"Gross Receipts" - ICAI's Views
According to ICAI, all receipts whether in cash or in kind arising from carrying on of the business (which will be assessable as business income) should be included in gross receipts.
Items not to be included in 'gross receipts' Items to be included in 'gross receipts'
According to ICAI's Guidance Note on Tax Audit,
the following shall not to be included in gross receipts :
• Advance forfeited in respect of fixed assets.
• Advance received for services to be rendered - these are liabilities and not part of gross receipts until services
are rendered. - For contrary viewpoint-see Dy. CIT v. Gopal Krishan Builders[2004] 91 ITD 124 (Lucknow) (SMC).
• Dividends on shares except where the assessee is a dealer in shares.
• Interest income if not assessable as business income.
• Out of pocket expenses collected separately from clients by solicitors, advocates/CAs and credited to a separate account and utilized for making payments (stamp duties, counsel's fees, travelling expenses etc.) on client's behalf.
• Reimbursement of advertising charges received by advertising agent from clients.
• Reimbursement of advertising charges received from clients by a recruiting agent.
• Reimbursement of customs duty and other charges received by a clearing agent.
• Reimbursements of payments to airlines, railways etc. (incurred on behalf of clients) received by a travel agent.
• Rental income which is not assessable as business income.
• Sales proceeds of fixed assets.
• Sales proceeds of investments.
• Share of profit of a partner of total income of a firm excluded from his total income under section 10(2A). [On the same analogy, whether all profits or receipts exempt from tax under section 10 of the Act and excluded from total income would not be included in gross receipts? The answer appears to be "Yes" from the ruling in India Magnum Fund's case (supra) – SeeQ.13. above.
• Write back of amounts no longer payable to creditors.
• Write back of provisions no longer required. According to ICAI's Guidance Note on Tax Audit, the following shall be included in gross receipts :
• Advance received from customers and forfeited.
• Cash incentives for exports.
• Charges recovered not by way of reimbursement of actual expenses incurred.
• Commission, brokerage, service charges and other incidental charges received by a chit fund.
• Consolidated amount for transportation, boarding and lodging and other facilities in respect of package tour received from members of a group tour by a travel agent.
• Dividends on shares received by a dealer in shares.
• Duty drawback.
• Exchange difference (net) on export sales (on the same principle as for reimbursement of expenses below)
• Finance income of lessor.
• Gross receipts including lease rent in the business of operating lease.
• Hire charges and instalments received in the course of hire purchase.
• Hire charges of cold storage.
• Insurance claims (except for fixed assets).
• Interest income - Where the same is assessable as business income.
• Interest income (gross) received by a money lender.
• Liquidated damages.
• Out of pocket expenses recovered by CA/solicitor/advocate as part of a consolidated fee.
• Profits on sale of import license.
• Recovery of charges from clients by advertising agencies where the Ad. Agency books space or time-slots in bulk and then sells to clients.
• Reimbursement of expenses incurred (e.g. packing, forwarding, freight, insurance, travelling etc.) - if the same
is not credited to a separate account. If the same is credited to a separate account and expenses incurred are debited to that account, then only the net surplus should be added to turnover for section 44AB purposes.
• Rental income - Where the same is assessable as business income.
• Sales proceeds of scrap, wastage etc. - if not treated as part of sale or turnover.
What if the tax auditor is called upon to give his report only in respect of one
or more businesses carried on by the assessee and the books of account of the other businesses are not produced as the same are not required to be audited under the Act?
In such a case, the tax auditor should mention the fact that audit has not been conducted of those businesses whose books of account had not been produced. However, if the financial statements include, inter alia, the results of such business for which books of account have not been produced, the auditor should qualify his report in Form No. 3CB.
Form 3CD
How to furnish nature of business or profession details required by Item 8(a)?
State the principal line of each business or profession (e.g. manufacturing of electronic goods, wholesaler in food grains etc.) against clause 8(a). (ICAI's Supplemental Guidance).
♦ If more than one business or profession is carried on during the previous year, nature of every business or profession.
♦ In case of a service provider (person rendering services), broadly state the nature of each type of service against clause 8(a). (ICAI's Supplemental Guidance).
♦ ICAI does not clarify what 'each type of service means'. Classification according to service tax law will come in very handy. Each category of taxable service may be treated as a 'type of service'.
♦ Part B of Annexure I to Form No. 3CD also requires this information. The Note at the end of the said Annexure provides details of the various sectors and sub-sectors in which the assessee could be engaged as well as the Code Nos. for various sectors and sub-sectors.
♦ The statement/descripttttion given against this clause should tally with the information given in Part B of Annexure I to Form No. 3CD.
How to state change in the nature of business/profession against item 8(b)?
If there is any change in the nature of business or profession, it is not enough to merely give a 'yes' answer or to merely state the fact that there is a change. In such a case, 'particulars of such change' should be stated. If there is no change in the nature of business or profession, it is sufficient to state the fact that there is no such change.
ICAI has interpreted Clause 8(b) as under:
♦ 'Change in the nature of business or profession' in clause 8(b) should be construed to mean any material change in the nature of business or profession. Any material change in the nature of business or profession should be clearly stated against clause 8(b).
♦ 'Change' refers to a change during the previous year under audit. Any change after the balance sheet date should be ignored.
Instances/examples of changes in business or profession that needs to be reported against clause 8(b) Instances/examples of changes in business or profession that needs no reporting against clause 8(b)
(i) change from manufacturer to trader.
(ii) change in the principal line of business.
(iii) change from wholesale business to retail business.
(iv) change from manufacturing own commodities to manufacturing goods on job work basis for others.
(v) addition to a particular line of a business.
(vi) discontinuance of a particular line of business.
(vii) amalgamation/demerger if a new line of activity emerges as a result.
(viii) hiving off of any activity in restructuring. (i) temporary suspension of business.
(ii) amalgamation/demerger if there is a similar line of activity-i.e. no new line of activity emerges as a result.
(iii) CA who was rendering services related to direct taxes starts rendering services related to indirect taxes also (since CA's core area of practice consists of accounting, auditing, finance and taxation).
(iv) a manufacturer and exporter of garments until last financial year does business of high sea sales in current financial year and high sea sales not material in relation to existing business- no need to report since change is not a material change.
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