In the Income tax act, the words “Turnover”, “Gross receipts” and Sales are used at many places. In the common business parlance, the terms sales and turnover are used interchangeably. However, as per Income Tax law, guidelines are available on the question of what constitutes turnover. Understanding the concepts of these words is necessary for the purpose of the tax audit.

An audit is mandatory for corporate assessees, irrespective of the amount of turnover. In the case of other assesses, the Act mentions that, assessees who satisfy the necessary conditions should get the accounts audited. The Act specifies different limits for applicability of tax audit in different circumstances.

The Term ‘Turnover’ has not been defined under the Income Tax Act, 1961. But it is defined in other acts like:

According to section 2(91) of Companies Act 2013
 

"Turnover" means the gross amount of revenue recognised in the profit and loss account from the sale, supply, or distribution of goods or on account of services rendered, or both, by a company during a financial year.”

  "Sales ", "Turnover" and "Gross Receipts" are commercial terms and they should be construed in accordance with the method of accounting regularly employed by the assessee. Section 145(1) of the income Tax Act, 1961 provides that income chargeable under the head "Profits and gains of business or profession" should be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.

Hence, mixed system of accounting is not allowed under Income Tax Law.
 
 

Turnover:

The term ‘turnover’ for the purposes section 44AB would mean the aggregate amount for which sales are affected or services rendered by an enterprise. The following should not be deducted from sales to arrive at turnover:
Inclusions (Not to be deducted from Turnover)

1. Sale of scrap/ By product
2. Sales proceeds of shares, securities, debentures etc. held as stock in trade by the assessee.
3. Cash discount other than allowed in invoice
4. Commission on sales
5. If sales tax/ Excise duty was included in sale price while accounting (Inclusive method), then the same shall form part of Turnover.

Exclusions (To be deducted from Turnover)

1. If sales tax/ Excise duty was not included in sale price while accounting (Exclusive method), then the same shall not form part of Turnover.
2. Sale proceeds of Fixed Assets and  Investment property.
3. Sale proceeds of shares, securities, debentures held as an Investment.
4. Discounts allowed in the Invoice.
5. Turnover discount (even if allowed by way of separate credit note)
6. Ancillary charges such as packing, freight and forwarding etc. provided they are separately mentioned in the Invoice. Otherwise they will form part of Turnover.
7. Sales Returns
8. Price adjustments.
9. Special rebate (Excluding commission on sales)

Gross Receipts:

Gross Receipts would include all receipts whether in cash or in kind arising from carrying on of the business which will normally be assessable as business income under the Act.
 
Inclusions (To be included):

1. Sale proceeds of scrap, wastage etc. if it is included in sale or turnover
2. Advance received and forfeited from customers
3. Cash assistance under the scheme of Government
4. Liquidated damages
5. Duty Drawbacks
6. Export incentives
7. Insurance claim (except relating to fixed assets)
8. Foreign exchange fluctuations on export sales
9. Interest income (if it forms part of business income)
10. Dividend income (in case of dealer of shares and securities)
11. Commission, brokerage, service and other incidental charges received in the business of chit funds
12. Reimbursement of expenses incurred (if credited to separate account then only to the extent of surplus)
13. Hire charges and instalments received
14. Finance income in case of lessor
15. Gross receipts including lease rent in the business of operating lease
16. Hire charges of cold storage

 Exclusions (Not to be included):

1. Sale proceeds of asset held as investment.
2. Interest income (if not included as business income)
3. Dividend income except in case of dealer in shares
4. Reimbursements of custom duty and other charges collected by clearing agent
5. Share of profit of a partner of a firm/LLP excluded from total income u/s10(2A)
6. Liabilities/ provisions of creditors, expenses or taxes written back
7. Rental income (if not included as business income)
8. Reimbursement of advertising charges by an advertising agent from the client.

 
Turnover includes  GST ?

The term ‘turnover’ mean the aggregate amount for which sales are effected or services rendered by an enterprise. As per the guidance note issued by the ICAI:

• If GST or any other tax is included in the sale price, no adjustment in respect thereof should be made for considering the quantum of turnover. Trade discounts can be deducted from sales but not the commission allowed to third parties.
• If, however, GST or any other indirect tax recovered are credited separately to GST or other tax account (being separate accounts) and payments to the authority are debited in the same account, they would not be included in the turnover.

Indirect taxes should normally not be included to arrive at the limits of s. 44AB, except in the cases as stated above.
 

Further it should be noted that, 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.
 
 

Gross Receipts in case of Profession

Gross receipts in case of profession would include all receipts arising from carrying on of the profession. Re-imbursement of expenses if collected separately either in advance or otherwise, should not form part of the "gross receipts". As these receipts are used to making payment of taxes, fees etc. on behalf of client.  If, however, such out of pocket expenses are not specifically collected but are included / collected by way of a consolidated fee, the whole of the amount so collected shall form part of gross receipts.
 

In conclusion, the term “Turnover” has wider meaning under the income tax act. ‘Turnover’ is not defined in the Act, thereby leading to different interpretations. The varied kinds of businesses and transactions that lead to varied inferences on what constitutes turnover of a business. It depends on the basis of nature of business and transactions. It is advisable to take professional consultancy for calculation of turnover for particular business or profession to comply with law without default.