gross profit less than 5%

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divyesh (Querist)
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13 March 2010 We have partnership firm trading in cement, turnover is less than 40 lakhs and due to low margin our GP is less than 5%, do we need to audit our accounts ?

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divyesh

CMA Ramesh Krishnan

CMA Ramesh Krishnan (Expert)
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13 March 2010 If less than 40 Lakhs no need to tax audit

divyesh

divyesh (Querist)
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13 March 2010 My tax consultant advises me that we have to audit accounts , can u please tell me provision of which section of income tax act , i need not get my accounts audited ?

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CMA Ramesh Krishnan

CMA Ramesh Krishnan (Expert)
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13 March 2010 Refer Sec.44AB of the Income tax

CA Gangadhar Mishra

CA Gangadhar Mishra (Expert)
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13 March 2010 your tax consultant is right on the assumption that you are not maintaining books of a/cs and your income is ascertained under sec-44AF of the Income tax Act, 1961 where 5% net profit is to be calculated on gross turnover, if your net profit is less than 5% you have to audit your books of a/cs.

CA CHINTAN AJMERA

CA CHINTAN AJMERA (Expert)
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13 March 2010 Agree with gangadhar mishra

Rahul Gupta

Rahul Gupta (Expert)
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13 March 2010 Agreed. If Profit is less than 5% then audit is compulsory as pr section 44AF.

divyesh

divyesh (Querist)
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15 March 2010 We are maintaining proper books of accounts and in our business of cement which of semi-wholesale type profit margin never crosses 3%, do still i have compute my taxable income u/s 44af or get my accounts audited , kindly guide if any other option is available under which i can compute my tax liability on actual income

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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26 July 2024 In your business scenario where profit margins are very low and you maintain proper books of accounts, you have a few options for computing your taxable income and ensuring compliance with tax regulations. Here’s a detailed guide to help you navigate this:

### **1. Tax Computation Under Section 44AF**

**Section 44AF** was applicable to small traders and manufacturers where the income was deemed to be a certain percentage of gross receipts. However, this section was abolished from Assessment Year 2011-12 (Financial Year 2010-11) and replaced by Section 44AD for small businesses.

### **2. Options for Computing Taxable Income**

**A. Section 44AD (For Small Businesses)**

1. **Applicability**:
- Under **Section 44AD**, a small business with a turnover of up to ₹2 crore can opt for a presumptive taxation scheme.
- This section allows taxpayers to declare 8% of the gross receipts as their income, which is deemed to be the income of the business.

2. **Exemption**:
- If you maintain proper books of accounts and your income is less than 8% of the gross receipts, you can opt for this scheme, and it will not be mandatory to maintain detailed books of accounts or get them audited.
- If you prefer to show a lower profit margin, you will need to maintain books of accounts and get them audited.

**B. Regular Accounting and Audits**

1. **If Opting Out of Section 44AD**:
- **Maintain Books**: You should maintain proper books of accounts.
- **Audit Requirement**: As per **Section 44AB**, if your gross receipts exceed ₹1 crore (or ₹2 crore if you are opting under Section 44AD), you are required to get your accounts audited by a chartered accountant.

2. **Tax Computation**:
- **Actual Income**: Compute your taxable income based on the actual profit as per your books of accounts.
- **Audit Report**: Obtain an audit report under Section 44AB if your gross receipts exceed the threshold limit.

**C. Section 44AE (For Transporters)**

1. **Applicability**:
- If your business involves the transport of goods by vehicles and your turnover falls within the limits specified, you might consider this section. However, it is generally applicable to transport businesses rather than cement distribution.

### **3. Compliance and Filing**

**A. Filing Requirements**:

1. **Under Section 44AD**:
- If you choose this section and your turnover is below ₹2 crore, you can declare your income at 8% of gross receipts without needing an audit.
- If you choose to declare a lower income, you will need to maintain books of accounts and get them audited.

2. **If Your Turnover Exceeds Thresholds**:
- You will need to get your accounts audited under **Section 44AB**.
- File your income tax return with the correct details of your income and audit report.

**B. Filing the Return**:

1. **Form ITR-4**:
- If opting for Section 44AD, you will file your return using **ITR-4** (presumptive taxation).

2. **Form ITR-3**:
- If you maintain books of accounts and the turnover exceeds the prescribed limit, file using **ITR-3** along with an audit report.

### **4. Conclusion and Advice**

- **Maintain Proper Books**: Regardless of the method you choose, maintaining accurate books of accounts is crucial.
- **Consider Opting for Presumptive Scheme**: If feasible, the presumptive taxation scheme under Section 44AD can reduce compliance burdens.
- **Consult a Tax Professional**: It's advisable to consult with a tax advisor or accountant to evaluate the best option for your specific situation, considering your profit margins and business structure.

By following these guidelines, you can ensure compliance with tax regulations and potentially reduce the audit and accounting burden based on your business needs.