The Impact of Section 44AA and 44AB of the Income Tax Act

Sections 44AA and 44AB were introduced for simplifying the tax compliances of people in business & small professionals. These sections prescribe minimum agreements such as maintenance of books & tax audits required by the entity that falls under the provisions of this section. Maintenance of books & accounts is not mandatory for every business. Instead, this section prescribes the criteria that decide who needs to comply with these provisions.

Section 44AD was introduced as the presumptive taxation scheme for the benefits of businessmen. The primary aim for the insertion of this section is to minimize the compliance requirement for small taxpayers of maintaining a bunch of records.

What is the Presumptive Taxation Scheme?

The presumptive taxation scheme can be availed by the businesses as well as professionals. The presumptive scheme under section 44AD can be availed by businessmen with turnover up to INR 2 Crore that allows assesses to calculate the tax payable on estimated income at the prescribed rates. And also, they are relieved from complying with the provisions of section 44AA & 44AB.

Section 44AA: An Overview

Section 44AA prescribes the mandatory requirement for the maintenance of books of account for the purpose of Income Tax^[1]. This section prescribes the minimum income, types of records to be maintained & penalty for non-compliance of the provisions of this section that are discussed in quick glance hereinbelow.

• Maintenance of books of accounts under section 44AA
• By Professionals: Assessee indulge in the following profession has to necessary maintain the above-stated books of account:
• Legal
• Medical
• Engineering
• Architecture
• Accounting
• Technical Consultancy
• Interior Decorator
• Film artist
• Practicing CA, CS or CWA

• Other businesses or professions: Assessees indulge in any other business or profession other than the stated above has to maintain the books of accounts.

These professionals or businesses are required to maintain these books of account compulsorily if there turnover or profit in case:

• Gross Receipts or Turnover exceeds INR 1000000 (INR 2500000 w.e.f 2017 For Individual & HUF)
• Profit exceeds INR 120000 (INR 250000 w.e.f 2017 For Individual & HUF)
• If the assessee opts the benefits of the presumptive scheme under section 44AA, 44AE, 44BB, and 44BBB and he declare the income less than the minimum percent prescribed u/s 44AA. He has to maintain the books of accounts on a compulsory basis.
• These books are required to be maintained in every financial year for a period of 6 years.
• Defining Books of Account as per section 44AA

Books of accounts are the documents or records that contain all the details of the business. It is the detail of every transaction carried on by the business during the financial year. Books of accounts are governed by Section 44AA of the Income Tax Act, 1961. Following are the books that are required to be maintained:

• Cashbook
• Ledger
• Journal
• Xerox copy of bills & receipt of transactions exceeding INR 25,000
• Original bills & receipt of every transaction exceeding INR 50,000.

• Penalty for non-compliance u/s 271A

If an assessee failed to maintain the books of account required under section 44AA will be penalized as per the following:

• Without international transactions: INR 25000
• With international transactions: 2% of the value of the international transaction.

Section 44AB- An Overview

An individual who is carrying on business & profession with prescribed gain & receipt from the business or profession is compulsorily required to get audited all his books of account maintained under section 44AA.

• Audit of the books of accounts

An audit is compulsory for the following assessee:

• An individual who runs the business & his turnover exceed INR 1 Crore in the previous year
• An individual who a professional & his gross receipt exceeds INR 50 Lakhs in the previous year.
• In case an individual has more than one business or profession, the turnover from all the units is pooled for the requirement of this section.
• Assessing officer if doubtful about the authenticity of the books can order special audit under section 142(2A) if he requires that there is a need for such audit due to the complexity of accounts & volume of transactions.

• Penalty for non-compliance u/s 271B

If an assessee who is required to get his books of accounts audited but doesn’t comply the same, is subjected to the penalty at the rate of 0.5% of turnover subject to the maximum of INR 150000.

Section 44AD- An Overview

Income tax department under section 44AD has framed the Presumptive Taxation Scheme relieving small taxpayers from tedious compliance of maintaining of books & records and the audit of the same.

Eligible assessee for the scheme under section 44ADA

Benefits of this section can be enjoyed by:

• Resident taxpayers being an individual.
• Resident HUF
• Resident Partnership firm
• Business whose total turnover does not exceed INR 2 Crore in the previous year.

Non-applicability

Provisions of the section do not apply on the following:

• Agency business
• Business with commission income or brokerage income
• The business of hiring or leasing of carriage.

Benefits of the scheme

Following are the benefits of the presumptive scheme under section 44AD that can be availed by an eligible assessee:

• Net income for the assessee who opts for this scheme is computed at the rate of 8% of its Total Turnover/Gross Receipts. 
• In case all the receipts are from account payee cheque, through the draft or by the use of electronic methods of a bank account or through any digital receipt.
• An assesses who opts for the benefits under section 44AD is not required to maintain books of account that are required to be maintained under section 44AA.
• The assessee who opts for the benefits under section 44AD is also not required to get his accounts audited as required under section 44AB.

Features of the presumptive taxation scheme under section 44AD

• An individual has to pay 100% of the advance tax on the 15^th of every march.
• In case the income declared is less than the 8% or 6% of turnover, then the assessee has to comply with the provisions of section 44AA & 44AB.
• No further deductions can be claimed by an assessee including depreciation & unabsorbed depreciation.
• An individual who opts for the presumptive scheme has to follow the scheme for continuous five years. In case he fails to file the scheme for continuous five years, then he won’t be able to opt for the scheme for further next five years.