28 July 2011
What is the meaning of Turnover for Audit Purpose? Does it only mean Sales, Turnover and Gross Receipts or we should also consider Puchases for this purpose?
In the “Guidance Note on Terms Used in Financial Statements” published by the Institute, the expression “Sales Turnover” (Item 15.01)has been defined as under:
“The aggregate amount for which sales are effected or services rendered by an enterprise. The term `gross turnover’ and `net turnover’ (or `gross sales’ and `net sales’) are sometimes used to distinguish the sales aggregate before and after deduction of returns and trade discounts”.
The Guide to Company Audit issued by the Institute, while discussing “sales”, states as follows : (Page 53 of 4th Edition, 1980) “Total turnover, that is, the aggregate amount for which sales are effected by the company, giving the amount of sales in respect of each class of goods dealt with by the company and indicating the quantities of such sales for each class separately. Note(i) The term `turnover' would mean the total sales after deducting therefrom goods returned, price adjustments, trade discount and cancellation of bills for the period of audit, if any. Adjustments which do not relate to turnover should not be made e.g. writing off bad debts, royalty etc. Where excise duty is included in turnover, the corresponding amount should be distinctly shown as a debit item in the profit and loss account.”
The “Statement on the Amendments to Schedule VI to the Companies Act, 1956” issued by the Institute, (Page 14, 1976 edition) while discussing the disclosure requirements relating to `turnover’ states as follows:- “As regards the value of turnover, a question which may arise is with reference to various extra and ancillary charges. The invoices may involve various extra and ancillary charges such as those relating to packing, freight, forwarding, interest, commission, etc. It is suggested that ordinarily the value of turnover should be disclosed exclusive of such ancillary and extra charges, except in those cases where because of the accounting system followed by the company, separate demarcation of such charges is not possible from the accounts or where the company’s billing procedure involves a composite charge inclusive of various services rather than a separate charge for each service. In the case of invoices containing composite charges, it would not ordinarily be proper to attempt a demarcation of ancillary charges on a proportionate or estimated basis. For example, if a company makes a composite charge to its customer, inclusive of freight and despatch, the charge so made should accordingly be treated as part of the turnover for purpose of this section. It would not be proper to reduce the value of the turnover with reference to the approximate value of the service relating to freight and despatch. On the other hand, if the company makes a separate charge for freight and despatch and for other similar services, it would be quite proper to ignore such charges when computing the value of the turnover to be disclosed in the Profit and Loss Account. In other words, the disclosure may well be determined by reference to the company’s invoicing and accounting policy and may thereby vary from company to company. For reasons of consistency as far as possible, a company should adhere to the same basic policy from year to year and if there is any change in the policy the effect of that change may need to be disclosed if it is material, so that a comparison of the turnover figures from year to year does not become misleading.”
Applying the above generally accepted accounting principles, a few typical cases may be considered: (i) Discount allowed in the sales invoice will reduce the sale price and, therefore, the same can be deducted from the turnover. (ii) Cash discount otherwise than that allowed in a cash memo/sales invoice is in the nature of a financing charge and is not related to turnover. The same should not be deducted from the figure of turnover. (iii) Turnover discount is normally allowed to a customer if the sales made to him exceed a particular quantity. This being dependent on the turnover, as per trade practice, it is in the nature of trade discount and should be deducted from the figure of turnover even if the same is allowed at periodical intervals by separate credit notes. (iv) Special rebate allowed to a customer can be deducted from the sales 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. (v) Price of goods returned should be deducted from the figure of turnover even if the returns are from the sales made in the earlier year/s. (vi) Sale proceeds of fixed assets would not form part of turnover since these are not held for resale. (vii) Sale proceeds of property held as investment property will not form part of turnover. (viii) Sale proceeds of any shares, securities, debentures, etc., held as investment will not form part of turnover. However if the shares, securities, debentures etc., are held as stock-in-trade, the sale proceeds thereof will form part of turnover.
29 July 2011
Sir, Suppose a film production company in its very first year of business incurred expenses to the tune of 2crs.and no revenue generated. So I would like to know whether audit is applicable in this case ?
From the above definitions cited, it is clear that sales / receipt are only to be considered as turnover. Hence, purchases / expenses will not be considered as turnover and consequently, tax audit will not be applicable in your case.
29 July 2011
Sir, There's a Mumbai Tribunal judgement in the case of Vijay Maheshwari, HUF (228 ITR (St) 157) where it has been held that the word "turnover" used in Section 44AB means purchases as well as sales.
Tribunal judgement is not binding on assessee. As a member of ICAI, we are required to follow ICAI Guidelines (incl. Guidance note). Hence, if you ask me in the capacity of Chartered Accountant, whether tax audit will be applicable in your case, my answer will No.
CAclubindia
