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2017-08-17
‘Turnover’, ‘Gross Receipts’, ‘Sales’ are the buzzwords during this Tax Audit season. Incidentally, they are the very starting point of a Tax Audit. They form the qualifying criteria, determine whether a taxpayer is liable to tax audit during a given year. Sec. 44AB of the Income Tax Act lays down limits of turnover beyond which taxpayers are liable to get their accounts audited by a Chartered Accountant and present a Tax Audit Report in Form No. 3CD. The deciding basis, i.e., ‘turnover’ is not defined in the Act, thereby leading to different interpretations. Added to that are the varied kinds of businesses and transactions that lead to varied inferences on what constitutes turnover of a business. The Taxsutra Database team, has in this insight, tried to cover various issues that crop up in analysing the terms, 'turnover' and 'gross receipts', and have reached the Courts. Issues such as whether or not WIP of a construction business, receipts from job works, etc. constitute turnover; whether subscription received by a chit fund is revenue in nature and to be covered within the purview of turnover; treatment of commission receipts, sale on principal-to-principal basis; classification of income of a nursing home – whether business or professional; applicability of Sec. 44AB to income of a co-operative society, a mutual concern, etc. are some of the issues covered in this insight. We hope this helps readers as a useful guide to cater to their clients in this Tax Audit season.
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Sr. No. |
Case Name |
Conclusion |
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Speculative transactions |
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1. |
Turnover in Speculative Transactions |
No turnover is effected by a contract to buy future goods without any delivery – Mumbai ITAT rules in favour of assessee for AY 1989-90; On noting that the buying and selling of UTI units was a speculative transaction with no delivery that took place, holds that the units of UTI contracted to be bought were future goods and were unascertained…read more |
| 2. |
Profit of Speculative Transactions |
Speculative transactions' profit irrelevant for Sec 44AB; Confirms penalty for tax audit failure - ITAT upholds penalty u/s. 271B for tax audit default; Assessee had entered into speculative share transactions where value exceeded prescribed limit for tax audit u/s. 44AB…read more |
| 3. |
Turnover in Speculative Transactions |
Deletes penalty, tax audit u/s 44AB not applicable to speculative commodity transactions - Jaipur ITAT deletes Sec 271B penalty levy (for non-filing of tax audit report), holds assessee (an individual engaged in business of speculative transactions in commodities through NCDEX) not liable to get his accounts audited u/s 44AB…read more |
| 4. |
Turnover in Speculative Transactions |
Speculative commodity transactions not liable to tax audit absent "turnover" element - ITAT rules in favour of the assessee-HUF; Quashes levy of penalty; Notes that the assessee was engaged in online trading of commodities and in this speculation activity, there was no physical delivery of commodities given or taken…read more |
| 5. |
Turnover in Speculative Transactions |
The value of the sale transaction of commodity through MCX without delivery cannot be considered as turnover for the purpose of Sec. 44AB - ITAT deletes penalty levied u/s. 271B as the transactions carried out by the assessee would not fall in the ambit of turnover for the purpose of Sec. 44AB; Holds that since assessee's company is trading in commodities directly with the Multi Commodity Exchange of India Ltd. without taking delivery, the entire transaction through Multi Commodity Exchange were marked-to-market and were squared at the end of each day, or carried forward to the subsequent day; therefore, only the net amount is either debited or credited to the assessee’s account as per the contract notes…read more |
| 6. |
Where sharebroker does not sell goods of its constituents as his own and only charges commission for bringing two parties together to transactions of sale and purchase of shares, such transactions cannot amount to ‘sale, turnover or receipt’ of sharebroker himself within meaning of Sec. 44AB. |
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Where income comprises of non-business receipts |
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| 7. |
[TS-5474-HC-2012(Punjab & Haryana)-O] Where income comprises of non-business receipts |
Sec. 44AB is not applicable when assessees have no “Income from business or profession” - HC rules in favour of assessee; Holds that Sec. 44AB is not applicable where there are no profits or gains of business or profession; consequently, penalty u/s. 271B is deleted…read more |
| 8. |
Where income comprises of non-business receipts |
