Meaning of Turnover or sales for the purpose of Tax Audit

Dear Amitji

Thanks for this informative piece of information.  However, I take liberty to disagree on the issue of sales tax, excice duty etc.

The definition of Turnover as per guidance note issued by ICIAI may hold good for classification and nomenclature in Company Audit Reports. However as far as Income Tax Act Audit provisions u/s 44AB, the term referred is Total Sales, Turnover or Gross Receipts which encompasses all inclusive taxes such as Sales Tax, Excise duty, service tax etc even though the assessee maintains a seperate account for the same. We may refer to decision of Supreme Court in the case of Chowringhee Sales Bureaue in this regard.

Dear Vineet ji, thanks for appericiation. In my view if the sale is made inclusive of taxes, then the taxes will constitute as part of the gross turnover for the purpose of section 44AB. However if the VAT or any other tax is seperatley charged on the sale price and seperate account heads are maintained for VAT etc then it will not be part of the Gross Turnover for the purpose of tax audit.

 Please refer to the views expressed by Prof Narayan Jain Advocate and Dilip Loyalka F.C.A in the book "How To Handle Income Tax Problems Volume 1"

If we also see the ITR 4 or 5 forms in the part A P&L A/c, Gross Receipts or sales are required to be shown in the column 1 and VAT and other taxes are required to be shown in the sepearte columns 2,8,34, which also to some extent shows that gross receipts should not include indirect taxes. although ITR forms cannot be a conclusive proof to show that Gross Turnover or sales should be consideed as excluding indirect taxes for the purpose of tax audit, still it shows the intent of the legislature to some extent.

I want to read the exact text of the judgement mentioned above please provide the same or citation if possible.

Citation 87 ITR 542 (SC). Decision attached.

The facts of the case are quite different. The decision in the above judgement is case specific. It has been emphasised in the judgement that as the amount of sales tax was received by the appelant as an auctioneer, therefore the amount of sales tax shall be considered as his business or trading receipt. Nowhere it has been decided in the judgement that sales tax received would form part of gross receipts or gross sales for the purpose of section 44AB.

Dear Amitji

The Chowringhee Sales Bureaue case is considered as one of the landmark jusdgements in history of direct taxation and it will be trivial to pass the same as case specific. It is invariably quoted in all cases where the issue of turnover crops in specially disallowance u/s 43B, section 80I, 80IA, 80HHC etc. Referring to this decision it has invariably been held that receipts in the nature of sales tax, excise duty etc form part of total turnover or gross receipts.

As a matter of fact courts have been at great pais to dither from ratio of above decision in case of computation of deduction u/s 80HHC wherein it was held that sales tax will not be included in total turnover (Refer Sudarshan Chemicals Bombay High Court and other decisions) due to specific context in that section and not as general rule.

The ratio des dandi of chowringhee decision is not whether the sales tax receipt of auctioneer are trading receipt is is actually what the court held as below:

It is the true nature and the quality of the receipt and not the head under which it is entered in the account books as would prove decisive. If a receipt is a trading receipt, the fact that it is not So shown in the account books of the assessee would not prevent the assessing authority from treating it as trading receipt.

So immaterial of the fact whether sales tax receipt is credited to sales accout or any other head (including balance sheet item), if the same is in nature of trading receipt (which normally the case is unless the sale consideration and sales tax is received on behalf of somebody else as agent), it will form part of gross turnover/ Gross Receipts.

Dear Amitji

The Chowringhee Sales Bureaue case is considered as one of the landmark jusdgements in history of direct taxation and it will be trivial to pass the same as case specific. It is invariably quoted in all cases where the issue of turnover crops in specially disallowance u/s 43B, section 80I, 80IA, 80HHC etc. Referring to this decision it has invariably been held that receipts in the nature of sales tax, excise duty etc form part of total turnover or gross receipts.

As a matter of fact courts have been at great pains to dither from ratio of above decision in case of computation of deduction u/s 80HHC wherein it was held that sales tax will not be included in total turnover (Refer Sudarshan Chemicals Bombay High Court and other decisions) due to specific context in that section and not as general rule.

The ratio des dandi of chowringhee decision is not whether the sales tax receipt of auctioneer are trading receipt, it is actually what the court held as below:

It is the true nature and the quality of the receipt and not the head under which it is entered in the account books as would prove decisive. If a receipt is a trading receipt, the fact that it is not So shown in the account books of the assessee would not prevent the assessing authority from treating it as trading receipt.

So immaterial of the fact whether sales tax receipt is credited to sales accout or any other head (including balance sheet item), if the same is in nature of trading receipt (which normally the case is unless the sale consideration and sales tax is received on behalf of somebody else as agent), it will form part of gross turnover/ Gross Receipts.

I agree with Mr. Amit Bajaj, advocate. In Vat regime , Vat has to be calculated separately to claim input tax credit. So the assessee has to maintain separate accounts for input tax and output tax . So that he can calculate the tax liability in every  month.Therefore the Vat amount will not part of the total turnover.

Dear Mr Giri, There is no denial that seperate accounting treatment is required for  in VAT regime but that exactly is the ratio of Supreme Court decision. If the Tax collected by assessee is in the nature of its trading receipts, the same will be added to total turnover irrespective of the accounting treatment. As a matter of fact such collected tax is treated as income of the assessee and deduction in respect of the same is allowed u/s 43B only on payment basis.

Even the unutlised VAT credit (input tax) though accounted for seperately is included in the taxable profits of the assessee u/s 145A of the Act by adjustment in the valuation of stock.

VAT being a TRADING receipt will form part of receipts although not qualifying as SALES in profit and loss account.

Dear Amit,

Turnover means Gross Turnover (Including excise and sales tax) but excluding sales return, rebate, discounts, dbk etc.

for Agent it is Comission

for Speculative business it is net of Sale and purchase.

for Share broker: Brokerage received.