Books of Accounts under Section 44AA: Essential Record-Keeping Guide
The government is very worried about tax evasion, and one of the many strategies used to monitor citizen incomes is keeping a book of accounts. It is clear that those with higher incomes are subject to a larger tax slab. According to Section 44AA of the Income Tax, taxpayers in high-income enterprises or professions are required to keep the books of their accounts, and Section 44AB mandates that a chartered accountant conduct an additional audit of the books. As evidence of the audit, the audit report is created, guaranteeing that every account is authenticated. When income tax returns are filed, this proof is sent in. We will discuss Section 44AA of the Income Tax Act in detail.
Table of Contents
Benefits of Maintaining Books of Account
For both the income tax department and the tax-paying public, the book of accounts is one of the most crucial documents. It can assist in controlling your tax bracket, the amount withheld for certain payments and investments, your income sources, and the tracking of fluctuations in your revenue. They also serve as a useful point of reference when filling out IT return forms, and the audit verification of these accounts is crucial, particularly for high-earning industries or occupations.
Who Needs to Maintain Books of Account?
If a firm or profession generates more than Rs. 1,20,000 in revenue, or if turnover or gross revenues for an established practice exceed Rs. 10,000 in any of the three years prior, books of accounts or accounting records must be kept. This also holds true for recently established businesses and professions whose total receipts are anticipated to surpass Rs. 10,000,000 or whose annual income is anticipated to surpass Rs. 1,20,000. Additionally, the following restrictions are raised if the individual or HUF is conducting business or practicing a profession:
The limit for income is Rs. 2,50,000.
The limit for turnover or gross receipts is Rs. 25,00,000.
Furthermore, books of accounts for designated professionals must only be maintained if their income has exceeded Rs. 1,50,000 for each of the three years prior.
The specified professionals include:
Architectural
Accountancy
Medical
Legal
Interior decoration
Engineering
Technical consultancy
Company Secretary
An authorised representative is a person who, in court or before any authority established by law, represents another person for a fee. It excludes those who work for the individual so represented, as well as those who practise accounting.
Film artists include producers, editors, directors, actors, choreographers, musicians, artists, dance directors, camera operators, storytellers, lyricists, screenplay or dialogue writers, and costume designers.
These regulations will apply to you if you are a freelancer following any of the above professions and your gross receipts exceed Rs. 1,50,000.
Such books and accounts are required to be kept for enterprises and professions (apart from specific professionals) so that the tax officer can determine the taxable income. On the other hand, Rule 6F specifies the accounting records that must be maintained for some professionals.
Specified Books of Accounts to be Maintained Under Rule 6F
Journal: A journal has to be kept under the commercial accounting system. A journal is a record of everyday activities. When we use the double entry method of accounting—that is, when each debit has a matching credit and vice versa—we get a record where total credits equal total debits.
Cash book: A daily log of cash inflows and outflows that displays the cash balance at the end of the day, or ideally at the end of each month, and not earlier.
Ledger: A ledger that has information about every account and flows from the journal can be utilised to create financial statements.
Invoices: Photocopies of any invoices or receipts you've issued that total more than Rs 25 are to be retained. Also, you must have the original invoices for costs you have incurred that exceed Rs 50.
For those in the medical field, such as doctors, surgeons, dentists, pathologists, radiologists, etc., there are additional obligations. These include keeping a daily cash register that records patient information, services provided, money collected, and the date of receipt. Information about the stock of medications, pharmaceuticals, and other consumables should also be available.
The Head Offices should keep all of these books up to date. It is essential that each year’s books must be maintained for six years. Maintaining these books is crucial for keeping records, and failing to do so may result in a 25000 Indian rupee fine. If the accounts are not kept up to date, a penalty equal to 2% of the total value of each foreign transaction is assessed. For the best outcomes, it is crucial to keep meticulous and responsible records of these accounts in the most systematic manner possible.
Exemptions: When is Bookkeeping Not Mandatory?
No books of account are needed to be kept if the income is less than Rs. 1,20,000 and the total sales, turnover, or gross receipts for the three years prior are less than Rs. 10,000,000. When income is anticipated to be less than Rs 1,20,000 and sales, turnover, or gross receipts are anticipated to be less than Rs 10,000, the same criterion applies to newly established professions and businesses.
As per the Income Tax Act, a profession or business that earns more than Rs. 1,20,000 per year or has gross receipts, sales, or turnover exceeding Rs. 10,000,000,000 in any of the three years prior is required to keep books of accounts and other records that the Assessing Officer can use to determine their taxable income. There are no required records. When income exceeds Rs 1,20,000 or sales, turnover, or gross receipts above Rs 10,000, the same criterion applies to newly established businesses or professions.
If a taxpayer believes their income from a company or profession is less than the presumed income determined by section 44AD/44ADA, they may switch from presumptive taxation under section 44AD/44ADA to regular taxes. When income is above the basic exemption level of Rs. 2,50,000, it becomes necessary to maintain books of accounts as mandated by section 44AA and conduct an audit in accordance with section 44AB.
It is not necessary for businesses covered by section 44AE to keep any books of accounts. Nonetheless, taxpayers who assert that their business income is less than the assumed income determined by section 44AE are required to keep the books of accounts in accordance with section 44AA and arrange for an audit under section 44AB.
