the turnover for purpose of this section.

In order to ensure proper compliance with section 44AB, section 271B has been enacted which reads as under:-

“Failure to get accounts audited

271B. If any person fails to get his accounts audited in respect of any previous year or years relevant to an assessment year or furnish a report of such audit as required under section 44AB, the Assessing Officer may direct that such person shall pay, by way of penalty, a sum equal to one-half per cent of the total sales, turnover or gross receipts, as the case may be, in business, or of the gross receipts in profession, in such previous year or years or a sum of one hundred fifty thousand rupees, whichever is less.”. As such, the failure of a person, to get his accounts audited in respect of any previous year or furnish a copy of such report as required under section 44AB may attract a penalty equal to 0.5% of the total sales, turnover or gross receipts, or Rs.1.5 lakh whichever is less. However, in view of the specific provisions contained in section 273B, no penalty is imposable under section 271B on the assessee for the above failure if he proves that there was reasonable cause for the said failure. The onus of proving reasonable cause is on the assessee.

 Some of the instances where Tribunals/Courts have accepted as “reasonable cause” are as follows:

(a) Resignation of the tax auditor and consequent delay;

(b) Bona fide interpretation of the term `turnover’ based on expert advice;

(c) Death or physical inability of the partner in charge of the accounts;

(d) Labour problems such as strike, lock out for a long period, etc.;

(e) Loss of accounts because of fire, theft, etc. beyond the control of the assessee;

(f) Non-availability of accounts on account of seizure;

(g) Natural calamities, commotion, etc.

The reasonable cause in the case of assessee was that the turnover was less than 60 Lakhs. The question of reasonable cause comes when turnover demands audit and the assessee by chances has not got the books audited . But here in the case of the assessee the turnover never demanded audit & non audit requirement will not justify penalty U/s 271B of the Income Tax Act,1961.

On the basis of above as the assessee was under bona fide belief that the turnover of the assessee was less than Rs. 60 Lacs and he was not liable to get his accounts audited by a chartered Accountant and more over the next year he has shown the entire work in progress as opening stock and got the books of accounts audited. In these circumstances the penalty is not justified. You are requested to drop the penalty proceedings in the case of the assessee.