When do we need to Prepare Books of Accounts & Audit?
The Income Tax Act has specified the books of accounts required to be maintained for Income Tax, and these have been prescribed under section 44AA and Rule 6F.
Who is required to maintain books of account?
Books of accounts/accounting records have to be maintained if the gross receipts are more than Rs. 1,50,000 in 3 preceding years for an existing profession. This also applies to a newly set up profession whose gross receipts are expected to be more than Rs. 1,50,000.
The accounting records to be kept have been prescribed in Rule 6F. The below professions are required to maintain books of accounts/accounting records:
- Legal
- Medical
- Engineering
- Architectural
- Accountancy
- Technical consultancy
- Interior decoration
- Authorized representative — A person who represents another person for a fee before a tribunal or any authority constituted under any law. It does not include an employee of the person so represented or a person carrying on the Profession of accountancy.
- Film artist — This includes a producer, editor, actor, director, music director, art director, dance director, cameraman, singer, lyricist, story writer, screenplay or dialogue writer and costume designer.
- Company secretary
- If you are a freelancer pursuing any of these listed professions, your gross receipts are more than Rs. 1,50,000, these rules shall apply to you.
- Suppose the gross receipts of the Professions listed above are not more than Rs 1,50,000 in any one or more of the preceding three years for an existing profession or for a newly set up domain whose gross receipts are expected to be not more than Rs 1,50,000. In that case, the professional is not required to maintain books of accounts as per section 44AA. In such a situation, a professional has to keep books of accounts, enabling the AO to compute the taxable income of the professional.
Specified books of account as per Rule 6F
- Cashbook A record of day to day cash receipts and payments shows cash balance at the end of the day or at best at the end of each month and not later.
- According to the mercantile accounting system, A journal is a log of all day to day transactions. It is a record, in accounting terms, where total credits equal total debits when we follow the double-entry system of accounting, i.e. each debit has a corresponding credit and vice versa.
- A ledger where all entries flow from the journal has all accounts and cans to prepare the financial statements.
- Photocopied of bills or receipts issued by you which are more than Rs 25
- Original bills of expenditure incurred by you which are more than Rs 50
Following are the additional requirements in case of a person carrying on the medical Profession — physicians, surgeons, dentists, pathologists, radiologists, etc.
- Daily cash registers with details of patients, services rendered, fees received and date of receipt.
- Details of stock of drugs, medicines, and other consumables used
Should maintain these books at the Head Office or each of the offices.
| Taxpayer | Profit/Loss | Applicable taxing section | Whether books as per section 44AA applicable |
| Business Income > Rs 1,20,000 | Profit | Normal provisions | Yes |
| Business Sales, turnover, gross receipts > Rs 25 Lakh | Profit/Loss | Normal provisions | Yes |
| Business Sales, turnover, gross receipts </= Rs 25 Lakh | Profit/Loss | Presumptive taxation – Section 44AD | No |
| Business Sales, turnover, gross receipts </= Rs 25 Lakh | Profit/Loss | Normal Provisions | No |
| BusinessTurnover </= 2 Crore | Profit | Presumptive taxation – Section 44AD | No |
| BusinessTurnover </= 2 Crore | Loss | Presumptive taxation – Section 44AD | No |
| BusinessTurnover </= 2 Crore | Profit/Loss | Normal provisions | Yes |
| ProfessionGross receipts </= 50 Lakh | Profit/Loss | Presumptive taxation – Section 44ADA | No |
| ProfessionGross receipts </= 50 Lakh | Profit/Loss | Normal provisions | Yes
|
For how long should these books be maintained?
Must keep each year's books for six years from the end of that year.
Failure to maintain books of accounts: If you fail to maintain books of accounts as prescribed, you may be charged a penalty of Rs 25,000 or, in some cases where you may have international transactions, and you have failed to maintain information and documents for such transactions – 2% of the value of each international trade. It would be diligent in maintaining your books of accounts and keeping track of all your expenses and income methodically.
When is bookkeeping not required?
- Where the income does not exceed Rs 1,20,000 or total sales, turnover, or gross receipts are not more than 10,00,000 in all preceding three years — no books of account are required to be maintained, in the case of a newly set up profession or Business, the same rule applies when income is expected to be less than Rs 1,20,000 or sales/turnover/gross receipts are expected to be less than Rs 10,00,000.
- Where the income is more than Rs 1,20,000 or total sales, turnover, or gross receipts are more than 10,00,000 in all preceding three years, such Profession or businesses must maintain books of accounts and other documents which may enable the Assessing Officer to calculate their taxable income as per the Income Tax Act. No specific records are prescribed. In the case of a newly set up profession or Business, the same rule applies when income is expected to be more than Rs 1,20,000 or sales/turnover/gross receipts are expected to be more than Rs 10,00,000.
- For Professions and Businesses covered under sections 44AD and 44AE, businesses under sections 44AD and 44AE are not required to maintain any books of accounts. However, taxpayers who claim that their income from the Business is lower than the presumed income calculated under section 44AE must keep books of accounts as specified in section 44AA and have them audited under section 44AB. A taxpayer may shifts from presumptive taxation under section 44AD/44ADA to ordinary tax to claim that their income from Business or Profession is lower than the presumed income calculated under section 44AD/44ADA. In such a case, where the income exceeds the basic exemption limit of Rs 2,50,000, books of accounts as required under section 44AA have to be maintained and audited as per section 44AB.
- In the case of a taxpayer whose turnover was less than Rs 25 Lakh but having total income above the maximum amount not chargeable to tax, they are excluded from maintenance of books of accounts as per 44AA.
Audit Requirements
Audit of accounts is compulsory by a Chartered Accountant for the following persons
| Tax Payer | Compulsory Audit required when |
|---|
| A person carrying on Business | If total sales, turnover or gross receipts are more than Rs. 1 crore |
| A person carrying on Profession | If gross receipts are more than Rs. 50 lakh |
| A person covered under presumptive income scheme section 44AD | If the business income is lower than the hypothetical income calculated as per Section 44AD and the person's total income is more than the maximum income, exempt from tax. |
| A person covered under presumptive income scheme section 44AE | If the income of the Business is lower than the hypothetical income calculated as per Section 44AE. |
| A person covered under presumptive income scheme section 44ADA | If the Profession's income is lower than the hypothetical income calculated as per section 44ADA and the person's total income is more than the maximum gain, exempt from tax. |
The due date for getting records audited and submission of audit report
| Taxpayer | Audit Form | Statement Form | The due date for Audit | The due date for submission of the report |
|---|
| A person carrying on Business or Profession is compulsorily required to get audited under any other statute/law. | Form 3CA | Form 3CD | September 30 of the assessment year | September 30 of the assessment year |
| A person other than those listed above who are required to get audited under Income tax law | Form 3CB | Form 3CD | September 30 of the assessment year | September 30 of the assessment year.
|
The deadline for Audit and submission of the report is November 30 in international or specified domestic transactions.
Penalty when accounting records as required are not maintained as per Section 44AA
If the taxpayer fails to maintain accounting records as per the requirements of Section 44AA, a penalty may be levied under section 271A. The maximum penalty that can charge is Rs. 25,000. However, if the taxpayer can prove a reasonable cause for failure to maintain accounting records – such a fine may not be levied.
If the taxpayer fails to get the accounting records audited or furnish an audit report as per the requirements of Section 44AB, a penalty may be levied under section 271B. The minimum sentence charged is 0.5% of the total sales, turnover or gross receipts, and the maximum penalty is Rs 1,50,000. However, if the taxpayer has a reasonable cause for failure to get an audit done – such a fine may not be levied.
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