21 November 2013
A Partnership Firm having Turnover Rs. 5000000/- And actual Net profit of Rs.1250000/- @25%; Declares Net profit as Rs.400000/- @8% tacking advantage of Section 44AD
Now, remuneration allowed shall be Rs.330000/- and Net profit taxable shall be Rs.70000/- Where as Remuneration according to the actual profit would have been Rs.840000/- and Net profit Rs.410000/-
Now, Please explain the effect of same on personal income tax of partners i.e. say if there are 2 partners, then how to compute their personal income tax. What shall be the taxable remuneration in hands of partners And as the share of net profit is exempted from tax, which amount shall be taken as share of Net profit. Please explain the effect of same in books of accounts.
a word of caution before we talk about this case, please don't read section 44AD as a fixed rate section like 44AE. If your net profit is at 25%, AO has all the right to tax you at higher rate.
the remuneration claimed as expense shall be taxable in their personal tax returns. over and above this amount, it shall be exempt share of profit.
Further please understand that if you maintain books, you would be taxed on 25% profit. Under 44AD books are not required and should be avoided.
22 November 2013
But Sir, the section does not say that if books of accounts are maintained, then the firm has to pay tax on actual profit.
the setion is : "Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an eligible assessee engaged in an eligible business, a sum equal to eight per cent of the total turnover or gross receipts of the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession”." For the purposes of this section,— (a) “eligible assessee” means,— (i) an individual, Hindu undivided family or a partnership firm, who is a resident, but not a limited liability partnership firm as defined under clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008 (6 of 2009) 27a ; and (ii) who has not claimed deduction under any of the sections 10A, 10AA, 10B, 10BA or deduction under any provisions of Chapter VIA under the heading “C. - Deductions in respect of certain incomes” in the relevant assessment year; (b) “eligible business” means,— (i) any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE; and ii) whose total turnover or gross receipts in the previous year does not exceed an amount of 1 crore.
If you maintain the books, it shall be open for the AO to scrutinize the same and tax higher profits!!
Kindly note that while it appears that as long as you offer profit at 8% your job is done, it is not the case. If the AO is able to determine that you made more profit, he can tax you. And what could be a better evidence of additional income than the well prepared books!!
That is, if tax is paid on 8% of gross turnover, then in a sense no books of accounts are maintained by the firm. in that case the firm would not be able to capitalize the entire profit. And in future, when it is under compulsory audit, it would be difficult to account for capital etc.
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