Who requires to maintain books of accounts ?
Category : Income Tax
Section 44AA of Income Tax Act and rule 6F of Income Tax rules deal with the provisions regarding maintenance of books of accounts under Income tax Act. As per section 44AA(1) read with rule 6F the persons carrying on any of the profession as mentioned below are required to maintain books of accounts and other documents as may enable the assessing officer to compute total income, if yearly gross receipts of the profession exceeded Rs. 150,000.
6. Technical consultancy
7. Interior decoration
8. authorized representative
9. film artist
10. any other profession as is notified by the board
No books of accounts are required to be maintained by professionals covered u/s 44AA(1):
If the gross receipts of a profession do not exceed Rs. 150,000 in any one of the three years immediately preceding the previous year or where the profession has been newly setup in the previous year, total gross receipts in the profession for that year are not likely to exceed the said amount, then such professional need not to maintain any books of accounts.
It means that if the gross receipts of a profession exceed Rs.150,000 in all the three years preceding the previous year only then the books of accounts will be required to be maintained, if the gross receipt exceed the prescribed limit in the two preceding years but not in the third preceding year then there will be no need to maintain books of accounts.
Maintenance of Books of accounts by other Persons covered u/s 44AA (2):
In relation to any other persons engaged in any other profession or carrying on any business other than section 44AA (1), the requirement of compulsory maintenance of books of accounts applies if- either the income from business or profession exceeds Rs 120000 or the turnover or gross receipts exceed Rs 10 Lakhs in any one of the three years immediately preceding the previous year.
No books of accounts are required to maintained by other persons covered u/s 44AA (2):
If the Income or the gross receipts or gross turnover of a person carrying on business or profession other than profession as mentioned u/s 44AA (1) do not exceed in any one of the three years preceding the previous year then no books of accounts will be required to be maintained.
Presumptive Income scheme:
The persons who are filling their return of income under the presumptive income scheme like under section 44AD or 44AE or 44AF etc are not require to compulsorily maintain books of account u/s 44AA. However where the profits and gains from the business are deemed to be profits and gains u/s 44AD or 44AE or 44AF or 44BB or 44BBB as the case may be, and the assessee has claimed income to be lower than the profits or gains so deemed, then the books of accounts will be required to be maintained u/s 44AA.
Maintain books of accounts in case of new 44AD section:
A new clause IV has been added to sub section 2 of section 44AA w.e.f. 01-04-2011 which provides that where the profits and gains from a business are deemed to be profits and gains of the assessee under new section 44AD which is also applicable w.e.f 01-04-2011 and the assessee has claimed such income to be lower than the profits and gains so deemed i.e. below 8% and the income of the assessee exceeds the maximum amount which is not chargeable to income tax during previous year then in such case such person shall keep and maintain books of accounts and other documents as may enable the assessing officer to compute his total income.
Thus it means that if a person declares his income below the 8% of his total turnover or gross receipts as required u/s 44AD which is applicable w.e.f 01-04-2011 and his income is above the exempted limit then he will have to compulsorily maintain books of accounts. But if his total income is below the exempted limit and profits are also declared below 8% of gross turnover or gross receipts then he will need not to maintain books of accounts.
Books of accounts to be maintained by persons covered u/s 44AA(1):
Following books of accounts and documents are required to be maintained:1 cash book,2 Journal, if the accounts are maintained as per mercantile system of accounting,3 Ledger4 Carbon copies of bills, serially numbered and carbon copies or counterfoils of receipts issued in respect of sums exceeding Rs 25,5 original bills for expenses exceeding Rs. 50 and payment vouchers for petty expenses. However in a case where the cash book maintained by the person contains adequate particulars in respect of the expenditure incurred, then vouchers are not necessary in respect of expenses upto Rs 50.
Persons engaged in medical profession are, in addition, required to maintain daily case register in the prescribed Performa (Form No. 3C) and inventory, as at the beginning and end of the year, of stock of drugs, medicines and other consumables accessories used for the purpose of the profession.
Books or books of accounts
Includes ledgers, day-books, cash books, account-books and other books, whether kept in the written form or as print-outs of data stored in a floppy, disc, tape or any other form of electro-magnetic data storage device.
For how many years books of accounts are required to be preserved:
Every year the record of books of accounts grows up and the cupboards filled up more and more. Every assessee wants to know for how many years he should keep the records of his books of accounts.
Books of accounts and other documents are to be kept for at least 6 years from the end of relevant assessment year. That means from the assessment year 2014-15 one should keep books of accounts upto the assessment year 2008-09 i.e. books of accounts of financial year 2007-08.
The time limit for issuing notices for assessment or reassessments have been prescribed u/s 149, after the end of such prescribed time no notice can be issued and no assessment can be framed, therefore the assessee will not need books of accounts of the concerned year. Keeping in mind the time limit as provided u/s 149 for issuing notice the following suggestions are made regarding preservation of books of accounts:
1. If the assessee has made an appeal against any assessment order of any year then the books of accounts of such year should be preserved until the final decision of such appeal.
