[FAQs] Computation of Gross Receipts/Turnover | Tax Audit | A.Y. 2023-24
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- Last Updated on 13 September, 2023
FAQ 1. How to calculate the gross receipt or sales turnover for a tax audit?
Applicability of tax audit under section 44AB depends upon gross receipts, sales, or turnover of an assessee, so the first and foremost thing is their calculations.
1. Sales turnover
As per ‘Guidance Note on Terms Used in Financial Statement’ published by the ICAI, the meaning of the term’ sale turnover’ shall be aggregate of amount for which sales are affected by an enterprise. The terms gross turnover and net turnover are sometimes used to differentiate the turnover before and after deduction of returns and discounts.
An invoice may involve various extra and ancillary charges. Some of these charges may form part of the sale turnover whereas some may be excluded while determining the value of sales turnover. The treatment thereof is explained in the below table.
Particular |
Treatment |
Trade discount or turnover discount | To be excluded from sales turnover if discounts are allowed in the sales invoice |
Cash discount | Not to be excluded from sales turnover |
Special Rebates | To be excluded from sales turnover 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. |
Commission on sales | Not to be excluded from sales turnover |
Sales return | To be excluded from sales turnover |
Sale proceeds from the transfer of fixed assets | To be excluded from sales turnover |
Sale proceeds of property held as an investment | To be excluded from sales turnover |
Sale proceeds from the transfer of securities held as stock-in-trade | Not to be excluded from sales turnover |
Scrap | To be excluded from sales turnover unless the assessee is engaged in the business of dealing in scrap. |
2. Gross receipt
The term ‘Gross Receipts’ is not defined in the Income-tax Act. The ‘Guidance Note on Tax Audit’ issued by ICAI provides that in the case of professionals, ‘Gross receipts’ include all receipts arising from carrying on a profession. However, certain receipts may or may not be included in the gross receipts.
The following receipts shall be included in the gross receipts:
- Out-of-pocket expenses, recovered by way of consolidated fees, would form part of gross receipts.
- Cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of government.
- Any duty drawback is payable to any person against exports under specified schemes.
- The aggregate gross interest income received by a money lender, commission, brokerage, service, and other incidental charges received in the business of chit funds.
- Reimbursement of expenses incurred (i.e., packing, forwarding, freight, insurance, travelling, etc.). However, if the same is credited to a separate account in books, only the net surplus on this account should be added to gross receipts or turnover.
- Hire charges of cold storage.
- Liquidated damages.
- Insurance claims, except those which are linked with fixed assets.
- Sale proceeds of scrap, wastage, etc., unless treated as part of sale turnover, whether or not credited to a miscellaneous income account.
- Lease rent in the business of operating lease.
- Finance income to reimburse and reward the lessor for his investment and services.
- Hire charges and installments received in the course of hire purchase.
- Advance received and forfeited from customers.
- The value of any benefit or perquisite, whether convertible into money or not, arising from business or exercise of a profession.
Following receipts shall be excluded from the gross receipts:
- Out-of-pocket expenses recovered separately from the client shall not form part of gross receipts.
- Where a professional receives an advance for services that are yet to be rendered, it will not form part of the gross receipts till the services are rendered.
- Sale proceeds of fixed assets, including advance forfeited, if any.
- Sale proceeds of assets held as investments.
- Rental income unless the same is assessable as business income.
- Dividends on shares except in the case of an assessee dealing in shares.
- Income by way of interest unless assessable as business income.
- Reimbursement of customs duty and other charges collected by a clearing agent.
- The amount received by travel agents from clients for payment to airlines, railways, etc., is excluded if received by way of reimbursement of expenses incurred on behalf of the client. If, however, the travel agent is conducting a package tour and charges a consolidated sum for transportation, boarding and lodging and other facilities, then the amount received from the members of the group tour should form part of gross receipts.
- The amount of advertising charges recovered by an advertising agent from his clients by way of reimbursement shall be excluded. However, if he books the advertisement space in bulk and recovers the charges from different clients, the amount recovered by him will form part of his gross receipts.
- Share of profit of a partner in the total income of the firm shall be excluded from the total income of the partner.
- Write back amounts payable to creditors or provisions for expenses or taxes no longer required.
In case of sale by a commission agent or by a person on a consignment basis, if the property in goods or all significant risks and rewards of ownership of goods continue to belong to the principal, the relevant sale price shall not be part of the turnover of the commission agent. In this case, the turnover shall be the amount of commission earned by the agent. However, if the property in the goods, significant risk and reward of ownership belongs to the commission agent, the sale price received/receivable shall form part of his turnover.
