Compulsory Maintenance of books of account under Income Tax

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Compulsory Maintenance of books of account under Income Tax

One of the most common questions by the taxpayers is with regard to the maintenance of books of accounts. Whether the maintenance of books of account is compulsory or not?

It may be noted that Section 44AA of Income Tax Act and rule 6F of Income Tax rules contains the provisions regarding maintenance of books of accounts under Income tax Act.  Wherever required, the books of accounts has to be maintained and kept at the principal place of business or profession as per Rule 6F(3). However, this is for the current year and there is no specific rule as to where the books of accounts of earlier years should be kept. It is normally advisable to keep the same at the principal place of business only. It may be noted that wherever the maintenance of books of accounts is mandatory, any failure on the part of the taxpayers to maintain books of accounts and other documents or to retain them as required u/s 44AA attracts penalty of Rs. 25000 u/s 271A. The penalty can be imposed by the assessing officer or CIT (Appeal).ITAT, Delhi in (1998) 97 Taxman n 273(Magzine)/60T.T.J. 278 has held that there is no rule made to the effect that which books of accounts are required to be made by the persons carrying on business covered u/s 44AA (2), therefore if the assessee has kept the details of Incomes and expenditures then no penalty shall be levied u/s 271A. Similar ratio was laid down in Sujan Singh v. AO [2007] 110 TTJ (Asr.) 818 wherein it has held that Rule 6F has not been made applicable to the persons carrying on business or Profession other than those mentioned u/s 44AA(1) and covered u/s 44AA(2). The case of the assessee falls u/s 44AA (2), as the assessee was carrying on a business of poultry farm. the board has not specified or notified the books of account to be maintained by persons covered under sub-section 2 of section 44AA.Therefore, rule 6F is not applicable to the case of the assessee. ITAT in this case has relied on ITO v. Dinesh Paper Mart [1999] 64 TTJ (Nag.) 674 : [1999] 70 ITD 274(Nag.) relied on.

However, above judgment and observation need to be read with due distinction between section 44AA(1) vis a vis 44AA(2). This two sections distinguishes the maintenance of books of accounts for businessmen vis a vis professionals.

U/s 44AA(1) read with rule 6F the persons carrying on any of the profession as mentioned below are required to maintain books of accounts and other documents as may enable the assessing officer to compute his total income, if yearly gross receipts of the profession exceeded  Rs 1,20,000.

1) Legal

2)Medical

3)architectural

4)engineering

5)accountancy

6)technical consultancy

7)interior decoration

8)authorized representative

9)film artist

10) Any other profession as is notified by the board

It may be noted that proviso to Rule 6F (1) provides that if the gross receipts of a profession do not exceed Rs 120000 in any one of the three years immediately preceding the previous year or where the profession has been newly setup in the previous year, his total gross receipts in the profession for that year are not likely to exceed the said amount, then such professional need not to maintain any books of accounts as mentioned in sub rule 2 of rule 6F. In short, if the gross receipts of a profession exceed Rs 120000 in all the three years preceding the previous year only then the books of accounts will be required to be maintained, if the gross receipt exceed the prescribed limit in the two preceding years but not in the third preceding year then there will be no need to maintain books of accounts as contemplated in sub rule 2 of rule 6F.

The Rule for person engaged in business is different from professionals as discussed above. Any persons engaged in any other profession or carrying on any business other than those covered by section 44AA (1) as discussed above, the requirement of compulsory maintenance of books of accounts applies if either the income from business or profession exceeds Rs 120000 or the turnover or gross receipts exceed Rs 10 Lakhs in any one of the three years immediately preceding the previous year.

If the Income or the gross receipts or gross turnover of a person carrying on business or profession other than profession as mentioned u/s 44AA (1) do not exceed in any one of the three years preceding the previous year then no books of accounts will be required to be maintained u/s 44AA (2).

 

 

Above rule of maintenance of books of accounts is subject to the presmtupive scheme of taxation contained in section 44AD, 44AE, 44ADA. This section provides immunity from maintenance of books of accounts if other conditions prescribed therein is followed.

 

This persons covered by the presumptive income scheme like u/s 44AD or 44ADA or 44AE are not require to compulsorily maintain books of account u/s 44AA.

However, if the profits and gains from the business are deemed to be profits and gains u/s 44AD or 44ADA or 44AE or 44AF or 44BB or 44BBB as the case may be, and the assessee has claimed his income to be lower than the profits or gains so deemed, then the books of accounts will be required to be not only maintained u/s 44AA but is also required to be audited u/s 44AB.

Presumptive Taxation Scheme u/s 44AD:

Section 44AA(2) provides that where the profits and gains from a business are deemed to be profits and gains of the assessee under section 44AD and the assessee has claimed such income to be lower than the profits and gains so deemed i.e. below 8% & the income of the assessee exceeds the maximum amount which is not chargeable to income tax during previous year then in such case such person shall keep and maintain such books of accounts and other documents as may enable the assessing officer to compute his total income.  This 8% is to be taken as 6% if the receipt against sale transactions is in digital mode.

In short, if taxpayers declares his income below the 8% or 6% of his total turnover or gross receipts as required u/s 44AD and his income is above the exempted limit then such taxpayers will have to compulsorily maintain his books of accounts. However, if the total income is below the exempted limit and profits are also declared below 8% or 6% of gross turnover or gross receipts then such persons will not be required to maintain compulsory books of accounts.

Nature of Books of Accounts:

This contained in Rule 6F of the Income Tax Rules-1962. As per Rule 6F(2) the following books of accounts and documents are required to be maintained:

1) cash book,

2) Journal, if the accounts are maintained as per mercantile system of accounting,

3) ledger

4) carbon copies of bills, serially numbered and carbon copies or counterfoils of receipts issued in respect of sums exceeding Rs 25,

5) original bills for expenses exceeding Rs. 50 and payment vouchers for petty expenses. However in a case where the cash book maintained by the person contains adequate particulars in respect of the expenditure incurred, then vouchers are not necessary in respect of expenses incurred up to Rs 50.

 

 

In addition to above, there are some prescribed books for persons engaged in medical profession. In addition to above, such medical professionals are required to maintain daily case register in the prescribed Performs i.e., Form No. 3C and inventory, as at the beginning and end of the year, of stock of drugs, medicines and other consumables accessories used for the purpose of the profession.

Whether Books in physical form is mandatory?

 

It may be noted that Books or books of accounts have been defined u/s 2(12A) as including ledgers, day-books, cash books, account-books and other books, whether kept in the written form or as print-outs of data stored in a floppy, disc, tape or any other form of electro-magnetic data storage device. In short, the law even recognizes the records in electronic form as books of accounts. Further, document has been u/s 2(22AA) as including an electronic record as defined in clause (t) of sub section (1) of section 2 of the Information Technology Act, 2000.

There is an interesting observation by Gauhati High Court which is worth mentioning before we end this topic. Gauhati HC in (1996) 222 ITR 691 has held that if the penalty u/s 271A has been levied on an assessee for non maintenance of books of accounts then thereafter no penalty shall be levied u/s 271B for not getting the books of accounts audited. Its an interesting observation by the Gauhati HC.

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