Meaning of Turnover or sales for the purpose of Tax Audit

A person is required to get his accounts audited u/s 44AB if
1)The turnover of  business exceeds Rs 60 Lakhs, or
2)The Gross Receipts of Profession exceed Rs 15 Lakhs.

In case of business what should be the meaning of turnover/sales? Should it be Gross sales or net sales? Should it include VAT, Sales tax or excise duty? The meaning of turnover/sales for the purpose of tax audit is dissussed 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 companies (Auditors' Report) Order 2003 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 sales tax and excise duty to be included in the sales/turnover: If the sales tax/VAT and excise duty are included in the sale price no adjustment in respect thereof should be made for considering the quantum of turnover. If  however, the excise duty and/or Sales Tax Account (being seperate Accounts) and payments to the authority (i.e payment of sales tax/VAT and excise duty with the treasury)are debited in the same account, they would not be included in the turnover.

Sales of Scrap: Sales of scrap shown seperately 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 [2004] 266 ITR 172 (Mad.)

Trade Discounts: Trade Discounts can be deducted from sales. Trade Discounts are generaly 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, 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 therefrom 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.

Amit Bajaj Advocate
Email: amitbajajadvocate@hotmail.com

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