Read More Sales Turnover or Gross Receipts
FAQ 2. Whether the out-of-pocket expenses received by professionals shall form part of gross receipts?
The expression “gross receipts” in the profession would include all receipts arising from carrying on of such profession. Generally, professionals like solicitors, advocates or chartered accountants receive out-of-pocket expenses in advance and credit it in a separate client’s account to utilise them for making payments for stamp duties, registration fees, travelling expenses, etc., on behalf of the clients. These amounts, if collected separately in advance or otherwise, should not form part of the “gross receipts”. If, however, such out-of-pocket expenses are collected by way of a consolidated fee, the whole of the amount so collected shall form part of gross receipts, and no adjustment shall be made in respect of actual expenses paid on behalf of his clients out of the gross fees so collected.
Furthermore, the advance fees received 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.
FAQ 3. How to calculate the turnover of the commission agent?
Turnover of a commission agent or a person selling goods on a consignment basis is determined based on the transfer of significant risk or reward of ownership. If the property in 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 turnover of the commission agent. In this case, the turnover shall be the amount of commission earned by the agent. However, if the property in the goods, significant risk, and reward of ownership belongs to the commission agent, the sale price received/receivable shall form part of his turnover.
ICDS-IV (Revenue Recognition) also provides that in the case of an agency relationship, the revenue of an agent shall be the amount of commission and not the gross inflow of cash, receivables or other consideration. The CBDT1 has also clarified that while determining the turnover in case of Kachha Arahtias, the turnover does not include the sales effected on behalf of the principals and only the gross commission has to be considered. However, in the case of Pucca Arahtias, the total sales/turnover of the business should be taken into consideration.
FAQ 4. How to calculate the turnover of a share broker?
When a share broker purchases securities on behalf of his customers, he does not get them transferred in his name, but they are delivered in the name of the customer. The same is true in the case of sales. The share broker holds the delivery merely on behalf of his customer. The property in securities does not get transferred to the share-brokers. Only brokerage, which is being accounted for in the books of share brokers, should be considered for calculating the turnover. However, in the case of transactions entered into by a share broker on his personal account, the sale value should be considered while calculating the sales turnover. The case of a sub-broker is not different from that of a share broker.
FAQ 5. How to calculate the turnover in case of a speculative transaction?
A ‘speculative transaction’ means a transaction in which a contract for the purchase or sale of any commodity or securities is periodically or ultimately settled otherwise than by the actual delivery or transfer of commodity or scrips. Thus, in speculative transactions, both positive and negative differences can arise from the settlement of contracts. Each transaction, whether resulting in a positive or negative difference, is an independent transaction. In such transactions, though the contract notes are issued for the 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 considered as the turnover.
For example, Mr X is an assessee engaged in speculative business. He derives the following profits or losses while dealing in securities:
Securities | Amount of gain or (loss) |
A | 15,000 |
B | (24,000) |
C | (14,200) |
D | 16,000 |
Total | 69,200 |
While computing the turnover of Mr X, all the differences, whether positive or negative, shall be aggregated.
FAQ 6. How to calculate the turnover in the case of derivatives?
The Income-tax Act does not contain any provision or guidance for the computation of turnover in F&O trading. Para 5.14(b) of the 2022 GN provided the following guidance on how turnover or gross receipt in respect of transactions in derivatives, futures and options is to be determined:
(a) The total of favourable and unfavourable differences shall be taken as turnover.
(b) The premium received on the sale of options is also to be included in turnover. However, where the premium received is included for determining net profit for transactions, the same should not be separately included.
(c) In respect of any reverse trades entered, the difference thereon should also form part of the turnover.
The above guidance left a lot of doubts. For instance, what is to be done in respect of open positions (i.e., trades not squared up as at year-end and settled in the next financial year)? What if there is a delivery-based settlement in derivative contracts? What about treatment in the hands of the transferor of the underlying asset in case of delivery-based settlement in derivative contracts?
The new guidance in Para 5.10(b) of the 2023 GN provides that the turnover or gross receipt in respect of transactions in derivatives, futures and options is to be determined as follows:
(a) In the case of squared-off transactions, the total of favourable and unfavourable differences shall be taken as turnover.