Sec. 44AB applies only in respect of business income and not in respect of other income - HC rules in favour of assessee; Holds that “In the case of an individual carrying on business as a sole proprietor it is necessary to comply with the provisions of s. 44AB only in respect of his business income. It would not be necessary to comply with the provisions of s. 44AB in respect of his other income.”…read more |
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Commission Receipts |
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| 9. |
[TS-6003-HC-2008(KARNATAKA)-O] Commission to be considered as income or total receipts |
Where assessee is under a bona fide belief that commission earned from advertising agency was to be included in his turnover and not the entire value of service, penalty u/s. 271B for failure to get accounts audited u/s. 44AB is deleted - ITAT deletes penalty u/s. 271B; Holds that assessee is engaged in the business of Advertising Agency, and during the year under consideration, the commission earned from the Advertising Agency was not in excess of the limits prescribed u/s. 44AB for the purpose of getting the books audited…read more |
| 10. |
Sale of stamps on commission basis |
Where assessee is under a bona fide belief that his role is that of a commission agent in sale of stamps, penalty u/s. 271B for failure to get accounts audited u/s. 44AB deleted - ITAT rules in favour of assessee; Holds that assessee is a commission agent, and only commission would form part of his turnover, and not the value of stamps sold, since the stamps are sold by the assessee on behalf of the Government…read more |
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Sale on principal to principal basis |
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| 11. |
[TS-6234-HC-2014(Allahabad)-O] Sale on principal to principal basis |
Where the assessee had sold gas cylinders on principal to principal basis and not on commission basis, provisions of Sec. 44AB apply - HC rules in favour of Revenue; Holds that “the agreement clearly indicated that the appellant was appointed as a distributor on principal to principal basis for sale of gas cylinders to consumers. … Consequently, the sale of gas cylinders was liable to be included on the turnover of the appellant.”…read more |
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Turnover for assessees in construction business |
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| 12. |
[TS-5076-ITAT-2017(BANGALORE)-O] Turnover for assessees in construction business |
Penalty u/s. 271B leviable on assessee-builder for failure to get accounts audited u/s. 44AB; Method of recognition of income not relevant - ITAT rules in favour of Revenue; Holds that the assessee’s claim that he was following the project completion method, therefore had a bona fide belief that it was not necessary to get his accounts audited, is not sustainable as the application of Sec. 44AB is independent, and is not depended upon the method of accounts adopted by the assessee u/s. 145, whether it follows the project completion method or percentage completion method…read more |
| 13. |
Sec. 44AB qualifying criteria for Builders |
Amounts ‘received’ by a builder towards construction from its customers, is qualifying criteria for Sec. 44AB; The method adopted for recognising its income is irrelevant – Mumbai ITAT rules partly in favour of assessee; Holds assessee liable to audit u/s. 44AB on ‘gross receipts’ basis; However, deletes penalty u/s. 271B on the ground that the word, 'gross receipt' is liable to be construed in more than one way, and thereby gives rise to a debatable question, constituting a reasonable cause u/s. 273B; ITAT holds while examining ‘gross receipts’ for purpose of Sec. 44AB, “It is the nature of the receipt, and not the profit element therein, that is relevant”…read more |
| 14. |
WIP in a construction business |
WIP in a construction business cannot be considered as turnover for the purpose of Sec. 44AB - ITAT rules in favour of assessee; Holds that “"turnover" and "gross receipts" mean gross inflow of cash receivables and other considerations arising in the course of ordinary activities of an enterprise from the sale of goods or from the rendering of services to the buyer or client. In case of work-in-progress, there is no buyer and accordingly, work-in-progress cannot be considered … turnover”…read more |
| 15. |
Advance received for booking of flats to be included in ‘gross receipts’ as the same is to be adjusted towards cost of construction and has element of profit. |
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Other issues |
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| 16. |
[TS-5413-ITAT-1992(CALCUTTA)-O] Treatment of discounts |
