Our firm's turnover is over Rs. 300 million. Do we need audited accounts to keep the partners' share exempt?

A partnership firm with turnover of Rs. 300 million or more keeps its partners’ shares exempt only if its return is filed with audited financial statements. The audit must be by a firm of Chartered Accountants or a firm of Cost and Management Accountants. The rule is a proviso to section 92(1) of the Income Tax Ordinance, 2001, and it applies from the first year turnover reaches that level.

What does the law say?

Section 92(1) sets the basic rule for every association of persons (AOP), which includes a firm. The AOP is liable to tax separately from its members. Where the AOP has paid tax, the amount a member receives in the capacity of member out of the AOP’s income is exempt from tax.

The second proviso to section 92(1), inserted by the Finance Act, 2024, attaches a condition to that exemption for larger AOPs. The share of a member of an AOP “having turnover of three hundred million rupees or above during the tax year or any of the preceding tax years” is not exempt if audited financial statements have not been filed along with the AOP’s return of income. The audit has to be done by:

• a firm of Chartered Accountants as defined under the Chartered Accountants Ordinance, 1961; or
• a firm of Cost and Management Accountants as defined under the Cost and Management Accountants Act, 1966.

What counts as turnover for the Rs. 300 million test?

Section 2 defines “turnover” by pointing to section 113(3). Under section 113(3), turnover means:

• gross sales or gross receipts from the sale of goods, excluding sales tax, federal excise duty and trade discounts shown on invoices or bills, and excluding amounts taxed as a final discharge of liability;
• gross fees for rendering services, including commissions, except those covered by final tax;
• gross receipts from executing contracts, except those covered by final tax.

So the test is on gross turnover, not profit. A trading firm with thin margins can cross Rs. 300 million long before its profit looks large.

How does it work in practice?

The test has two parts. First, check whether the AOP’s turnover was Rs. 300 million or more in the current tax year or in any earlier tax year. Second, if it was, check whether audited financial statements from a qualifying firm were filed along with the AOP’s return for the year.

The words “along with return of income” tie the audited statements to the return itself. Section 114(2)(a) already requires a return to carry the annexures, statements or documents that are prescribed, and section 118(3)(b) sets the due date for an AOP’s return: 30 September following the end of the tax year. For tax year 2027 (1 July 2026 to 30 June 2027) that is 30 September 2027. Section 114(6)(a) also refers to “revised audited accounts” where a return is revised.

Worked example (illustrative figures)

Malik Traders is a partnership of three brothers in Faisalabad selling yarn. Its made-up turnover, as defined in section 113(3), is:

Tax year	Turnover
2024	Rs. 310,000,000
2025	Rs. 280,000,000
2026	Rs. 265,000,000
2027	Rs. 240,000,000

Step by step for tax year 2027:

1. Turnover in tax year 2027 is Rs. 240,000,000, below Rs. 300,000,000.
2. The proviso also looks at “any of the preceding tax years”. Tax year 2024 turnover was Rs. 310,000,000, which is Rs. 10,000,000 above the threshold.
3. The firm is therefore within the proviso for tax year 2027, even though turnover has fallen for three years in a row.
4. If the firm files its tax year 2027 return with accounts audited by a Chartered Accountants or Cost and Management Accountants firm, each brother’s share keeps the exemption in section 92(1).
5. If it files unaudited accounts, the proviso says the brothers’ shares “shall not be exempt”.

What if …?

What if the firm has never reached Rs. 300 million? The second proviso does not apply. The general exemption in section 92(1) governs the members’ shares, subject to the AOP having paid tax.

What if the audited accounts are filed late, after the return? The proviso speaks of statements filed “along with return of income”. The Ordinance does not say in section 92 whether filing them later with a revised return under section 114(6) cures the position. That point is not settled by the text.

What if the share loses its exemption? The proviso removes the exemption but section 92 does not say under which head the share is then taxed, or how tax already paid by the AOP is treated in the member’s hands. The text is silent on both.

Common mistakes

• Testing only the current year. The proviso reaches back to any preceding tax year, with no stated limit.
• Using profit instead of turnover. The threshold is on turnover as defined in section 113(3).
• Assuming any auditor will do. Only the two kinds of firm named in the proviso qualify.
• Thinking the AOP pays the price. The AOP’s own tax under section 92(1) is unaffected. The exemption lost is the members’.

What to check in the official text

Read section 92(1) with both provisos and the footnotes, which show the second proviso was inserted by the Finance Act, 2024 and the first by the Finance Act, 2014. Read section 113(3) for the turnover definition and section 114(2) for what must accompany a return. The Chartered Accountants Ordinance, 1961 and the Cost and Management Accountants Act, 1966 define which firms qualify, and those laws are not part of this corpus. Any form or annexure prescribed for AOP returns on the IRIS system is also outside what this page covers.