Terms relevant for provisions of section 44AB

[Tax Audit Report]

"business"

The term "business" is defined in section 2(13) of the Act, as under "Business" includes any trade, commerce, or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.

The word `business' is one of wide import and it means activity carried on continuously and systematically by a person by the application of his labour or skill with a view to earning an income.


The expression "business" does not necessarily mean trade or manufacture only - Barendra Prasad Roy v ITO [1981] 129 ITR 295 (SC).

Whether a particular activity can be classified as `business' will depend on the facts and circumstances of each case.

The following activities have been held to be business

(i) Advertising agent

(ii) Clearing, forwarding and shipping agents - CIT v. Jeevanlal Lallubhai & Co. [1994] 206 ITR 548 (Bom).

(iii) Couriers

(iv) Insurance agent

(v) Nursing home

(vi) Stock and share broking and dealing in shares and securities - CIT v. Lallubhai Nagardas & Sons [1993] 204 ITR 93 (Bom).

(vii) Travel agent.

[Tax Audit Report]

"Profession"

The term "business" is defined in section 2(36) of the Act, as under profession to include vocation.

Profession is a word of wide import and includes "vocation" which is only a way of living. - CIT v. Ram Kripal Tripathi [1980] 125 ITR 408 (All).

Whether a particular activity can be classified as`profession' will depend on the facts and circumstances of each case.

The expression "profession" involves the idea of an occupation requiring purely intellectual skill or manual skill controlled by the intellectual skill of the operator, as distinguished from an operation which is substantially the production or sale or arrangement for the production or sale, of commodities. - CIT Vs. Manmohan Das (Deceased) [1966] 59 ITR 699 (SC).

The following have been listed out as professions in section 44AA and notified thereunder (Notifications No. SO-17(E) dated 12.1.77 and No. SO 2675 dated 25.9.1992)

(i) Accountancy


(ii) Architectural


(iii) Authorised Representative


(iv) Company Secretary


(v) Engineering


(vi) Film Artists - Actors, Art director (including Assistant Art Director), Cameramen, Dance director (including Assistant Dance Director), Dialogue writer, Director (including Assistant Director), Dress designer, Editor, Lyricist, Music director (including Assistant Music Director), Screen play writer, Singer, Story writer.


(vii) Interior Decoration


(viii) Legal


(ix) Medical


(x) Technical Consultancy


(xi) Information technology

CBDT has recognised the following persons in relation to the sports activities as Professional Services for the purpose of the section 194J, namely :

Sports Persons,

Umpires and Referees,

Coaches and Trainers,

Team Physicians and Physiotherapists,

Event Managers,

Commentators,

Anchors, and

Sports Columnists.

[Notification No. 88/2008/F. No. 275/43/2008-IT(B), dated 21-8-2008]

The Note at the end of Part B of the Annexure to Form No. 3CD specifies various sectors and sub-sectors of various business activities and the Code of these activities (for the purpose of mentioning the Code indicating the Nature of Business against Part B of the Annexure). The said Note categorises the following as belonging to the ‘Professionals’ sector:

Sector Sub-sector Code
(6) Professionals Chartered Accountants, Auditors etc. 0601
Fashion Designers 0602
Legal Professionals 0603
Medical Professionals 0604
Nursing Homes 0605
Speciality Hospitals 0606
Others 0607

This code again puts a controversy that nursing home and speciality hospitals are professionals. The controversy had been settled by the decision of ITO v. Ashalok Nursing Home (P.) Ltd. [2006] 156 Taxman 86 (Mag.) (Delhi), the Tribunal held that a company cannot be said to carry on a profession. For a person to be engaged in a profession, personal skill is necessary. A company being an artificial person cannot be said to possess any personal skills. A company being an artificial person does not have a mind and body and therefore cannot be engaged in profession. It can neither have any intellectual skill or any manual skill. Rule 6F(3) read with section 44AA requires persons carrying on medical profession to maintain the Daily Case Register in Form 3C. An assessee-company running a nursing home cannot be said to carry on a profession and therefore, such assessee-company is not required to maintain a Daily Case Register in Form 3C. Rule 6F(3) uses the word ‘persons’ and section 2(31) defines ‘person’ to include company is of no consequence. That does not alter the position that an artificial person cannot carry on a profession.

Further Mumbai High Court has held in the case of Dedicated Health Care Society TPA (India) (P) Ltd. Vs. ACIT [2010], that hospitals are providing professional services hence covered u/s 194J.

In view of these development, it would be safer to treat the nursing home and hospitals as profession.

[Tax Audit Report]

The term "sales", "turnover" or "gross receipts" are not defined in the Act, and therefore their meaning has to be considered for the applicability of the section.

[Tax Audit Report]

As per “Guidance Note on Terms Used in Financial Statements”

“Sales Turnover” means

“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”.

As per the Guide to Company Audit issued by the Institute

“sales”

“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,
while discussing the disclosure requirements relating to `turnover’ states

“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 turnovershould 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.”

