Section 44ad - book profit more than 8%

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Manoj Agarwal (Querist)
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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)
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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.

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Manoj Agarwal

Manoj Agarwal (Querist)
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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?

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AVTAR SINGH

AVTAR SINGH (Expert)
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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)
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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.