Can Partners remuneration be reduced to meet 6%* net profit (to avoid Audit), *All Bank Receipts
Sec 44AD has not been used in any of the previous years.
ITR 5 is being filed since inception without 44AA & 44AB. However in AY18-19 44AA was inadvertently selected as YES.
Mine is a freelance partnership firm, with turnover less than 10lac.
Your question can be summarized as follows:-
- You are a Partnership Firm (Assuming you are not LLP)
- You are filing ITR-5 without applicability of section 44AA & 44AB.
- You are never audited.
- You never opted for 44AD.
- In FY 2017-18, 44AA was ticked as applicable.
- In the FY 2019-20, your profit is less than 6% of gross digital receipts.
- Your turnover does not exceed Rs. 1 cr. (Limit given u/s 44AB for audit)
- In any of the three previous year, you profit does not exceed Rs. 120000/- and gross receipts/turnover does not exceed Rs. 10 lakh (limit given u/s 44AA for keeping books of accounts by partnership firm)
Your question can be answered in the following series of questions.
Whether 44AD available as a choice to Partnership Firm?
Yes, a partnership firm can opt for 44AD and can declare his profits to be 6% of gross receipts (in case of digital transactions).
Whether 44AB applied to you/ Do you require to get your accounts audited u/s 44AB ?
If your turnover is less than Rs. 1 crore then you are not required to go for audit even if your profit is less than 6% of gross receipts. Earlier upto FY 2015-16, you were required to go for audit if your profits is less than 8%/% (limit given in 44AD) but this was due to section 44AB(d). But 44AD(d) if amended w.e.f FY 2016-17 to cover only profession and now it does not cover businesses.
Now businesses are covered u/s 44AB(e), which states that if you have earlier opted for 44AD and you are opting out then you need to get your accounts audited. But you never opted for 44AD.
Hence you may opt 44AD to declare profit being 6% but if you do not opt for 44AD then also you are not required to go for audit if your turnover does not exceeds Rs. 1cr. You can declare profit less than 6% without being audited.
Now coming to your final question
Can partner remuneration be reduced to meet 6% profit (to avoid audit)?
Partner remuneration is paid as per partnership deed and agreement between partners but as per section 40b of income tax, there is upper ceiling on interest and remuneration of partners.
You need not reduce partner remuneration to avoid audit as you are not required to go for audit even your profit is less than 6%. Further things should be kept actual otherwise you may have to face penalty.
Thanks Rabindra for answering in Detail.
I would like to inform that in..
FY 16-17 & 17-18 turnover EXCEEDED 10 lakh limit; profits DID NOT EXCEED 1.20 lakh limit. (8% & 8.5% profit)
FY 18-19 turnover EXCEEDED 10 lakh limit; profits EXCEEDED the 1.20 lakh limit. (9% profit)
FY 19-20 turnover DID NOT EXCEED 10 lakh limit; profits DID NOT EXCEED 1.20 lakh limit. (3% profit)
So does it mean that I have to mention YES for 44AA in ITR 5.
Does maintaining accounts of incomes/expenses in Tally Software qualify as Maintaining of Accounts.
As per section 44AA, if the limits are crossed in any of the three previous years then this section applies to you and you have to to keep and maintain such books of account and other documents as may enable the AO to compute your total income in accordance with the provisions of this Act.
As per detail provided, you have crossed the limit given u/s 44AA in FY 2018-19 hence section 44AA is applicable to you and you have to maintain books of accounts as required (see rule 6F). May please also note that:-
- Books of accounts can be maintained in soft or hard copy
- Books and accounts can be maintained on any software like tally or other.
- Keep soft or hard copy of all bill (received or issued), vouchers, cash book etc.