[Opinion] Income Tax Issues on the Significance of the Terms ‘Sales and Turnover’

V K Subramani – [2025] 180 taxmann.com 474 (Article)

For the purpose of income-tax computation, determination of total income is the fundamental pre-requisite. In the case of taxpayers having income from business or profession, the starting point of computation is determination of gross receipt, turnover or sales. Unfortunately, there is no definition for these terms in the Income-tax Act,1961 nor in the Income-tax Act, 2025. While these terms have enormous significance for computing the income liable for income tax, the uncertainty in these terms haunt the serious practitioners of law. This refresher takes note of the importance of these terms and the issues surrounding them.

1. Meaning of Gross Receipts, Sales and Turnover

For the purpose of computation of income, the most significant item is the ‘sales or turnover or the gross receipt’. Unless one knows the sales or gross receipt, it is not possible to decide, how much is the income? Similarly, for the purpose of deciding the monetary ceiling for tax audit under section 44AB, one should know whether the sales, turnover or gross receipt has exceeded Rs.1 crore or not. In the case of taxpayers desirous of admitting income under section 44AD, then also it is to be known how much is the sales, turnover or gross receipt correctly so that it is possible to adopt and apply some percentage for the determination of presumptive income.

In the case of notified professions to whom section 44ADA would apply, there also one must know the meaning of the term ‘gross receipt’. Even in the case of non-residents or foreign companies engaged in shipping business or in operation of aircraft, if wants to offer income on presumptive basis, knowing the correct meaning of the term ‘sales, turnover or gross receipt’ is imperative.

One has to take recourse to the comparative legal statutes for the purpose of determining the turnover or sales. Section 2(6) of the CGST Act 2017 says ‘aggregate turnover’ means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis), exempt supplies, export of goods or services or both and inter-State supplies of persons having the same Permanent Account Number, to be computed on all India basis, but excludes Central tax, State tax, Union territory tax, Integrated tax and cess.

Therefore, if a person is having the same PAN number, then his entire turnover to be counted. It includes taxable supplies, exempt supplies, zero rated supply of goods or services, inter-State supplies and also supplies between two distinct places but having the same PAN. One important thing is that the aggregate turnover excludes inward supplies liable to tax under the reverse charge mechanism as well as tax under the GST law, namely CGST, SGST, UTGST, IGST and any compensation cess. Similarly, section 2(112) defines the term ‘turnover in State / Union territory’. The term ‘turnover’ provides for exclusion of Central tax, State tax, Union territory tax, Integrated tax and cess. So, this clarity is obtained by referring to GST law but not under the Income-tax Act.

So, is this the turnover which is to be adopted for the purpose of computing the presumptive income under sections 44AD or 44ADA? One may adopt the turnover or services as per the above definitions excluding GST and admit the presumptive income thereon. But when it comes to income taxation per se, whether the GST collected would form part of the trading receipt became a crucial question in Chowringhee Sales Bureau (P.) Ltd. v. CIT 1973 taxmann.com 151/[1973] 87 ITR 542 (SC).

2. Chowringhee Sales Bureau Case

The assessee a private limited company dealing in furniture was also acting as an auctioneer. In respect of sales effected as auctioneer, the assessee realised commission of Rs. 32,986 by way of sales tax. The amount was credited separately in the books of account as sales tax collection account. The assessee did not remit the sales tax amount to the actual owner of the goods nor was the amount deposited by it as sales tax to the State exchequer because it took the position that the statutory provision creating the liability was not valid. Also, the assessee did not refund the amount to the person from whom it was collected. The court held the amount realised by the assessee by way of sales tax was part of trading receipt and the amount credited as sales tax collection account would not make any material difference. The court held that it is the true nature of receipt and quality of the receipt that must be seen and not the head under which the amount is credited. If a receipt is a trading receipt, even if it is not shown in the books of account that would not prevent the assessing authority from treating it as a trading receipt.

So, there is one school of thought which says that the amount of GST when it is collected/collectible, it would form part of the trading receipt. However, since the word turnover under the CGST or SGST or UTGST or IGST excludes GST, one could also possibly conclude that for the purpose of turnover, the amount of tax collection though included in invoice is not to be considered. The Annual Information Statement (AIS) generated by the Income-tax Department reflects turnover under GST by excluding the amount of GST. Thus, there is perfect synchronisation between the GST law and this concept of determination of turnover by excluding GST for the purpose of Income-tax.

3. Taxpayers in General

Where the assessee is not admitting the income as per the presumptive provision and maintains books of account whether collection by way of GST would form part of the turnover continues to remain ticklish because of section 145A.

Section 145A says that for the purpose of determining the income chargeable under the head ‘Profits and gains of business or profession’:

(i) the valuation of inventory shall be made at lower of actual cost or net realisable value computed in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145;

(ii) the valuation of purchase and sale of goods or services and of inventory shall be adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods or services to the place of its location and condition as on the date of valuation;

Section 145A was substituted w.r.e.f. 01.04.2017 by the Finance Act, 2018 providing for inclusive method of accounting of inventory.

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