CA Umesh Sharma

CA Umesh SharmaArjuna (Fictional Character): Krishna, Independence Day of our country is coming closer on 15th August. All citizen lives happily because of independence. Similarly when as per income tax provisions small taxpayer fells independence?

Krishna (Fictional Character): Arjuna, very well said, every people needs independence at home, at work, etc. All make efforts to get independence. Our country has given independence to each and every citizen being a democracy. Like Income Tax Act has also given independence to the small tax payers for maintaining books of accounts and accordingly paying tax under section 44AD. These Businessman has 2 options, 1) show profit at 8% of turnover and has taxable income or 2) If he want to show less profit and have taxable income then tax audit is compulsory. Further if profit is below 8%, then scrutiny, enquiry, etc may be invited.

Arjuna: Krishna, How 8% profit under section 44AD is required to be shown?

Krishna: Arjuna, under section 44AD the businessmen whose annual turnover or receipt is less then Rs. 1cr then he can show profit at 8% of annual turnover or more and on the said profit he has to pay tax. And one more condition of having taxable income above basic exemption limit is there. Only the information related to the turnover or receipt needs to be maintained. Maintenance of books of accounts as per section 44AA is not necessary, that’s why it is an easy way. For e.g. If the annual turnover or receipt of the cloth merchant is Rs. 80 Lakhs then he has to show at least profit at 8% i.e. Rs. 6,40,000 and on this amount he has to pay tax. On this he may avail deduction as per section 80 and he has to pay the assessed tax as per the slab rate. The due date of filing return as per section 44AD is 31st August.

Arjuna: Krishna, what if the tax payer opt for tax audit?

Krishna: Arjuna, if tax payer’s 1] profit is less than 8% and 2] if its taxable income is more than the tax exemption limit (Rs. 2.5 lakh) then he has to maintain the books of accounts as per section 44AA. Further he has to get his books of accounts audited from a Chartered Accountant. For e.g. If the annual turnover or receipt of the cloth merchant is Rs. 80 lakhs and his profit is 4% i.e. Rs. 3,20,000, then he has to maintain the books of account and also he has get his accounts audited from Chartered Accountant. Tax payer has given the independence to choose any one option every year. Tax payer should choose appropriate and right option considering the income and expenses. If the tax payer wants to opt for this option i.e. to get his accounts audited then the due date for filling return is 30th September.

Arjuna: Krishna, the option of showing profit at 8% is very nice. Who all can take benefit of this option?

Krishna: Arjuna,

  1. If annual turnover is less than Rs. 1cr then taxpayer have option of showing profit @ 8%. However if annual turnover is more than Rs.1cr then it is compulsory for all taxpayers to get his accounts audited. The option of 8% is not applicable to them.
  2. This option is applicable to Individual, HUF and Partnership firms. This option is not applicable Company, LLP and other tax payers.
  3. Taxpayers carrying on business can take benefit of it for e.g. retailer, wholesaler, and manufacturer, etc.
  4. It is not applicable for professionals for e.g. C.A, Advocate, Doctors, etc. and also it is not applicable for the taxpayers having income from commission, brokerage and leasing, plying goods carriages.

Arjuna: Krishna, what are the features of this 8% profit option?

Krishna: Arjuna, the important points to keep in mind while opting for this option are:

  1. Tax payer can show profit more than 8%,
  2. Taxpayer will not get the deductions of expenses under section 30 and 38,
  3. Expenses of the business as per section 40, 40A, 43B will not be disallowed. For e.g. if the tax payer has not paid VAT before filing return then it will not be disallowed.
  4. Partnership firms can take the deduction of salary and interest given to partner under section 40 (b),
  5. The taxpayer are not required to pay advance tax,
  6. Income tax department had made available very easy form ITR 4 S (SUGAM) for the individual and HUF. Only the taxpayer has to give information of debtors, creditors, cash and closing stock value as on 31st March in this form.
  7. If the taxpayer has paid tax on profit at 8% or more then he may not have to face scrutiny.

Arjuna: Krishna, what one should learn from this?

Krishna: Arjuna, department brings many such schemes for the taxpayers but the taxpayers due to lack of knowledge does not take benefit of these schemes. In every law provide some or some type of schemes, we should study them properly and take the advantage of them. Under this option of 8% profit maintenance of books of accounts as per income tax is not necessary but as per sales tax, service tax, etc. maintenance of books of accounts is necessary. This is contradiction between two laws. So tax payer should maintain the proper books of accounts and take benefit of schemes.

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Tags : CA Umesh Sharma (197) Section 44AD (125)

0 responses to “Independence in 8th Month, but for Small taxpayer if, its profit above 8%”

  1. Vidyadhar Swami says:

    For Karthik,

    If you show the profit 8 % or more, Audit is not compulsory.
    CBDT can not ask for P&L and Balance Sheet in future, if you opt for section 44AD.

  2. Karthik says:

    If the person want to show more than 8% also audit is compulsory.

    Eg: Turnover is 20 lacks and he want to show 15% of profit then taxable income is 3 lacks. As after he prepare accounts him self (not reviewed by any accountant or auditor) he thought to come to know this much.

    And advise, in future Department may ask P&L and Balance sheet sign by auditor for this situation.

  3. TANVI says:

    Sir, if partnership firm opts for Section44AD then which ITR form should be used?

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