Partnership firm and 44 AD - Professionals - Taxation - TIK Share
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Partnership firm and 44 AD

Kamaldeep Singh



I don't have worked much on Partnership firm accounts and seek some clarity. A client of mine started a partnership firm on 1.1.14. He suffered losses and unabsorbed depreciation as firm was in initial stage. However, he was not able to maintain proper books of account and wants to avail 44AD. The turnover is around 9 lacs and actuall loss around 300000 lacs plus ample unabsorbed depreciation before salary to partners and interest on capital.

I want to know the following:

1) The partnership provides that Interest on capital may not be provided if firm has insufficient profit or is in loss. So firm here is not willing to provide interest. However, it is written in deed for salary: that remuneration as spelt out u/s 40(b) shall be worked out n payable and such remuneration shall be paid in profit sharing ratio. Does this makes remuneration payable compulsory? the firm is not willing to. Even if shown then at least 150000 wud have to be shown as salary as Net profit would be 900000*8% rs. 72000. Again it will be a loss that could not be carried forward.

2) If firm declares profit u/s 44AD then while preparing ITR5 how do we represent Balance Sheet.I know depreciation etc. has to be charged at usual rates. I believe actual Balance sheet must be produced which would show depletion in Capital Account. Is doing so correct? I have seen professionals making balance sheet on the basis of 44AD profits ignoring low profit or actual loss.

My query might seem silly but I am really confused and don't wanna mess up.

Kindly guide.

Kamaldeep Singh


One more thing, if the firm declares 44AD though suffers loss actually, Then presumptive profit share is to be shown in partner's return of actual loss?


CA Pulkit Sharma


Coming to first part, Section 44AD strictly requires that if profit is to be shown below 8% audit is required. However you may refer to sub-clause 5.

On second part, In partners return you can show actual profit or 8%. But i would advice 8% since no tax is payable on profit share from firm and it will increase his personal capital.



Rahul Rai


Treatment suggested by Pulkit is right, i think.