Trade discount should be excluded from ‘sales’ or ‘turnover’ for purpose of qualifying limit u/s. 44AB; Relying on advice by the Chartered Accountant that Sec. 44AB is inapplicable to it, a reasonable cause for failure to comply with Sec. 44AB – ITAT deletes penalty u/s. 271B reasoning that there is a sufficient cause for non-compliance; Holds that discounts are allowed in sales bills themselves or at the time when payment were made by the parties to the assessee and the discount amounts are properly recorded in the assessee’s accounts, and no discrepancy has been found by the AO in this account…read more |
| 17. |
[TS-5538-HC-2006(RAJASTHAN)-O] Receipts from Job Work |
For attracting Sec. 44AB, receipts of an assessee by way of sale or trading business and receipts for doing job work have to be clubbed; Bona fide belief that assessee was not required to get its accounts audited u/s. 44AB leads to deletion of penalty u/s. 271B - HC allows assessee’s appeal; Holds that “It may be noticed that "sales", "turnover" or "gross receipts" are not words of art used in relation to any individual transaction independently, but have been used as "sales", "turnover" or "gross receipts". The expression 'total’ qualifies all the other three expressions viz. 'sales’, 'turnover’ and 'gross receipts’.”…read more |
| 18. |
[TS-5352-ITAT-2005(CHANDIGARH)-O] Transportation receipts to be included in turnover |
Transportation receipts received by assessee to be included in its turnover, and not only the difference between amount received and amount paid for transportation - ITAT rules in favour of Revenue; Confirms penalty levied u/s. 271B for failure to get its accounts audited u/s. 44AB; Holds that “the transportation has been done by the assessee directly, and not on behalf of other concerns and so these transportation receipts form part of the total turnover which undisputedly exceeded Rs. 40 lakhs, and as the assessee has not got his accounts audited as per s. 44AB, he was in default under s. 44AB, and liable for penalty under s. 271B.”…read more |
| 19. |
[TS-5489-ITAT-2004(HYDERABAD)-O] Turnover for a chit fund |
Subscription amount collected by the foreman of a chit fund from subscribers is on capital account, and thus not part of turnover/ gross receipts/ sales for the purpose of Sec. 44AB - ITAT rules in favour of assessee; Holds that “assessee was not required to comply with the requirements of s. 44AB, as its turnover as per the method of accounting adopted by it and as per trade practice and statutory requirements, did not exceed Rs. 40,00,000 during these years.”…read more |
| 20. |
[TS-6190-ITAT-2012(LUCKNOW)-O] Audit of accounts when income exempt u/s 80P |
Assessee having believed in good faith that since it’s income was exempt u/s 80P, it was not required to get its books of account audited u/s 44AB, penalty was deleted u/s. 271B for AY 2006-07; However, penalty upheld u/s. 271B for subsequent year since assessee was served with a notice levying penalty u/s. 271B for the preceding year before filing return for the subsequent year - ITAT rules partly in favour of assessee-society constituted under the U.P Co-operative Societies Act; Holds that “it was under a bona fide belief that it was not required to get its accounts audited u/s. 44AB in view of its entire income being exempt u/s. 80P of the Act. Its' statutory audit was completed well in time, so that it was definitely in a position to obtain an additional report u/s. 44AB from a firm of Chartered Accountants, i.e., were it to be in its knowledge or been so advised.”…read more |
| 21. |
‘Turnover’ when assessee carries on more than one business |
Penalty u/s. 271B is leviable only in respect of turnover of business whose accounts were not audited, and not of all businesses taken together – ITAT holds in favour of assessee; Holds that “.. in a case where an assessee carries on more than one business and the turnover of all businesses taken together is more than the specified limits he has to get the accounts of all the businesses audited”, however, penalty cannot be imposed in respect of the business whose books of accounts have been audited and filed on or before the due date specified in the Act…read more |
| 22. |
[TS-5382-ITAT-2006(HYDERABAD)-O] Income of a nursing home, whether professional or business income |
Activities of a nursing home constitute business and not profession - ITAT cancels penalty u/s. 271B for A.Y.s 1998-99 and 1999-2000; Holds that “activities of the nursing home...constitute business activity, and since the turnover of the assessee during the years was below the limit of Rs. 40 lakhs prescribed in cl. (a) of s. 44AB, assessee was not required...to get its accounts audited in terms of s. 44AB; Rejects Revenue’s contention that activities of assessee-firm constitutes a vocation/ profession, and hence the limit of Rs. 10 Lakhs as prescribed under clause (b) of Sec. 44AB applies…read more |
| 23. |
[TS-5076-HC-2016(KARNATAKA)-O] Section 44AB vis-a-vis Mutual Concern |
