Section 44AA of Income Tax Act, 1961, deals with the maintenance of books of accounts by individuals or entities engaged in certain professions and businesses. The provision ensures transparency and proper documentation, allowing the Assessing Officer (tax officer) to accurately compute the taxpayer’s income.
Who Must Maintain Books of Accounts?
Section 44AA applies to both professionals and businesses. The requirement depends on the type of work you do and your earnings.
Professionals
If you are engaged in any of the following professions, you must maintain books of accounts:
Legal Profession: Lawyers, judges, etc.
Medical Profession: Doctors, dentists, physiotherapists, etc.
Engineering: Engineers and technical consultants.
Architecture and Interior Decoration: Architects and interior designers.
Accountancy: Chartered accountants and other accounting professionals.
Other Professions: Any profession that is specifically notified by the Central Board of Direct Taxes (CBDT).
Professionals in these fields must maintain proper books of accounts to ensure that the income tax assessment is accurate.
Businesses
If you are running a business or profession that is not listed above, you must maintain books of accounts if:
Your income exceeds ₹1,20,000, or
Your sales, turnover, or gross receipts exceed ₹10,00,000 in any of the three preceding years.
These thresholds ensure that businesses of significant size maintain proper records.
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Thresholds for Maintenance of Books
Under Section 44AA, businesses and professionals must keep their books if they meet the criteria outlined above. However, newly established businesses and professions also need to maintain books if they expect to exceed the specified income or turnover during their first year. This helps the Assessing Officer verify whether the income declared is correct.
Deemed Profits and Gains
Section 44AA also applies to cases where profits and gains from the business are considered deemed profits under special provisions of the Act, such as:
Section 44AE: This applies to businesses involved in the transportation sector.
Sections 44BB and 44BBB: These sections apply to foreign companies engaged in specific activities in India, like the exploration of mineral oils.
If the taxpayer claims a lower income than the deemed profits under these sections, they must still maintain books of accounts. This ensures that the income is genuinely lower than the deemed profits.
What Books of Accounts Must Be Maintained?
The Income Tax Board (CBDT) specifies the types of books and records that need to be maintained. According to the rules, these may include:
Cash Book: A record of all cash transactions.
Journal and Ledger: For businesses that follow the mercantile system of accounting.
Inventory Records: If necessary, especially for businesses dealing with physical goods.
Receipts and Payments: Records of all receipts and payments related to the business.
Bill Copies: Businesses must keep carbon copies of bills if the amount exceeds ₹25,000.
Expenses: Proof of expenses must be maintained, especially if the amount exceeds ₹50,000.
These records help the Assessing Officer verify the income and expenses claimed by the taxpayer.
Also, Get to Know Section 44 Arbitration And Conciliation Act
Where Should Books Be Maintained?
The books of accounts must be kept at the principal place of business or profession. They should be available for inspection if the tax authorities decide to review the records. The books should also be maintained in a way that makes them easy to access.
Retention Period for Records
According to Section 44AA of Income Tax Act, the books of accounts must be maintained for a specific period. The CBDT has the authority to prescribe the duration for which the records must be kept. Generally, records should be retained for at least six years from the end of the relevant assessment year. This helps in case of any future audits or reviews by the tax authorities.
Consequences of Non-Compliance
Failure to maintain proper books of accounts as required by Section 44AA can lead to penalties under the Income Tax Act. If the books are not maintained, the Assessing Officer may:
Disallow certain deductions that the taxpayer claims.
Impose a penalty for non-compliance.
Conduct further investigations into the taxpayer’s income and expenses.
Penalties can range from ₹25,000 for not maintaining records to more severe actions for repeated offenses.
Exemptions from Maintenance
There are some exceptions to this rule. If the income from a business or profession is below ₹1,20,000 and the turnover is below ₹10,00,000, then the individual is not required to maintain books of accounts. Newly established businesses can also be exempt if they do not expect to meet the income or turnover thresholds.
However this exemption only applies to businesses and professions that are not required to maintain accounts under other provisions of the Act.
Summing Up
Section 44AA of Income Tax Act plays a crucial part in ensuring that taxpayers keep transparent and accurate financial records. It applies to both professionals and businesses, and the criteria depend on income levels, business size and the type of the job. Maintaining books of accounts helps ease the tax assessment process and ensures compliance with tax laws. Failure to cooperate can result in penalties, disallowance of deductions and further investigations.
For small businesses and professionals, adhering to these provisions is essential for smooth operations and avoiding any legal complications. Always consult a tax professional to understand how these rules apply to your specific situation.
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Section 44AA of Income Tax Act: FAQs
Q1. What is Section 44AA of Income Tax Act?
Section 44AA says that people and businesses have to keep books of accounts if their income or sales reach certain levels. It makes things clearer and makes figuring out taxes easier.
Q2. Who must keep books under Section 44AA?
Professionals such as doctors, lawyers, and accountants are required to keep books. Companies with income above ₹1,20,000 or turnover above ₹10,00,000 in three years must keep accounts.
Q3. What are the thresholds for keeping books?
Books have to be kept if income is more than ₹1,20,000 or turnover is more than ₹10,00,000 in any of the previous three years.
Q4. Are there exemptions under Section 44AA?
Yes, entities with income of less than ₹1,20,000 or turnover of less than ₹10,00,000 are exempt from keeping books.
Q5. What are the records required under Section 44AA of Income Tax Act?
Entities are required to keep a cash book, journal, ledger, stock, and receipts of expenses over ₹25,000.
Q6. What are the consequences if I fail to keep books as prescribed?
Failure to keep books can attract penalties, disallowance of deductions, and additional scrutiny by tax authorities.
