Is it required for your business or occupation to keep books of accounts? There are a lot of false beliefs about the maintenance of account books; not everyone needs them. Section 44AA of Income Tax Act 1961 states which professions must keep account books in order to assist income tax scrutiny.
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What is Section 44AA of Income Tax Act, 1961?
You are required to keep books of accounts under Section 44AA of Income Tax Act if your income from your current profession exceeded Rs. 120,000 during 3 previous years. The same rule is applicable if your business’s total sales, turnover, or gross receipts exceeded Rs. 10 lakh during 3 previous years.
The rule also covers all of the specified professions and businesses, including newly established businesses. If it is determined that a business’s actual profits and gains exceed the amount claimed by the assessee, Section 44AA of Income Tax Act also applies.
The minimum income limit for individuals and Hindu Undivided Families (HUFs) has been raised to Rs. 250,000. Additionally, they are not required to keep account books if turnover or gross receipts are up to Rs. 25 lakh.
Who needs to maintain books of accounts under Section 44AA of Income Tax Act?
The following professions are required to maintain and keep books of accounts according to Rule 6F:
- Medical (physicians, dentists, pathologists, doctors)
- Film artists (story writers, directors, producers, editors, singers, costume designers, music directors, etc.)
- Architects
- accountants
- company secretaries
- authorized representatives (a representative who charges an appearance fee before tribunals or other authorities)
- Engineers
- Technical consultants
- Interior decorators
- Any other occupation as notified in the Official Gazette by the Central Board of Direct Taxes (CBDT).
What are books of accounts as per Section 44AA of Income Tax Act?
Any taxpayer engaged in business or profession under the aforementioned conditions is required to keep books of accounts. This will help the Assessing Officer (AO) calculate the total income tax in accordance with the provisions of this Act. According to Rule 6F of Section 44AA of the Income Tax Act, taxpayers are required to maintain these books:
- Ledger: All entries in a ledger flow from a matching journal. It can be used to create financial statements and contains information on every account.
- Journal: In accordance with the mercantile accounting system, you should maintain a journal for all of your accounts. According to the double-entry accounting method, the total credits and total debits in this record of daily transactions must be equal.
- Cashbook: This is a record of daily cash payments and receipts. You can use it to record cash balances, either daily or monthly.
- Signed invoices and receipts that the taxpayer receives (for amounts over Rs. 50)
- Photocopies of invoices with serial or machine numbers (for amounts over Rs. 25)
Read also: What is Accounting and Its Objectives – 7 Important Types of Accounting
What are the audit requirements under Section 44AA?
| Category of Taxpayer | Audit Required |
| Individuals under presumptive income scheme u/s 44AE | If presumptive income is more than business income u/s 44AE |
| Individuals involved in business | If gross receipts, sales or turnover exceeding Rs.2 crore |
| Individuals under presumptive income scheme u/s 44AD | If business income is lower than presumptive income u/s 44AD and the total income of the individual exceeds the exemption limit. |
| Individuals involved in a profession | If gross receipts exceeding Rs.50 lakh |
Books of Accounts for Medical Professionals
Medical professionals need to keep additional documentation in case their income tax returns are investigated. They are listed below:
- A cash register that includes details on patients, services, fees paid, etc. (in Form No. 3C)
- An inventory of stocks of medicines, drugs, and other consumables needed for their line of work
Due Dates for Submitting Audit Report and Auditing of Records
| Category of Taxpayer | Audit Form | Statement Form | Submission Due Date | Audit Due Date |
| Individuals involved in a profession or business requiring a mandatory audit | Form 3CA | Form 3CD | 30 September of that year of assessment | 30 September of that year of assessment |
| Any individual other than above | Form 3CB | Form 3CD | 30 September of that year of assessment | 30 September of that year of assessment |
How Long Do You Have to Maintain Such Documents?
Professionals must maintain the above-mentioned account books and documentation for at least six years after the end of the assessment year. An AO may request certain papers in order to reopen a tax assessment for a given year under Section 147 of the IT Act.
Professionals need to maintain these records in the place or places where they perform their profession. Taxpayers are required to keep and maintain separate books of accounts for each separate workplace.
Penalty for Not Maintaining Account Books
The primary goal of Section 44AA of Income Tax Act is to prevent professionals without fixed salaries from engaging in tax evasion. If you fail to maintain all required records, you may be subject to penalties under Section 271A.
If you fail to keep a record of your transactions, you could face a fine of up to Rs. 25,000. A two percent (2%) fee is charged for each international transaction. To avoid this, it’s a good idea for professionals to maintain a record of their income and expenses.
Exceptions under Section 44AA of Income Tax Act
Marinating the books of accounts under 44AA is exempt in the following cases:
- When turnover or total sales is not more than Rs. 10,00,000 or when your income from your existing profession does not exceed Rs. 1,20,000
- A newly established business with gross turnover or sales under Rs. 10,000,000 is covered by the same rules.
- Taxpayers who have moved from presumptive taxation under Sections 44AD and 44ADA to normal taxation (provided that their income is within the basic exemption limit)
- Under Section 44AE, professional businesses such as goods carriage are exempt from maintaining account books.
Conclusion
Section 44AA of the Income Tax Act specifies the circumstances under which professionals and businessmen must keep books of accounts. It is usually a good idea to keep these records up-to-date because they help the assessing officer compute the income tax properly. By doing this, you may be sure they won’t have any reason to reopen your tax assessment.
Frequently Asked Questions (FAQ)
A tax audit is the inspection of one’s books of accounts in order to validate income tax calculations. It verifies that the taxpayer has followed the Income Tax Act’s regulations. Account book audits can only be performed by Chartered Accountants (CAs) with certification.
Small taxpayers with less than Rs 2 crore in revenue are exempt from maintaining books of accounts under Section 44AD of presumptive taxation, and their profits are presumed to be 8% of their revenue.
According to Section 44AE of the Income Tax Act, small businesses that operate in the plying, hiring, or leasing of goods carriages and have less than ten such vehicles may choose to use the Presumptive Taxation Scheme to determine their taxable income for a given fiscal year.
The Income Tax Department is legally permitted to send notices to taxpayers during the next eight years of the date on which the ITR is filed, as per section 149 of the Income Tax Law. For instance, if you submitted your ITR in the first fiscal year of 2022–2023, you will need to keep the ITR records for the next eight years, from 2030 to 2031.
As referred to in Form 3CD by a CA, it certifies the accuracy of the taxpayer’s books of accounts, reports observations and discrepancies identified by the CA, and reports required information in line with certain provisions of the Income Tax Act.