Income Tax

Who is required to maintain books of account as per Section 44AA?

Section 44AA of the Income Tax Act, along with Rule 6F, mandates books of account for income tax. These books of accounts are the official document that establishes the earnings and spending of a business.

This article deals with Section 44AA of the Income-tax Act, 1961. We will study in detail who must maintain the books of accounts and the documents required to be maintained, and the case when no books are to be kept.

What is Section 44AA?

Section 44AA of the Income Tax Act^[1], along with Rule 6F, mandates the maintenance of books of accounts for income tax. These books of accounts are the official documents that established the earnings & spending of a business. It helps in concluding the tax liability.

Section 44AA talks about who keeps the records, what documents are required and the duration to keep the records. We will learn this in the next segment.

Why is it essential to maintain books of accounts?

It is essential to maintain the books of accounts to determine the tax liability for a citizen. It determines the tax slab a person comes in and the amount to be deducted accordingly and helps check income variations. They also help in filing the IT Returns & audit-proof of the accounts.

Analysis of Section 44AA in respect maintaining of books of account

According to Section 44AA and Rule 6F of the Income Tax Act, there is a list of who needs to maintain the books of accounts for income tax purposes.

The list is:

• Legal
• Medical
• Engineering
• Architecture
• Accountancy
• Technical consultancy
• Interior designer
• Company secretary
• and a few more

The CBDT (Central Board of Direct Taxes) can add professions to the list as it deems fit.

The rules under this section will also apply to a freelancer who comes under any category mentioned above if his gross receipts are more than Rs. 2, 50,000 a year.

How are books of account maintained in the profession?

In the case of the person carrying on the profession, if:

• Gross receipt in the 3 years preceding the previous year is more than Rs. 1,50,000 or
• Possibly to exceed if the profession is newly set up.

Then the assessee is required under Section 44AA read with Rule 6F to maintain the books of account for income tax purposes. The books of accounts are to be maintained at least until the Assessing officer has completed the assessment.

How are books of account maintained in business?

In the case of the person carrying on the business, if:

• Profit or Gain from Business and Profession is more than Rs. 1,20,000 or
• total sale or the gross receipt is more than Rs. 10,00,000 in any of the 3 years preceding the previous years or
• Is likely to exceed in case of a newly established business.

Then the assessee is required to maintain the books of accounts or documents for which the AO (Assessing officer) will complete the assessment; otherwise, the assessee is not necessary to maintain the books of accounts.

What are the limits for maintaining the books of accounts in business or profession for Individuals & HUF (Hindu Undivided Family)?

The books of accounts are to be maintained if:

• The total income is Rs. 2,50,000 in business, or
• The turnover or the gross receipt is more than Rs. 25, 00,000.

Maintenance of accounts by other persons

• When the profits and gains from the business are deemed the assets’ profits and gain, as per section 44AE or 44BB or 44BBB, then the case may be. The assessee has claimed his income to be less than the deemed profits or gains during such previous year, or
• When the income exceeds the maximum amount, which was not chargeable to income tax in any previous year, where
• an eligible assessee declares profit for any previous year according to this section,
• declares profit for any 5 previous years relevant and is not according to this section,
• He is not eligible to claim benefit under this provision for the next 5 years of this assessment year.

What are the specified books of account under Rule 6F?

According to Rule 6F of the Income Tax Act, the books of accounts to be maintained are:

• Journals
• Cash memo
• Ledger
• Carbon copies of the bill
• Original bills
• In the case of a person who is a medical professional:
• Daily case register in Form 3C
• Inventory book (for the first & last day of the previous year of the stock of the pharmaceutical used in the profession.

As per Rule 6F (3), the books of accounts must be kept and maintained by the person at the principal place of business or profession.

As per Rule 6F (5), the books of account for each year must be kept for at least 6 years from the end of that year.

When are books of accounts not required?

The books of accounts are not required when:

• The taxpayers state that his income is less than the presumed income under Sections 44AD and 44AE,
• The income is less than Rs. 1,20,000 or the total sales do not exceed Rs. 10,00,000 in the 3 preceding years,
• For any newly setup business or profession with an income less than Rs. 1,20,000 or the total sales or turnover do not exceed Rs. 10,00,000 in the 3 preceding years.

Penalty for contravention

If a person fails to comply with the provisions of Section 44AA, he may attract a penalty of Rs. 25,000 u/s 271A. The penalty is imposed on failure to maintain books of accounts & other documents or to retain them. The AO (Assessing Officer) or the CIT can impose the penalty on such failure.

In some cases, failure to maintain the books of account for international transactions, then the penalty of 2% of each international transaction’s value will be levied.

Conclusion

Section 44AA of the Income Tax Act and Rule 6F mandate the maintenance of books of accounts for Income Tax.  Thus, it is essential to maintain the books of accounts to determine tax liability. It determines the tax slab a person comes in and the amount to be deducted accordingly and helps check income variations.

Read our article:How to save Income Tax through Tax Planning in India?