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Opinion - Taxation

Advancing an argument on advance

R. Anand

R. Anand on a case that had to interpret the terms governing tax audit

ACCOUNTANTS have grappled with expressions such as `total sales', `turnover', `gross receipts', and so on. Essentially accounting terms, these surface frequently in tax litigations as well. When tax audit was first introduced through Section 44AB of the Income-tax Act, 1961, the threshold limit for applicability in respect of businessmen was Rs 40 lakh. The section became applicable whenever total sales, turnover or gross receipts exceeded Rs 40 lakh and Rs 10 lakh, respectively, in the case of businessmen and professionals.

Introduced in 1984, the Section has lasted two decades, with the objective of ensuring that income-tax assessments are made simpler and faster since the basic data required for assessments are provided with the return of income, by filing Forms 3CA, 3CB and 3CD of the tax audit report. At present, there are mixed feelings on the efficacy of tax audit reports. The expressions turnover and gross receipts came up for interpretation before the Lucknow Bench of the Tribunal in the DCIT vs Gopal Krishan Builders (2004 91 ITD 124) case.

Facts, issues

In the assessment year 1997-98, the assessee, a partnership firm involved in the business of construction, started constructing a commercial-cum-residential building. The balance-sheet revealed construction work in progress and sundry creditors, as also advances received for booking of the building amounting to Rs 2.20 crore. As the tax audit report was not furnished, the assessing officer (AO) initiated penalty proceedings under Section 271B.

The assessee submitted that the firm was following the mercantile system of accounting and that Section 44AB was not applicable, as there was no turnover, sale or gross receipt as required under Section 44AB. The AO was of the view that the essence of Section 44AB was that certain classes of assessees, especially the bigger ones, should have their accounts audited and parameters of business determined by gross receipts, sale or turnover. According to the AO, the assessee was following the mercantile system of accounting and it was not right on its part to state that there were no receipts, sales or turnover. He took the stand the advances received during the course of construction forms part of turnover.

The assessee, on the other hand, took the stand that advances per se will not come under the category of turnover or gross receipts and, therefore, no tax audit would arise.

On appeal, the Commissioner (Appeals) upheld the assessee's view and deleted the penalty. The matter reached the tribunal. The issue for consideration was whether receipts amounting to Rs 2.2 crore, which was essentially the advances for carrying out construction work, can be taken as the basis to decide whether the assessee is subjected to tax audit.

The ICAI's view

The ICAI`s Guidance Note on tax audit under Section 44AB discusses in detail the scope and the process to be adopted in carrying out tax audit. In para 5.10 of the Guidance Note, the term `gross receipts' has been explained with some concrete examples. The inclusive items in the para relate to various categories of receipts but not advances received for carrying out construction activities.

Similarly, para 5.11 of the Guidance Note discusses items which do not form part of gross receipts. In this list also, the facts discussed in the case do not figure. Therefore, the ICAI has not categorically stated that such advances either forms part of `turnover' or `receipts' or does not form part of `turnover' or `receipts'. Hence, this matter has to be left to the interpretation by the courts.

Tribunal decision

The tribunal held that the advances received would come under the category `gross receipts' and having exceeded Rs 40 lakh, the assessee should have filed the tax audit report. The Tribunal reasoned that "each and every word used in any provisions of any statute is having its importance and used by the legislatures after much deliberations.

"The words in Section 44AB, `total sales', `turnover' or `gross receipt', had been used specifically and the scope of words `gross receipt' is quite wide, else the legislature would have stopped after using the words `sales' or `turnover'. The assessee had not been able to show as to how the amount received as advance from customers would not be included in the words `gross receipt'. Further, those amounts were having element of profit.

"The amount of advance was to be adjusted towards the cost of the flats booked by each customer and the amount of advance must be having cost of flat construction as well as element of profit, which might subsequently be bigger in proportion when whole of the amount fixed for sale of flat was realised, but it could not be said that the amount of advance received by the assessee would not be included in the scope of words 'gross receipt'."

To fortify its stand that "advances" partake the character of "receipts", the tribunal went into the rules of construction which stipulate that when two or more words susceptible of analogous meaning are coupled together with noscunter a sociis, they are understood to be used in their cognate sense.

On this basis, the tribunal proceeded to analyse that "total sales, turnover and gross receipts may broadly mean gross inflow of cash receivable and other consideration arising in the course of ordinary activities of an enterprise from the sale of goods or from the rendering of services.

It is measured by the charges made to customers or clients for goods supplied or services rendered to them and by the charges and rewards arising from the use of sources by them.

"It should, however, exclude amounts collected on behalf of the third parties trusts or obligations. The expressions total sales, turnover, gross receipts in Section 44AB allude to transaction which have a bearing on the computation of taxable income of an assessee, under the Act, from the business or profession carried on or deemed to be carried on by him."

There are strong views that tax audit has not fully served the purpose for which it was first introduced by the Finance Act of 1984. Repeated information in various combinations are asked though they are available as part of the tax audit report.

Moreover, issues such as whether a category of receipts should or should not form part of turnover for Section 44AB are still being grappled with. It is time to review the process of tax audit and make the required amendments to the forms so that it serves the interest of all concerned.

(The author is a Chennai-based chartered accountant.)

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