Section 44ad - book profit more than 8%

This query is : Resolved

Manoj Agarwal (Querist)
Follow

30 January 2014 ABC & Co. is a proprietorship firm doing trading in industrial tools. It has turnover of below Rs. 1 Crore and eligible for 44AD. It has been maintaining proper books of accounts for last several years. It's profits during FY 2013-14 is expected to be more than 8% of turnover. What are the risk involved in filing return of income u/s 44AD with presumptive income @ 8% when the actual income as per books is say 20%? Can the AO accept 8% when the books disclose 20%?

AVTAR SINGH

AVTAR SINGH (Expert)
Follow

30 January 2014 The AO has no power to reject your claim if it is 8% or more. But your increase in wealth/assets should not be more than the declared income. Otherwise, for unexplained investments/cash you can not only be required to pay tax and interest but penalty can also be imposed.

Message likes : 1 times

Manoj Agarwal

Manoj Agarwal (Querist)
Follow

30 January 2014 Thanks Singh Ji for the prompt reply. Suppose Turnover is Rs. 80 Lacs. So, presumptive tax @ 8% = 6,40,000/- which I want to declare u/s 44AD. But actual profit as per books @ 20% = 16,00,000/-. How to treat the differential profit of Rs. 9,60,000? This has indeed increased the Net Current Assets of the firm. Which profit should be credited to the Proprietor's Capital A/c?

AVTAR SINGH

AVTAR SINGH (Expert)
Follow

30 January 2014 U/s 44AD you can declare 8% or more. So if the assets have increased by Rs.1600,000 you should declare that amount as profit u/s 44AD.
Section 44AD says minimum should be 8% there is no upper limit.

Manoj Agarwal

Manoj Agarwal (Querist)
Follow

30 January 2014 Declaring more than 8% is optional. Can the AO add the differential income to my taxable profit if he come across my actual books of accounts? If I declare Rs. 16 Lacs as profit,then i lose the substantial benefit of 44AD. The section doesn't provide that if the actual profit is more than 8%, it must be declared.

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
Follow

23 July 2025 Under Section 44AD of the Income Tax Act, if you are eligible and choose to declare income on a presumptive basis at 8% or more of turnover (or 6% if digital receipts), you're not required to maintain books of accounts or get them audited, even if actual profits are higher.

Here’s a breakdown of the situation and the risks involved when actual profits are higher than 8%, but you still choose to declare just 8%:

✅ Legal Stand: You Can Declare 8% Even If Actual Profit is Higher
Section 44AD simply requires that income be at least 8% of turnover (or 6% for digital), not exactly the actual profit. So declaring only 8% is legally valid.

🔹 Section 44AD(1): "A sum equal to 8% or higher of the total turnover or gross receipts... shall be deemed to be the profits and gains of such business."

This means:

You're not legally obligated to declare 20% if your books show that much profit.

You can ignore actual books and declare 8%, as long as you're eligible under 44AD.

⚠️ Risk Area: Asset Mismatch & Scrutiny
The main risk is not legal, but practical:

💰 1. Mismatch Between Profit Declared and Capital/Asset Growth
If you declare ₹6.4L as income (8%), but your balance sheet shows a jump in net assets consistent with ₹16L profit (20%), the Assessing Officer (AO) may:

Invoke Section 69/69B (unexplained income or investments),

Question the source of capital, increase in cash or bank balances, or

Send scrutiny notice for possible underreporting.

🧾 2. Books of Accounts Available
If you maintain books and the AO gets access to them (e.g., from bank, GST filings, or other assessments), it can weaken your defense of 8% presumptive claim.

Even though books are not mandatory under 44AD, maintaining them and not aligning them with return can raise eyebrows.

📌 Best Practice Recommendation:
Option A – Declare Higher Profit
If you're maintaining books and your actual profit is 20%, consider declaring full ₹16L under 44AD, or at least something closer than 8%.
There’s no restriction on declaring higher than 8% under 44AD.

Option B – Declare 8%, Don’t Maintain Books
If you plan to declare only 8%, avoid keeping formal books or showing assets that can’t be supported by the declared income. Make sure capital account, bank balances, cash, etc., match the declared income.

🧮 Example Scenario:
Particulars Amount (₹)
Turnover 80,00,000
Profit as per books (20%) 16,00,000
Profit declared u/s 44AD (8%) 6,40,000
Difference 9,60,000

If bank balance or inventory increases by more than ₹6.4L, the AO may question the source of funds.

⚖️ Summary:
Question Answer
Can you declare only 8%? ✅ Yes, it's within the law.
Can AO force you to declare 20%? ❌ No, not unless you opt out of 44AD.
Can differential ₹9.6L be questioned? ⚠️ Yes, if assets increase beyond 8% profit.
Is it safer to declare more than 8%? ✅ Yes, especially if you're keeping books.

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