2. Where the assessment in relation to any Year has been reopened u/s 147 within time u/s 149, in such case all the books of account and documents shall continue to be kept till the assessment so reopened has been completed.
3. Books of accounts for only 7 financial years should be preserved. Therefore the taxpayers should keep books of accounts of only financial year 2007-08 and onwards.
Where the books of accounts should be kept:
The current year’s books of accounts should be maintained and kept at the principal place of business or profession. There is no specific rule as to where the books of accounts of earlier years should be kept.
Consequences for failure to maintain books of accounts:
Failure to maintain books of accounts and other documents or to retain them as required attracts penalty of Rs. 25000.).
Who is required to get accounts audited?
In Case of Business^
If a turnover or gross receipts (A.Y. 2013-14, w.e.f. 1-4-2013 by Finance Act, 2012) of a business is Rs. 1 crore or more than that then Audit of books/accounts is mandatory u/s 44AB.
In Case of Profession*
If gross receipts (A.Y. 2013-14, w.e.f. 1-4-2013 by Finance Act, 2012) of a profession is Rs. 25 lacs or more than that then Audit of books/accounts is mandatory u/s 44AB. But in A.Y.2012-13, the limit was Rs.15 lacs.
In Case of Truck Operators
Truck operators and person engaged in specified businesses declaring their income at an amount less than the amount computer under sections 44AE, 44BB or 44BB as the case may be, shall also, get their account audited u/s 44AB.
In Other Cases
Any assessee carrying on a business, declaring his income at an amount less than the amount computed under section 44AD and whose income exceed the basic exemption limit for the relevant previous year shall also get his accounts audited u/s 44AB.
Who will Audit Account?
In India, Chartered Accountant will audit the account and prepare the report as prescribed in Income Tax Act. They are qualified for accounts and having degree of Chartered Accountancy (CA) from ICAI. They charge fee for their service as prescribed by ICAI. Assessee can also authorize Chartered Accountant to file their income tax return on his behalf or file by himself. It is not mandatory to file income tax return by CA; only audit report is mandatory. The audit report must be submit before the due dates. The due date from A.Y.2012-13 is 30th September w.e.f. 1-4-2012.
Audit Report Format:
3CA, 3CD – Accounts audited under any other law
3CB, 3CD – Accounts audited under I.T. Act
Penalty on Failure to Get Audit Report
As it is mandatory and compulsory to get account audit if the asseesee falls in above conditions specified. Income Tax act has provision to levy penalty on failure to get account audit before due date i.e Rs.1,50,000 or 1/2% of gross receipt or turnover, whichever is less.
The voluntary tax compliance by the taxpayers considerably widened after the insertion of tax audit under section 44AB in the Income-tax Act, 1961 by the Finance Act, 1984. An important revision to Tax Audit reporting Forms was done in 1999.
This revision further enhanced the scope of the tax audit.
^The term “business” is defined in section 2(13) of the Income Act, 1961 as “Business” includes any trade, commerce, or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. The word `business’ is one of wide import and it means activity carried on continuously and systematically by a person by the application of his labour or skill with a view to earning an income.
Whether a particular activity can be classified as `business’ or `profession’ will depend on the facts and circumstances of each case. The expression “profession” involves the idea of an occupation requiring purely intellectual skill or manual skill controlled by the intellectual skill of the operator, as distinguished from an operation which is substantially the production or sale or arrangement for the production or sale, of commodities.
*The following have been listed out as professions in section 44AA and notified thereunder (Notifications No. SO-17(E) dated 12.1.77, No. SO 2675 dated 25.9.1992 and No. SO 385(E), dated 4.5.2001):
c . Authorised Representative
d. Company Secretary
f. Film Artists/Actors, Cameraman, Director, Singer, Story-writer, etc.
g. Interior Decoration
j. Technical Consultancy
k. Information Technology
The term “sales”, “turnover” or “gross receipts” are not defined in the Act, and therefore the meaning of the aforesaid terms has to be considered for the applicability of the section.
As per Guidance Note issued by the Institute of Chartered Accountants of India on Tax Audit under Section 44AB of the Income tax Act, 1961 –
The term ‘
’ for the purposes of this clause may be interpreted to mean the aggregate amount for which sales are effected or services rendered by an enterprise. If sales tax and excise duty are included in the sale price, no adjustment in respect thereof should be made for considering the quantum of turnover. Trade discounts can be deducted from sales but not the commission allowed to third parties. If, however, the Excise duty and / or sales tax recovered are credited separately to Excise duty or Sales tax Account (being separate accounts) and payments to the authority are debited in the same account, they would not be included in the turnover. However, sales of scrap shown separately under the heading ‘miscellaneous income’ will have to be included in turnover.
Considering that the words “Sales“, “Turnover” and “Gross receipts” are commercial terms, they should be construed in accordance with the method of accounting regularly employed by the assessee. Section 145(1) provides that income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” should be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. The method of accounting followed by the assessee is also relevant for the determination of sales, turnover or gross receipts in the light of the above discussion.