Practical point of views on Sec 44AD deemed profit vs Actual Profit



Quick Summary
Section 44AD allows businesses to declare a 'deemed profit' without maintaining detailed books. However, a strong view suggests this is for administrative ease, not for under-declaring profits when actual earnings are significantly higher. Declaring a profit lower than actual earnings, especially when asset accumulation doesn't match declared income, can be seen as tax evasion. While some argue for declaring the minimum deemed profit, this carries a risk of scrutiny and potential penalties.

Practical Point of View in cases where Income is higher than 8%, but the person is declaring deemed profit as income u/s 44AD

There are two views/interpretations coming from many taxpayers and professionals as below:

1. The much Stronger view is that the government has provided this facility to give relaxation for the purpose of maintaining books only and not for short declaration of profit and evading the taxes. An illustration for the same is given below:

Sec 44AD: Deemed vs Actual Profit - What You Need to Know

Year

Turnover

Actual Profit

Deemed Profit

Difference/Mismatch/Tax Evaded Income

1

 1,00,00,000.00

50,00,000.00

8,00,000.00

42,00,000.00

2

 1,00,00,000.00

50,00,000.00

8,00,000.00

42,00,000.00

3

 1,00,00,000.00

50,00,000.00

8,00,000.00

42,00,000.00

4

 1,00,00,000.00

50,00,000.00

8,00,000.00

42,00,000.00

5

 1,00,00,000.00

50,00,000.00

8,00,000.00

42,00,000.00

Total

 2,50,00,000.00

40,00,000.00

2,10,00,000.00

 

Now, Government is not a fool to ignore this, if they see an increase of 50 lakhs in assets (be it in the form of bank balance/FD/Shares), and you are declaring profit on 8 Lakhs. Where is the tax on 42 lakhs? It is not matching with the fund flow of your account. By this, you have accumulated income of 2.1 Cr extra without paying tax.

Yes, there is no requirement of maintaining books, but no such exemption to declare @ 8%, even if you have higher profits. Else, this would become the best ever Tax Evasion Tool.

2. Another view that is being supported by people not willing to pay tax on actual income is that the government has given this option to declare "deemed profit @ 8%" and no need to declare on whole profit. Also, they provide an ITAT judgement in favour of assessee to substantiate their claim.

Another Rationale that is being given by these people is that the Government does not know what is my actual profit as my books are not required to be kept, so I can declare any profit that I want.

 

They provide with the statistics of Income Tax Department that only 0.3% returns are selected for scrutiny every year. The risk of getting Scrutiny Notice is too much less.

Yes, the chances are less, but I won't suggest to go for such tax evasion method as my ethics doesn't allow me to do such thing for my clients. Yes, if the client is ready to take risk and is too much adamant to go for second option, make him aware of the facts if his file is selected for scrutiny and act accordingly.

I am a strong supporter of Option 1.


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