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Section 44AF

Started by bhaveshformals, January 19, 2009, 04:21:25 PM

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The assessee is engaged in retail trade.
He has prepared Financials. The P and L A/C is showing Profit of Rs. 2,40,000 i.e. 12% of Turnover.
Can he still take the benefit of Section 44 AF and offer only 5 % of the amount for taxation or will he have to offer 12% as shown in the P and L A/C

Bhavesh Savla
Keep Smiling.

sivaiah G

The assessee neednot show the P & L account prepared by him. He simply can file the return stating that his case fulfills all the conditions specified in that section ie. 44AF and therefore, he can offer 5% of the turnover as profits. However, he is entitled to credit his capital account with only the amount offered to taxation. Just because, his p& L account shows profit of 12% he cannot credit the capital account with that amount which is not offered for taxation.

Hope this will clarify the position.


That will lead to an imbalance in the accounts.
Suppose the assessee has invested the profits in Bank FDs. Then how wiil the Bank FDs be shown in the Balance-Sheet.

Bhavesh Savla
Keep Smiling.


Technically it should be 5% or Actuals whcihever is higher...


But you can't possibly penalise a person maintaining proper books of accounts and reflecting 8% in his profit and Loss Account whereas a person not maintaining books of accounts will pay only 5% of the Turonver.
It is common sense that the net profit can never be exaclty 5% of the Turnover. If his actual profit is less than 5%, then he wont take the benefit of Section 44AF. Also if the net profit is more than 5%, then he won't be able to take the benefit. Then the question is for whom is the Section meant?

Therefore I feel that even if the P and L a/c shows a net profit of more than 5%, the assessee is entitled to only take 5% of the Turnover as income.

Please write in your disagreements, your views. I have not been to find a case law on this subject.

Bhavesh Savla
Keep Smiling.


sivaiah G

These views are in everybodys knowledge. Just to throw further light I am uploading this. What is accounted and what is unaccounted. In my view accounted means what is offered to taxation and unaccounted is what is not offered to taxation. Therefore, the assessees who have offered their income u/s 44AF though their real income more than what has been offered are not entitled to credit the capital accounts with that excess amount as it is not offered for taxation. Since a beneficial section is there on statute, he can utilise that. Therefore, the excess income he had earned can be spent out side the books of accounts. One he brings the same into books, he is duty bound to offer the sources. Since this is not offered to taxation, he is liable to pay tax on that amount. Therefore, I stick to the opinion that he need not show the P & L account prepared by him and just can file the return of income u/s 44AF. Once he decided to show everything in books, he has to offer everything in the return and should come out clean. I think he cannot avail both the benefits. This is my opinion. Any other views on this subject are welcome. 


I like to address this two parts
1Making more profits and related Transactions, how to do it?
2) When Books of accounts maintained, what is IT view point?

It is expected that a person carry business to make profits.  in case of business as stipulated under section 44AF, the assessee is not required to maintain books of accounts. And stipulates that the assessee compute income @ 5% on the gross turnover.
The section doesnot bar
i) making more profits
ii) any transaction that is effected because of more profits.
Hence, An assessee if he could prove that he made such investments only from the turnover would not be required to pay tax for such additional income.
One may ask, how to go about doing it.
Suppose one is maintaining bank account and all sales / purchases are carried through that bank account and turnover is acheived through that. He couldnot prepare profit and loss or balance sheet. When he uses this bank account for all his investments, It means that his investments are genuine.
It is just that he is unable to maintain books of accounts.
I am sure this argument would hold good.
there could be a similar mechanism for cash transactions as well.

2) When books of account prepared and when the Profit is more than 5%

The assessee himself computed the income and it may be right on the part of ITO asking for more tax. :|
The assessee shall not file these statements to the IT :).