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2021

Maintenance of Books of accounts under Income Tax Act, 1961

Munimji Maintenance of Books of accounts under Income Tax Act 1961

In this article, we will discuss the legal provisions on the compulsory maintenance of books of accounts as specified in section 44AA of the Act by a Professional declaring tax under section 44ADA. Let us begin the discussion analyzing the provisions of section 44AA of the Act related to ‘Maintenance of accounts by certain persons carrying on profession or business’.

Section 44AA of Income Tax Act, 1961:

Section 44AA of the Act requires certain persons to maintain books of account. The provisions of this section read with Rule 6F of the Income Tax Rules, 1962 relate to maintenance of books by assessee as well as prescribe the list of books to be maintained.

Section 44AA was introduced in the Act vide Taxation Laws (Amendment) Act, 1975 and has come into force with effect from 1-4-1976. Since then there is no major amendment carried on in this section till Finance Act, 2020.

Bare Act:

(1) Every person carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board in the Official Gazette shall keep and maintain such books of account and other documents as may enable the Assessing Officer to compute his total income in accordance with the provisions of this Act.

(2) Every person carrying on business or profession [not being a profession referred to in sub-section (1)] shall:

i. if his income from business or profession exceeds one lakh twenty thousand rupees or his total sales, turnover or gross receipts, as the case may be, in business or profession exceed or exceeds ten lakh rupees in any one of the three years immediately preceding the previous year; or

ii. where the business or profession is newly set up in any previous year, if his income from business or profession is likely to exceed one lakh twenty thousand rupees or his total sales, turnover or gross receipts, as the case may be, in business or profession are or is likely to exceed ten lakh rupees, during such previous year; or

iii. where the profits and gains from the business are deemed to be the profits and gains of the assessee under section 44AE or section 44BB or section 44BBB, as the case may be, and the assessee has claimed his income to be lower than the profits or gains so deemed to be the profits and gains of his business, as the case may be, during such previous year; or

iv. where the provisions of sub-section (4) of section 44AD are applicable in his case and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year, keep and maintain such books of account and other documents as may enable the Assessing Officer to compute his total income in accordance with the provisions of this Act:

Proviso to Clause (i) and (ii) above:

o Provided that in the case of a person being an individual or a Hindu undivided family, the provisions of clause (i) and clause (ii) shall have effect, as if for the words “one lakh twenty thousand rupees”, the words “two lakh fifty thousand rupees” had been substituted:

o Provided further that in the case of a person being an individual or a Hindu undivided family, the provisions of clause (i) and clause (ii) shall have effect, as if for the words “ten lakh rupees”, the words “twenty-five lakh rupees” had been substituted].

(3) The Board may, having regard to the nature of the business or profession carried on by any class of persons, prescribe, by rules, the books of account and other documents (including inventories, wherever necessary) to be kept and maintained under sub-section (1) or sub-section (2), the particulars to be contained therein and the form and the manner in which and the place at which they shall be kept and maintained.

(4) Without prejudice to the provisions of sub-section (3), the Board may prescribe, by rules, the period for which the books of account and other documents to be kept and maintained under sub-section (1) or sub-section (2) shall be retained.

Explanation:

• Section 44AA(1) prescribes for compulsory maintenance of such books of accounts and other documents which will enable the Assessing Officer to compute his total income in accordance with the provisions of this Act. Sub-section (1) applies to the persons engaged in following professions:

o Legal profession;
o Medical profession;
o Engineering or architectural profession;
o Profession of accountancy;
o Technical consultancy;
o Interior decoration;
o Any other profession as notified by the Board.

• As per Section 44AA, persons carrying on the professions specified above are mandatorily required to maintain their books of accounts. However, the persons who are not covered in the list of professions specified under Section 44 AA which are mentioned above are mandatorily required to maintain their books of accounts only if:-

o If the Income from Business or Profession exceeds Rs. 1,20,000 or the Total Sales/ Turnover/ Gross Receipts exceeds Rs. 10,00,000 in any of the previous 3 years. These limits have been increased to Rs. 1,50,000 and Rs. 25,00,000 respectively from Financial Year 2017-18 onwards. (Announcement made in Budget 2017).
o If the Business or Profession is newly set-up, it would be required to maintain books of Accounts if the income from business or profession is likely to exceed the limits mentioned above.
o If the taxpayer is covered under Section 44AD/ Section 44AE/ Section 44AF and the taxpayer has claimed his income in the income tax return to be lower than the profits or gains deemed under Section 44AD/ Section 44AE/ Section 44AF respectively.

Rule 6F: Books of Accounts to be maintained:

The category of persons specified above under Section 44AA is mandatorily required to maintain the books of accounts as mentioned below:

• Cash Book;

• Journal (if the Accounts are maintained according to the Mercantile system of Accounting);

• Ledger;

• Carbon copies of Bills, whether machine numbered or otherwise serial numbered, wherever such bills are issued by the person, and carbon copies or counterfoils of machine numbered or otherwise serial numbered receipts issued by him. However, this requirement will not apply in relation to sums not exceeding Rs. 25,000;

• Original Bills wherever issued to the person and receipts in respect of expenditure incurred by the person. In case the bills and receipts are not issued and the expenditure incurred does not exceed Rs. 50,000 – the Payment Vouchers prepared and made by the person shall be kept. However, the requirements as to preparation and signing of the payment vouchers shall not apply in a case where the cash book maintained by the person contains adequate particulars in respect of the expenditure incurred by him;

• A person carrying on Medical Profession shall in addition to the books of accounts and other documents specified above shall also maintain the following:-
o A daily case register in Form 3C;
o Inventory Book (under Broad heads) as on the first and last day of the previous year of the stock of drugs, medicines and other consumable accessories used for the purpose of his profession.

• The Books of Accounts and other documents shall be kept and maintained by the person at the place where he is carrying on the profession or, where the profession is carried on at more than 1 place – the books should be maintained at the principal place of business. However, in case separate books of accounts are maintained in respect of each place where the profession is carried on, the books of accounts may be kept and maintained at the respective place at which the profession is carried on;

• All the books of Accounts specified above shall be kept and maintained for a period of 6 years from the end of the relevant assessment year.

Other Relevant Points:

• Cash Book means a Record of all Cash Receipts and payments, kept and maintained on a day-to-day basis and giving the cash balance in hand at the end of each day or at the end of a specified period not exceeding a month.

• Film Artist means any person engaged in his professional capacity in the production of a cinematographic film whether produced by him or any other person as:-
o Actor;
o Cameraman;
o Director, including an Assistant Director;
o Music Director, including an Assistant Music Director;
o Art Director, including an Assistant Art Director;
o Dance Director, including an Assistant Dace Director;
o Editor;
o Singer;
o Lyricist;
o Story Writer;
o Screen Play Writer;
o Dialogue Writer;
o Dress Designer.

Penalty under Section 271A:

A penalty of Rs.25,000 may be charged if the assessee does not confirm to the conditions of the said section.

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