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Tax Audit Turnover


Tax Audit Turnover

Tax audit turnover is an amount of turnover which attracts a mandatory tax audit. Tax audit is an audit of accounts conducted to satisfy the requirements of the Income Tax Act. The concept of Tax audit turnover applies to all Income Tax assessees who should undergo a tax audit. For assessees who satisfy the conditions mentioned in the Act, a tax audit is mandatory. One of the primary conditions for a tax audit is that the turnover should exceed the specified limit. In this article, the guidelines which apply to the calculation of turnover are explained.

For non-corporate assessees, the general procedure for determining the tax liability is self-assessment. Under self-assessment, the assessee makes a declaration in the Income Tax return concerning the income. The tax liability is settled based on the income mentioned in the Income Tax return. However, the Act specifies the specific circumstances in which self-assessment is not allowed. In these circumstances, it becomes mandatory for the assessee to get the accounts audited. The specific circumstances are mentioned in Sections 44AA, 44AB, 44AD, 44AE and 44ADA of the Act.

For corporate assessees, an audit is mandatory irrespective of the amount of turnover. In the case of other assessees, the requirement to undergo a compulsory audit of accounts is specified by the Income Tax Act. 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.

Meaning of Turnover

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. The purpose of the guidelines is to ensure that incomes are taxed under the appropriate heads. For instance, the sale of machinery will attract capital gains tax and thus does not form part of turnover. On the other hand, the sale of products to customers falls under business income and should, therefore, be considered as turnover. In Income Tax law, turnover refers to the total sales made by the assessee after making the required deductions for the following items:

  • Goods returned from customers
  • Price adjustment carried out after completion of the sale transaction
  • Trade discounts
  • Bills cancelled on account of termination of the sale transaction

Calculation of Turnover

  • The turnover should be calculated based on the rules of accountancy which are prevailing in the industry. Deductions should not be made for writing off irrecoverable debts or pending royalty payments which are in dispute. Also, additional charges, including packing, freight, forwarding, interest and commission, should not form part of the turnover.
  • The transactions included in turnover should be connected with the business of the assessee. Based on business terminology, it can be understood that turnover includes capital receipts also. However, based on the appellate tribunal and judicial decisions, it is inferred that exclusively revenue transactions should be considered for inclusion in turnover.
  • The accounting system maintained by the company may not have the necessary infrastructure to separate the additional charges from turnover. In such cases, the additional charges will be included in the turnover.
  • Turnover should include the amount of GST and excise duty. The inclusion should be made irrespective of whether the GST has been paid.

Turnover for Transactions in Securities

  • The taxability of the sale proceeds of securities depends on the purpose for which the securities were purchased. The securities may have been purchased for an investment purpose. In such cases, the sale transaction will attract capital gains tax. Since the transaction is covered by capital gains tax, the sale consideration will not be included in turnover.
  • Alternatively, the securities may have been purchased for trading purposes. Also, the assessee may be deriving revenue out of the purchase and sale of securities regularly. In such cases, the method of determining the turnover will not be uniform. The method deployed depends on whether the securities are traded as a speculative activity or to take delivery.
  • The assessee may perform trading in securities with the motive of earning a speculative profit. In such cases, the difference in the value of the assets purchased and sold is treated as the turnover.
  • Alternatively, the assessee may carry out sale and purchase transactions in securities for taking delivery. In such cases, the cumulative value of the sale transactions will be considered as the turnover.
  • The question of whether the securities have been purchased for trading purposes or investment purposes depends on the circumstances. The general criteria used for determining the nature of the purchase of securities is the volume and frequency of the transactions.

Turnover for Sale Through Agent

  • The assessee may be making a sale through a commission agent or consignee. In such cases, the criterion of transfer of risks and rewards of ownership should be applied.
  • The risks and rewards associated with ownership may be fully transferred to the commission agent or consignee. In such cases, the turnover of the assessee should not include the agency or commission sales.
  • Alternatively, the transfer of risks and rewards associated with ownership may not take place. In such cases, the turnover of the assessee must mandatorily include the agency or commission sales.
  • The quantum of purchases recorded in the books of accounts may exceed the threshold limit. In such instances, the assessee will be understood to have met the turnover criteria. Hence, tax audit will be mandatory for the assessee. In case the purchase criterion is satisfied, the tax audit is compulsory even if the turnover falls below the threshold limit.

Exclusions from Turnover

  • Sales proceeds arising from the sale of fixed assets should not be included in the turnover.
  • In the case of assessees engaged in job work businesses, a profit element may not be present in the value of the material supplied by the contractor to the assessee. In such cases, the turnover of the assessee will not include the value of the supplied material.
  • The assessee may be engaged in the business of residential or commercial properties. During the progress of the construction work, the work-in-progress for the properties would be reflected in the financial statements of the assessee. The work-in-progress reflects the unfinished business venture of the assessee. The work-in-progress is not represented by any commitment on the part of a buyer to make a purchase. Hence, ownership in the work-in-progress remains vested with the assessee. Since there is no transfer of ownership, it can be inferred that sale has not taken place. Thus, work-in-progress is not eligible for inclusion in the turnover.
  • The assessee may be engaged in the business of property development. The assessee may have obtained advances from customers towards booking of the property. In such cases, the advances will be excluded from the turnover to the extent an absence of a profit element can be discerned. The advances from customers may be adjusted against the cost of construction or disclosed separately as a current liability.

Circumstances for Mandatory Tax Audit

In the following circumstances, it is compulsory under the Act for the assessee to submit the accounts for audit:

  • If the turnover from the business during the financial year has exceeded one crore rupees
  • When the turnover from the profession during the financial year has exceeded fifty lakh rupees
  • If the assessee has opted for a presumptive taxation scheme but has declared a lower income
  • When the assessee has declared business income at the rate of eight per cent under Section 44AD, and the total income of the assessee has exceeded the basic exemption limit

Filing Requirements for Tax Audit

The assessee may be covered under the provisions of the Act which indicate mandatory applicability of tax audit. In such cases, the assessee is required to file the following forms together with the Income Tax return:

  • Form 3CA– This form should be used when the books of the assessee have already been submitted for audit under other laws. The books may have been audited as per the Companies Act or the Societies Registration Act. In such cases, a second audit need not be performed for satisfying the requirement for audit under the Income Tax Act.
  • Form 3CB– This form is used when the books of the assessee are audited exclusively to satisfy the requirements of the Income Tax Act.

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