Audit Requirements for Taxpayers
According to Section 44AB, a chartered accountant is required to audit the accounts of the following individuals:
Business Owners: If overall revenue, turnover, or gross receipts exceed Rs. 1 crore (the limit has been raised to Rs. 10 crore for taxpayers whose cash inflows and outflows do not account for more than 5% of total revenue and payments
Professionals: If gross receipts exceed Rs. 50 lakh
Under Section 44AD of the Presumptive Income Scheme: If an individual's total income exceeds the maximum income that is tax-exempt and they wish to disclose the business's income as less than the presumptive income determined in accordance with Section 44AD
Under Section 44AE of the Presumptive Income Scheme: If an individual wishes to report business income that is less than the assumed income determined in accordance with Section 44AE
Under Section 44ADA of the Presumptive Income Scheme: If a person's overall income exceeds the maximum amount that is tax-exempt and their profession's income is less than the presumptive income determined under Section 44ADA, then they are not required to pay income taxes
Audit Report Form
All taxpayers are required to complete the Audit Report Form by September of the assessment year. Form 3CA and Form 3CB are the two variations of the form. Form 3CB is filled out by people who are not employed by the professions indicated in Sections 44AD and 44AE, whereas Form 3CA is filled out by someone who is engaged in business or practice that requires a mandatory audit. The audit form 3CA and the statement form 3CD are provided with sections 3CB and 3CA, respectively. When submitting the report before the deadline of September 30, of the relevant assessment year, the Statement Form must also be completed in addition to the Audit Form.
Due Dates for Audits and Report Submissions
You must adhere to the set deadlines for having the records audited and submitting the audit report. These are:
If a taxpayer has to undergo an audit as part of their business or profession, they must complete the audit form 3CA together with the Statement Form 3CD. September 30 of the assessment year is the deadline for submitting the report and for having the finances audited.
Fill out Audit Form 3CB and Statement Form 3CD if you are a taxpayer who is not on the list but is nevertheless obliged by Income Tax Law to be audited. The deadline for both the audit and report submission is September 30 of the evaluation year.
The deadline for the audit and report submission in the event of specific domestic and international transactions is November 30 of the assessment year.
Penalties for Non-Compliance with Section 44AA
If the taxpayer does not keep accounting records under Section 44AA's obligations, section 271A may impose a penalty. There is a Rs. 25,000 maximum penalty that can be assessed. However, such a penalty might not be assessed if the taxpayer can demonstrate that there was a legitimate reason for the failure to keep accounting records. A penalty under section 271B may be imposed if the taxpayer neglects to have the accounting records audited or to provide the audit report in accordance with the requirements of Section 44AB. A minimum penalty of 0.5% of the total amount of sales, turnover, or gross receipts may be assessed. A maximum fine of Rs. 1,50,000 is imposed. However, such a penalty might not be applied if the taxpayer has a legitimate basis for not having an audit completed.
Conclusion
Section 44AA establishes the standards for maintaining books of accounts for both enterprises and professions. To avoid penalties and fines, taxpayers are required to comprehend the terms of this section and adhere to the legal obligations. For assistance in complying with Section 44AA and other aspects of the Income Tax Act, it is advised to consult a tax specialist who knows these laws inside out.
FAQ
Q1. What is Section 44AA of the Income Tax Act?
According to Section 44AA, anybody operating a business or practicing a profession must keep books of accounts. Individuals, Hindu Undivided Families (HUFs), businesses, firms, associations of people, and bodies of people are all included in this.
Q2. Who has to maintain books of accounts under Section 44AA?
If an established profession's gross receipts for the three years prior have exceeded Rs. 1,50,000, accounting records or books must be kept.
Q3. Is it compulsory for all taxpayers to maintain books of accounts?
You must keep the books of accounts if you exceed the restrictions outlined in Section 44AA for your business or profession.
Q4. Do salaried persons have to maintain any books of accounts?
No, a salaried individual is exempt from the need to keep books of accounts.
Q5. Which books of accounts have to be maintained under Section 44AA?
The type of business or profession determines which accounting records must be kept. Certain books of accounts are necessary for vocations including law, medicine, engineering, and architecture. The provision mandates that other firms maintain books of accounts, such as cash books, journals, ledgers, and other subsidiary books, that document daily transactions.
Q6. What are the requirements under Section 44AA for maintaining books of accounts?
Businesses with a revenue of at least Rs. 2 crores in a fiscal year are required to maintain books of accounts. The cutoff point for professionals is gross receipts in a fiscal year of at least Rs. 50 lakhs.
Q7. For how many years are books of accounts to be maintained?
Documents and books of accounts must be preserved for a minimum of six years following the conclusion of the pertinent assessment year.
Q8. What is the difference between audited and unaudited accounts?
An accountant prepares audited accounts and then conducts an audit, which involves verifying that a random sample of transactions was handled correctly. An accountant can also prepare unaudited accounts; however, they undergo an audit.
Q9. Can a taxpayer maintain books on a cash basis?
According to the regulations, a taxpayer may keep cash-basis books of accounts as long as their turnover and gross receipts are below certain criteria. Nonetheless, the taxpayer must keep accrual-based books of accounts if turnover or gross receipts are beyond the specified levels.
Related Posts
See AllIn the landscape of employee benefits, Group Gratuity Schemes stand out as a significant financial tool for employers in India. These...
Comments