Income Tax Taxation

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

Section-44A,-44AD-and-44AB

Introduction

Income Tax Act is a crucial legislation in India’s taxation system. The main role of this act is the assessment and collection of income tax; it provides several provisions and regulations. Section 44AB and 44AA are among the various important section of the Income Tax Act that have a particular significance since they deal with the maintenance of books of accounts and regulations related to tax audits. Section 44AA and 44AB are essential in increasing tax compliance and preventing tax evasion. Companies and individuals can provide a transparent and accurate financial image by keeping appropriate books of accounts. The tax audit also helps in finding inconsistencies, boosting the credibility of financial statements, and maintaining the integrity of the tax system.

What is a tax audit?

Tax authorities or government organizations in charge of implementing tax laws do an official inspection and verification of a taxpayer’s financial records, statements, and other relevant documents. A tax audit’s purpose is to verify that taxpayers are adhering to tax laws, accurately disclosing their income, and paying the right amount of taxes due.

Trained auditors or tax authorities examine the taxpayer’s financial data during a tax audit to evaluate its accuracy and detect any discrepancies or reporting mistakes. To ensure that the taxpayer has satisfied their tax responsibilities in compliance with the applicable tax rules, they carefully examine income, deductions, credits, and any other significant financial data.

What is the maintenance of books?

The systematic recording and documenting of financial transactions and other pertinent information about a business or organization is referred to as maintaining books of accounts. To facilitate decision-making, provide accurate financial reporting, and adhere to numerous legal and regulatory obligations, this procedure is essential. It entails several essential actions and concepts to guarantee that the books of accounts are accurate, trustworthy, and transparent. Each company must maintain its books of accounts at the registered office or another place chosen by the board of directors. The Registrar of Companies (ROC) must be informed if the company decides to retain its books at a different location. Additionally, the business is free to choose to manage its accounting electronically.

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What is a presumptive taxation scheme? 

This scheme’s major goal is to exclude all small taxpayers who are engaged in business from the necessity of keeping thorough financial records. The presumptive taxation structure allows users to disclose their income at a predefined rate. They are therefore released from the onerous duty of keeping thorough accounting records and the necessity to have their accounts audited. Sections 44AD, 44ADA, and 44AE of the Income-tax Act1 established the presumptive taxation scheme to decrease the burden of bookkeeping and auditing for such taxpayers.

Section 44AA

Books of accounts, in simple terms, means a specific book that consists of all the details related to the business. A company keeps books of accounts to systematically monitor its financial transactions and occurrences. Books of accounts are a collection of financial records. To provide accurate and transparent financial reporting, which is necessary for decision-making, tax compliance, and regulatory obligations, these records are of utmost importance.

By Professionals: Assessee indulges in the following profession has to necessarily maintain the above-stated books of account:

  • Legal
  • Medical
  • Engineering
  • Architecture
  • Accounting
  • Technical Consultancy
  • Interior Decorator
  • Film artist
  • Practising CA, CS, or CWA

The professional must keep adequate financial records or books of accounts if their gross income (total earnings) in any of the past three years exceeded Rs. 1, 50,000.

Professionals who have just begun their practice and anticipate total annual revenues of more than Rs. 1, 50,000 are subject to the same rule.

Other businesses: It is required to keep accurate books of accounts under specific circumstances for people or firms involved in any profession or trade other than those mentioned above:

  • If their Gross Revenues or Turnover exceed INR 1,000,000 (INR 2,500,000 for Individual & HUF, commencing from 2017).
  • If their profit exceeds INR 120,000 (INR 250,000 for Individual & HUF, starting in 2017).
  • These books must be updated yearly and kept for at least six years.
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Prescribed Books: A prescribed book means/consists of a Cash Book, carbon copies of bills issued for amounts exceeding Rs. 25000- etc; in the case of the Medical Profession, the Case register in Form No. 3C, as well as the Stock Register, are also to be maintained along with Journal and Ledgers.

Section 44AB

  • You must conduct a tax audit if you are a business owner and your annual sales or turnover totalled more than Rs. 1 crore.
  • You must also conduct a tax audit if you are a professional and your gross receipts for the most recent fiscal year exceeded Rs. 50 lakh. 
  • If you fall under Sections 44AD, 44AE, 44AF, 44BB, or 44BBB and declare fewer earnings than what is projected, you may still need to conduct a tax audit even if your income is below the aforementioned limits. 
  • There is an exemption for people who choose Section 44AD’s presumptive taxation plan and whose total income or turnover does not exceed Rs. 2 crores.
  • In a recent announcement, it was revealed that the threshold for a tax audit may be raised if a person conducts the majority of their transactions (at least 95%) digitally (online).

Penalty for non-compliance

  • Section 271A: The tax officer may issue a fine when an individual or company fails to maintain accurate records of their financial transactions (books of accounts). For regular transactions, the fine can be up to Rs. 25,000, and for foreign transactions, it can be up to 2% of the value of the transaction.
  • Section 271B: The highest fine for those who should have their financial records audited but fail to do so will be INR 150,000 or 0.5% of their turnover.
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Conclusion

In conclusion, the Income Tax Act’s Sections 44AA and 44AB are significant in evaluating whether tax audits apply to enterprises and professions. Section 44AA specifies account maintenance, whereas Section 44AB establishes requirements for tax audits. Following these rules improves financial openness, prevents fines, and promotes a more straightforward tax assessment procedure for taxpayers.

FAQs

Who is liable to maintain 44AA?

A person or a company that is conducting a business is liable to maintain the books of accounts according to the rules prescribed.

Which professionals are mentioned under section 44AA?

Medical, Legal, Accountancy, Film artists, Engineering, Architectural, Technical consultancy, Company Secretaries, and any person that represents someone in front of authority and Interior decoration are the professionals mentioned under section 44AA.

What is the penalty for non-compliance with 44AA?

The tax officer may issue a fine when an individual or company fails to maintain accurate records of their financial transactions (books of accounts). For regular transactions, the fine can be up to Rs. 25,000, and for foreign transactions, it can be up to 2% of the value of the transaction.

What is the 44AA threshold limit?

The professional must keep adequate financial records or books of accounts if their gross income (total earnings) in any of the past three years exceeded Rs. 1, 50,000. Professionals who have just begun their practice and anticipate total annual revenues of more than Rs. 1, 50,000 are subject to the same rule.

What is under section 44AB in income tax?

Section 44AB talks about the regulation of taxpayers, which are required to have a tax audit of their accounts.

What does Section 44AA deal with?

For income tax purposes, section 44AA lists the individuals and companies that must maintain books of accounts.

References

  1. https://incometaxindia.gov.in/pages/acts/income-tax-act.aspx

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