The Statement on the Manufacturing and Other Companies (Auditors' Report) Order, 1988 issued by the Institute in May 1989, while discussing the term ‘turnover’ in states

“The term ‘turnover’ for the purposes of this clause may be interpreted to mean the aggregate amount for which sales are effected or services rendered by an enterprise. If sales tax and excise duty are included in the sale price, no adjustment in respect thereof should be made for considering the quantum of turnover. Trade discount can be deducted from sales but not the commission allowed to third parties. If however, the Excise duty and/or sales tax recovered are credited separately to Excise Duty or Sales Tax Account (being separate accounts) and payments to the authority are debited in the same account, they would not be included in the turnover. However, sales of scrap shown separately under the heading ‘miscellaneous income’ will have to be included in turnover”.

[Tax Audit Report]

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.

[Tax Audit Report]

Question:

whether the sales by a commission agent or by a person on consignment basis forms part of the turnover of the commission agent and/or consignee as the case may be.

Solution:

In such cases, it will be necessary to find out, whether the property in the goods or all significant risks, reward of ownership of goods belongs to the commission agent or the consignee immediately before the transfer by him to third person.
If the property in the goods or all significant risks and rewards of ownership of goods continue to belong to the principal, the relevant sale price shall not form part of the sales/turnover of the commission agent and/or the consignee as the case may be.
If, however,the property in the goods, significant risks and reward of ownership belongs to the commission agent and/or the consignee, as the case may be, the sale price received/receivable by him shall form part of his sales/turnover.

In this context, it would be useful to refer to the CBDT Circular No.452 dated 17th March, 1986, where the Board has clarified the question of applicability of section 44AB in the cases of Commission Agents, Arhatias, etc. The Circular is published in Appendix I.

[Tax Audit Report]

Share brokers, on purchasing securities on behalf of their customers, do not get them transferred in their names but deliver them to the customers who get them transferred in their names.

The same is true in case of sales also.
The share broker holds the delivery merely on behalf of his customer.
The property in goods does not get transferred to the share brokers.

Only brokerage which is being accounted for in the books of account of share brokers should be taken into account for considering the limits for the purpose of section 44AB.

However,
in case of transactions entered into by share broker on his personal account, the sale value should also be taken into account for considering the limit for the purpose of section 44AB.

The case of a sub-broker is same as that of a share broker.

[Tax Audit Report]

The term "gross receipts" is also not defined in the Act.
It will 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.

In other words, the following items of income and/or receipts would be covered by the term "gross receipts in business"

i) Profits on sale of a licence granted under the Imports (Control) Order, 1955 made under the Imports and Exports (Control) Act, 1947;

ii) Cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India;

iii) Any duty of customs or excise re-paid or repayable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1995;

iv) The aggregate of gross income by way of interest received by the money lender;

v) Commission, brokerage, service and other incidental charges received in the business of chit funds;

vi) Reimbursement of expenses incurred (e.g. packing, forwarding, freight, insurance, travelling etc.) and if the same is credited to a separate account in the books, only the net surplus on this account should be added to the turnover for the purposes of Section 44AB;

vii) The net exchange rate difference on export sales during the year on the basis of the guiding principle explained in

(vi) above will have to be added.

viii) Hire charges of cold storage;

ix) Liquidated damages;

x) Insurance claims - except for fixed assets;

xi) Sale proceeds of scrap, wastage etc. unless treated as part of sale or turnover, whether or not credited to miscellaneous income account;

[Tax Audit Report]

The following itemswould not form part of "gross receipts in business"
for purposes of section 44AB

i) Sale proceeds of fixed assets

ii) Sale proceeds of assets held as investments

iii) Rental income unless the same is assessable as business income

iv) Dividends on shares except in the case of an assessee dealing in shares

v) Income by way of interest unless assessable as business income

vi) Reimbursement of customs duty and other charges collected by a clearing agent

vii) In the case of a recruiting agent,
the advertisement charges received by him by way of reimbursement of expenses incurred by him

viii) In the case of a traveling agent,
the amount received from the clients for payment to the airlines, railways etc. where such amounts are received by way of reimbursement of expenses incurred on behalf of the client.
If, however, the travel agent is conducting a package tour and charges a consolidated sum for transportation, boarding and lodging and other facilities,
then the amount received from the members of group tour should form part of gross receipts

and

ix) In the case of an advertising agent,
the amount of advertising charges recovered by him from his clients provided these are by way of reimbursement.
But if the advertising agent books the advertisement space in bulk and recovers the charges from different clients, the amount received by him from the clients will not be the same as the charges paid by him and in such a case the amount recovered by him will form part of his gross receipts.

[Tax Audit Report]

In reference to the above

items would not form part of "gross receipts in business" for purposes of section 44AB

the principle to be applied is that

if the assessee is merely reimbursed for certain expenses incurred, the same will not form part of his gross receipts.

But in the case of charges recovered, which are not by way of reimbursement of the actual expenses incurred, they will form part of his gross receipts.