Sec 44ad

This query is : Resolved

CA SAGAR BHADRA (Querist)
Follow

06 September 2011 If my Partnership firm has net profit margin of 5% then i have to pay tax on 8% or required to go for audit but if my margin is 10% then whether i can pay tax at 8%, if i dont want to show higher profit margin...

i will be really thankful to you if u can provide some idea about my query

CA Navin Jain

CA Navin Jain (Expert)
Follow

06 September 2011 IF YOUR MARGIN IS MORE THAN 8% THEN NO NEED TO AUDIT AND ONLY SHOW THE PROFIT 8%. HOWEVER YOU CAN ALSO SHOW THE PROFIT MORE THAN 8%.

CA SAGAR BHADRA

CA SAGAR BHADRA (Querist)
Follow

06 September 2011 Thank you sir for your reply

but sir if my case is selected in scrutiny then can i say that as per sec 44ad i am not liable to maintain books of accounts or i have to show all books of accounts demanded by Assessing officer, if i requires to show books of accounts than whether i will be liable to penalty for such excess profit not shown by me......

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
Follow

23 July 2025 ### **Understanding Section 44AD and its Application**

In your case, it seems like you're navigating the nuances of **Section 44AD** related to a **Partnership Firm** with respect to its profit margin and tax filing process. Let's break it down clearly:

---

### **Key Points from Section 44AD**:

1. **Presumed Profit**:

* Under **Section 44AD**, businesses (except those excluded) are presumed to have a **profit of 8%** of their **turnover** or **gross receipts**.
* You don't need to maintain books of accounts or undergo tax audit if your profit is **presumed** to be 8% (or more) of the turnover, and the **turnover is less than Rs. 2 crores**.

2. **What if Profit Margin is Less than 8%?**

* If your **net profit margin** is below 8% (as in your case of 5%), you are **required to maintain books of accounts** and undergo **tax audit under Section 44AB**, as the **presumed income** doesn't cover your actual earnings.
* The profit under **Section 44AD** would be **treated as 8% of your turnover** regardless of the actual margin. You can also **declare higher profit**, but you can't opt for **less than 8%** unless you opt for tax audit.

3. **What if Profit Margin is More than 8%?**

* If your actual margin is **10%**, you still **cannot declare less than 8%** under **Section 44AD**. Even if your actual profit is higher than the presumed 8%, you can still declare a **minimum 8% profit** for tax purposes under this section.
* You can, however, **declare more than 8%**, but **not less than 8%** if you're opting for **Section 44AD**.

4. **Scrutiny and Consequences**:

* **In case of scrutiny by the Assessing Officer** (AO), if you've declared **8%** and your **actual profit is lower**, the AO can demand the **books of accounts** and **proof** of your business transactions. This can potentially lead to penalties if the AO finds that you have underreported income or failed to provide sufficient justification.

* However, if your actual profit is more than **8%**, and you still opted for **8%** (as is allowed under the scheme), you would not face penalties unless there are other discrepancies or violations.

5. **Penalty for Non-Compliance**:

* If you opt for **Section 44AD** and underreport income, and the **AO** finds evidence of underreporting or tax avoidance, you may be subject to penalties under **Section 271A** (for failure to maintain proper books of accounts) and **Section 271B** (for failure to get accounts audited when required).

---

### **What You Should Do in Your Scenario**:

* If your **net profit margin** is **5%**, and you choose to file under **Section 44AD**, you **must pay tax on 8%** of your **turnover**.
* You cannot declare a lower profit than 8% unless you opt for **tax audit under Section 44AB** and file a detailed report of your actual income.
* If the **AO** demands books of accounts during scrutiny, you would be required to show the **books and records** even if you opted for **Section 44AD**.
* **If your profit is more than 8%**, you can show the higher income, but still must follow the **8% minimum rule** for **Section 44AD**.

---

### **Conclusion**:

* If you want to declare **less than 8% profit**, you must **opt for tax audit** and file the actual figures of profit.
* If you declare **exactly 8%**, there's no penalty or issue unless the AO finds discrepancies.
* **In case of scrutiny**, maintain the books and records to avoid penalties and disputes with the department.

Let me know if you need more detailed clarification on any specific aspect!

You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now