Query No. 18
Subject: Meaning of the term ‘total turnover’ in the case of a construction company.1
A. Facts of the Case
1. X Limited is a construction company engaged in construction of buildings, roads, bridges and other projects. Following is the financial data of the company for the financial year 2000-2001:
2. According to the querist, in financial year 2000-01, as per Accounting Standard (AS) 7, ‘Accounting for Construction Contracts’ (issued 1983), there were two methods of calculating the turnover, i.e., percentage of completion method and completed contract method.
3. The querist has stated that Rs. 1,215 lakh had been calculated as ‘total turnover’ of the company for the financial year 2000-2001. While calculating the ‘total turnover’, an amount of Rs. 210 lakh (say, about 20%) of closing WIP had been transferred as ‘incremental value’ to ‘total turnover’ on the basis of percentage of completion method. The summary of ‘total turnover’ is as follows:
4. The querist has stated that it is the eligibility norms of an agency that any company having the total turnover of Rs. 1,200 lakh or more could only apply for the tender.
5. According to the querist, the auditor of X Ltd. has given a certificate to this effect as below:
B . Query
6. The querist has sought the opinion of the Expert Advisory Committee as to whether the contentions made in paragraph 3 are correct.
C. Points considered by the Committee
7. The Committee notes that the basic issue raised in the query relates to calculation of total turnover of the company. The Committee wishes to point out that the opinion given by the Committee is purely from accounting point of view. In case ‘total turnover’ has been defined in the terms and conditions of the tender, the same would have to be considered.
8. The Committee notes that clause 3(ii)(a) of Part II of Schedule VI to the Companies Act, 1956, requires the disclosure of turnover "that is, the aggregate amount for which sales are effected by the company, giving amount of sale in respect of each class of goods dealt with by the company, and indicating the quantities of such sale for each class separately". The Committee further notes that in the case of companies rendering or supplying services, clause 3(ii)(c) of Part II of Schedule VI requires disclosure of "the gross income derived from the services rendered or supplied". On the basis of the aforesaid, the Committee is of the view that in the case of a company which constructs and sells flats etc., on its own account or acts as a contractor, the turnover would include only the amount recognised as sales in the profit and loss account on account of sale of flats etc., and/or the gross income derived from the services rendered as a contractor. The Committee is, therefore, of the view that turnover of a company involved in construction business would comprise only the income from its operations, namely, the construction and sale of flats etc. and/or the income from rendering of services as a contractor. Accordingly, ‘total turnover’ should not include any other income which may be earned during the course of the business such as income from interest, dividends etc.
9. The Committee also notes that the Announcement on ‘Applicability of Accounting Standards’, issued by the Institute of Chartered Accountants of India, published in the November, 2003 issue of the Institute’s Journal ‘The Chartered Accountant’ on pp 480-489, states in Annexure I ‘Criteria for classification of enterprises’ where turnover is one of the criteria for determining the level of enterprises that "Turnover does not include ‘other income’."
10. The Committee further notes that the Statement on the Companies (Auditor’s Report) Order, 2003, issued by the Institute of Chartered Accountants of India, states in paragraph 23 that "The term ‘turnover’ is a commercial term and should be construed in accordance with the method of accounting regularly employed by the company". The Committee also notes that the primacy of the method of accounting regularly followed by the enterprise for the purpose of arriving at the amount of ‘turnover’ has also been recognised in the Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, issued by the Institute of Chartered Accountants of India (paragraph 5.6). In this context, the Committee notes from the copy of the profit and loss account separately supplied by the querist that Schedule-I and Schedule-J related to ‘Income from Operations’ and ‘Other Income’ of the profit and loss account contain the following items respectively:
11. The Committee, keeping in view the meaning of the term ‘turnover’ as explained in paragraphs 8 and 9 above and the method of accounting regularly followed by the company, is of the view that the amount in respect of Sale of Flats/Plots (Projects) and Certified Work Bills (Contracts), can be considered as a part of the ‘total turnover’. With regard to the other two items in Schedule I, namely, Funpoint Sales (gross) and Hire Charges, the Committee refrains from expressing any view since the nature of the said items is not clear from the facts of the case. The Committee is further of the view that the ‘other income’ being neither a part of the sale proceeds of flats etc., nor of the services rendered as a contractor, does not form part of the total turnover.
12. The Committee notes that as per paragraph 3 of the facts of the case, "an amount of Rs. 210 lakh (say, about 20%) of closing WIP has been transferred as ‘incremental value’ to ‘total turnover’ on the basis of percentage of completion method". The Committee notes that the querist has not indicated how this amount has been arrived at under the percentage of completion method. The Committee further notes that this amount has not been included in the profit and loss account as a regular accounting method followed by the company. The Committee is of the view that such ad-hoc and arbitrary amount cannot form part of the total turnover of the company.
D. Opinion
13. On the basis of the above, the Committee is of the opinion that contentions made in paragraph 3 are not correct.
1 Opinion finalised by the Committee on 6.10.2004 |