(b) Premium received on the sale of options is also to be included in turnover. However, where the premium received is included for determining net profit for transactions, the same should not be separately included.
(c) In respect of any reverse trades entered, the difference thereon should also form part of the turnover.
(d) In case of an open position 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.
(e) 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 the underlying asset, the entire sale value shall also be considered as business turnover where the underlying asset is held as stock in trade.
For example, Mr A enters into the following transaction during the financial year 2022-23:
Security name | Type | Qty | Option Premium Paid | Option Premium Received | Strike price | Spot/Settlement price | Profit /(Loss) | Remarks |
Cipla | Futures | 500 | 1495 | 1610 | 57,500 | Squared off | ||
BHEL | Futures | 200 | 208 | 104 | -20,800 | Squared off | ||
IOC | Put (Sell) | 100 | 5 | 50 | – | Open (Note 1) | ||
ITC | Put (Sell) | 100 | 40 | 10 | -3,000 | Squared off | ||
Axis Bank | Futures | 200 | 1229 | – | Open (Note 1) | |||
TCS | Call (Buy) | 100 | 20 | 1500 | 1600 | 8,000 | Delivery Settlement | |
Infosys | Call (Buy) | 100 | 10 | 1000 | 950 | (1000) (Note 2) | Expired | |
GAIL | Put (Buy) | 50 | 4 | 100 | 90 | 300 | Delivery Settlement |
Note 1 – Mr A has an open position in underlying put option as on 31st March 2023. Thus, the turnover from such options shall be computed in the financial year in which the transaction is squared off or settled for delivery.
Note 2 – Delivery-based settlement in a Call (Long) option transaction can be made only if the option is “in the money”, which means the market price (settlement price) is above the strike price (trade price). However, if there is a profit/loss in the option premium amount, then it shall be considered in the calculation of turnover.
Thus, the turnover of Mr A shall be as follows:
Security Name | Profit/(Loss) |
Cipla | 57,500 |
BHEL | (20,800) |
IOC** | – |
ITC* | (3,000) |
Axis Bank** | – |
TCS | 10,000 |
Infosys | (1000) |
GAIL | 500 |
Total Turnover | 92,800 |
* As the amount of premium received is already considered for computing the profit or loss from the transaction, it is not included again while computing the turnover.
** Mr A has open position in underlying shares as on 31st March 2023. Hence, the turnover from such options shall be computed in the financial year in which transaction is squared off or settled for delivery. |
Para 5.10(b) of the 2023 GN clarifies that the above guidance for the determination of turnover “is only and only for the purpose of computing ‘turnover’ for tax audit”.
FAQ 7. How to calculate turnover in the case of multiple businesses?
Where an assessee is carrying on more than one business, sale turnover or gross receipts from all businesses shall be clubbed together. However, if the assessee is opting for the presumptive taxation scheme, the turnover of such businesses shall be excluded while determining his total sales turnover or gross receipts.
FAQ 8. How to check the threshold limit if the assessee is carrying on business and profession at the same time?
The ICAI, in the guidance note on tax audit, provides that if an assessee is carrying on a business and a profession, then a tax audit is required if turnover/receipts from either business or profession exceed the prescribed threshold limit.
For example, the professional receipts of an assessee are Rs. 54 lakhs and the total turnover from the business is Rs. 72 lakhs. It will be necessary for him to get the accounts of the profession and business audited because the gross receipts from the profession exceed Rs. 50 Lakhs.
Similarly, if the professional receipts are Rs. 42 lakhs and total turnover from business are Rs. 86 lakh. In this circumstance, as the gross receipt or turnover from a profession or business does not exceed the limits specified in Section 44AB, there is no need to conduct a tax audit.
FAQ 9. Whether GST shall be included while calculating the gross turnover or receipt?
Section 145A provides for the inclusion of taxes, cess, etc., in the value of sale, purchase, and inventory. However, the purpose of this provision is limited to the calculation of income taxable under the head ‘Profits and Gains from Business or Profession’. Whether this provision can be applied to calculate ‘sales turnover’ for Section 44AA, Section 44AB, Section 44AD, and Section 44ADA has always been a matter of disagreement between the revenue and taxpayer.