HC deletes penalty u/s. 271B, accepts assessee’s argument that it was under a bona fide belief that provisions of Sec. 44AB are not applicable to a Club, a mutual concern – HC sets aside ITAT’s order imposing penalty u/s. 271B, holds that explanation of bona fide belief offered by the assessee would constitute a reasonable cause u/s. 273B to absolve it from imposition of penalty u/s. 271B; AO rejected assessee’s explanation that it was a mutual concern and was supplying liquor and beverages only to its members, and there was no business carried on by assessee…read more |
| 24. |
Provisions of Sec. 44AB do not have any application on income excluded from total income |
Provisions of Sec. 44AB do not have any application in relation to incomes which are enumerated under Chapter III (i.e., excluded from total income); Assessee, a mutual fund, whose income is exempt u/s10(23D), is not liable to obtain any audit report u/s. 44AB – ITAT rules in favour of assessee; Holds that section 44AB is operational only when profits and gains of business or profession are to be computed for the purpose of computation of total income to meet the requirements of the provisions of section 4...read more |
Rulings on Tax Audit
| Sr. No. |
Case Name - Subject |
| 1. |
[TS-5151-HC-2008(PUNJAB)-O] - Sec. 44AB vis-a-vis Co-operative Societies |
| 2. |
[TS-5039-HC-2005(PUNJAB)-O] - Sufficient cause for delay in filing audit report |
| 3. |
[TS-249-HC-2013(UTT)-O] - Delay in auditing accounts due to appointment of Chartered Accountant being outside its domain |
| 4. |
[TS-5458-HC-2010(BOMBAY)-O] - Obtaining vs furnishing audit report |
| 5. |
[TS-731-SC-2012-O] - Provision towards payment of gratuity shown as not allowable in audit report but assessee failed to add said provision to total income |
| 6. |
[TS-5176-HC-1985(KARNATAKA)-O] - Constitutional validity of Sec. 44AB; Chartered Accountants vs Income tax practitioners |
| 7. |
[TS-5473-HC-1985(MADHYA PRADESH)-O] - Constitutional validity of Sec. 44AB |
| 8. |
[TS-5242-HC-1986(GUJARAT)-O] - Constitutional validity of Sec. 44AB |
| 9. |
[TS-5265-HC-1986(RAJASTHAN)-O] - Constitutional validity of Sec. 44AB; Sec. 142(2A) vs Sec. 44AB |
| 10. |
[TS-5037-HC-1987(ANDHRA PRADESH)-O] - Constitutional validity of Sec. 44AB; Chartered Accountants vs Income tax practitioners, advocates |
| 11. |
[TS-5726-HC-1989(MADRAS)-O] - Constitutional validity of Sec. 44AB |
| 12. |
[TS-5063-SC-1998-O] - Constitutional validity of Sec. 44AB; Chartered Accountants vs Income tax practitioners |
| 13. |
[TS-5759-HC-1989(MADRAS)-O] - Constitutional validity of Sec. 44AB; Mode of accepting loans and deposits |
| 14. |
[TS-6056-HC-1998(KARNATAKA)-O] - Constitutional validity of Sec. 44AB; Prescribing different due dates for filing return |
| 15. |
[TS-5052-HC-2000(PUNJAB)-O] - Failure to file audit report along with return of income |
| 16. |
[TS-5506-HC-2001(PUNJAB)-O] - Failure to file audit report along with return of income |
| 17. |
[TS-5110-HC-2000(BOMBAY)-O] - Commission Receipts |
| 18. |
[TS-5648-HC-1999(ALLAHABAD)-O] - Defects in audit report not valid compliance of Sec. 44AB |
| 19. |
[TS-5292-HC-2000(DELHI)-O] - Audit u/s 44AB does not preclude AO from asking evidence from assessee to substantiate its claim |
| 20. |
[TS-5389-HC-1998(RAJASTHAN)-O] - Sec. 142(2A) vs Sec. 44AB |
| 21. |
[TS-5454-HC-1998(DELHI)-O] - Sec. 142(2A) vs Sec. 44AB |
| 22. |
[TS-5631-HC-1998(MADRAS)-O] - Restriction on the number of tax audits that can be undertaken by a Chartered Accountant |
| 23. |
[TS-5173-HC-2003(KERALA)-O] - Restriction on the number of tax audits that can be undertaken by a Chartered Accountant |
| 24. |
[TS-5375-HC-2011(MADRAS)-O] - Delay in filing audit report due to illness of assessee's auditor |
| 25. |
[TS-5261-HC-2008(KARNATAKA)-O] - Audit of more than one business |
Related notifications, press release and latest amendment by Finance Act, 2017 on the issue of Tax Audit
| Sr. No. | Notification/Press Release | Summary |
| 1. | Notification No. 88/2016 | CBDT re-notifies ICDS text, applicable from AY 2017-18; Tax audit report to disclose impact |
| 2. | Notification No. 58/2017 | CBDT revises Form 3CD regarding information on transactions mentioned in Sec. 269SS & 269T |
| 3. | Press Release dated 20-06- 2016 | If an eligible person opts for presumptive taxation scheme u/s 44AD(1), he shall not be required to get his accounts audited if the total turnover or gross receipts of the relevant previous year does not exceed two crore rupees. |
| 4. | Proviso to Sec. 44AD(1) | Finance Act, 2017 has inserted a proviso to Sec. 44AD(1) stating that profit shall be deemed at 6 percent instead of 8 per cent where the amount of total turnover or gross receipts is received by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account during the previous year or before the due date specified in sub-section (1) of section 139 in respect of that previous year. |