Where an assessee has opted for the Composition Scheme under the GST Act, the tax is not recovered from the customer and is debited to the statement of profit & loss as an indirect expense. Thus, the amount of GST paid by an assessee does not form part of his gross turnover. In the case of other assessees, as GST is charged from the customer and is recognised separately in the books of accounts, it is not clear whether the amount of GST shall be included in the turnover for calculation of taxable income only (as provided by Section 145A) or for every other provision which has a reference to ‘turnover’. Unless the CBDT clarifies its stand on this matter, it would be appropriate to ignore the amount of GST while calculating the gross turnover or gross receipts for the following reasons:
- Section 145A begins with ‘for the purpose of determining the income chargeable under the head Profits and gains of business or profession’, which makes this provision inapplicable for other purposes.
- If GST recovered from the customer is credited to Current Liability Accounts (Output CGST, Output IGST, or Output SGST) and payments to the authority are also debited to the said separate account, these should not form part of the turnover shown in profit and loss account. ICAI’s Guidance Note on Tax Audit also confirms that if tax recovered is credited to a separate account, they would not be included in the turnover.
- The inclusion of GST in the turnover would have a cascading effect, as presumptive income would be computed on the component of GST, which is never treated as income of the assessee.
(For detailed analysis and illustrations on the valuation of sale, purchase, and inventory, refer to ‘Treatment of Tax paid on Goods (Inclusive v. Exclusive Approach)’)
Read More ‘Treatment of Tax paid on Goods (Inclusive v. Exclusive Approach)’
FAQ 10. Mr A, a partner in a firm, has obtained a remuneration of Rs. 12 crores from the firm during the FY 2022-23. Is it mandatory for Mr A to get the accounts audited since the remuneration received from a firm exceeds the specified limit?
Any interest, salary, bonus, commission or remuneration due to or received by a partner from the firm is taxable as his business income under Section 28(v) provided such payments were deducted while computing taxable profits of the firm. The Bombay High Court, in the case of Perizad Zorabian Irani v. PCIT [2022] 139 taxmann.com 164 (Bombay), held that if the assessee was only a partner in a partnership firm and was not carrying on any business independently, remuneration received by the assessee from said partnership firm could not be treated as gross receipts of assessee and, accordingly, assessee was justified in not getting the accounts audited under section 44AB with respect to such remuneration.
The Madras High Court, in the case of Anand Kumar v. ACIT [2020] 122 taxmann.com 252 (Madras), also held that remuneration and interest received by the individual assessee from the partnership firm could not be termed to be a turnover of the assessee.
Based on the above case laws, it can be opined that Mr A is not engaged in independent business activities and is merely a partner in a business conducted by the firm. Consequently, his remuneration from the partnership firm should not be classified as gross receipts or turnover. Hence, he shall not be subject to audit under Section 44AB.
- Circular No. 452 dated March 17, 1986
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The definition of the aggregate turnover includes exempt supplies within its scope. Further, the term exempt supplies includes non-taxable supply within its scope.
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Hello Sir, In the given case, the turnover shall be the amount of commission earned by the person from running of CSC i.e. Rs. 10. It is also supported by ICDS-IV (Revenue Recognition) which provides that in the case of an agency relationship, the revenue of an agent shall be the amount of commission and not the gross inflow of cash, receivables, or other consideration.
Hello Sir,
Your article says that as per the guidance note issued by ICAI, the advances received by a professional, the services against which are not yet provided shall not be covered in Gross receipts. But when I checked the guidance note 8th edition of 2022, I found the other points but I could not find this point. Can you help to find it?
Please refer to point number 5.19 of page no. 20 from the link: https://resource.cdn.icai.org/70897dtc56864ed.pdf
The company is in service segment, Will tax audit be applicable in case the turnover is 9 Crore and advance for service is 2Cr. considering turnover and receipts exceeding 10Crore
Where an assessee is carrying on both business and profession, then the tax audit is required if turnover or gross receipt from either business or profession exceeds the threshold limit as prescribed under Section 44AB.
The threshold limit for tax audit u/s 44AB is Rs. 1 Crore (for businesses) and Rs. 50 Lakhs (for professionals). The limit for businesses will be extended to Rs. 10 crores if the following conditions are satisfied:
a) Cash receipts, including amount received for sales, turnover, or gross receipts, does not exceed 5% of the aggregate amount received during the previous year; and
b) Cash payments, including the amount incurred for expenditure, do not exceed 5% of the aggregate amount paid during the previous year.
Further, if a professional received an advance for services which are yet to be rendered, it will not form part of the gross receipts till the services are rendered.
If the company satisfied the conditions of the threshold limit of Rs. 10 crores, in this case tax audit is not required.
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