When to maintain Books of Account under the Income Tax Act 1961

Income tax act 1961 specifies the nature of books of account. The expression books of account is defined under section 2(12A) and books of account are prescribed by rule 6F. It also defines and specifies limits, when it is mandatory for businessman and professional to maintain those books of accounts. Section 44AA of the income tax act deals with above cited points.

 Let us understand the provision of act and how we can comply with those provisions.

Section 44AA (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.

Commentary on Sub-Section-1: Specified professional stated in Sub-section (1) of section 44AA has to maintain the books of account irrespective of the amount of income earned. There has no threshold for income, sales, gross receipt or turnover been provided to apply which means If professional is covered under this sun-section, he has to maintain books of account specified under rule 6F. Few professionals are covered under this sub-section which has to be carefully read and apply with section 44AB and 44ADA of the act.  

Section 44AA(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:

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 :

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.

Commentary on sub-section 2: Every person carrying business or profession not being a profession specified under sub-section 1 has to maintain books of accounts. These is threshold has been provided. You have to maintain books if income crosses INR 1.20 Lakh (2.50 lakh in case of Individual or HUF) or sale exceeds INR 10 lakh (25 lakh in case of Individual or HUF) in any of the 3 years immediately preceding the previous year. If business is newly set up the limits cited above have to be seen during the previous year or if it is likely to exceed during the year.

Such books of account to be kept and maintained for the period of 6 years under the income tax act. Failure to maintain books of account without reasonable cause may attract penalty under section 271A or 273B.

Sub-Section (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.

Sub-Section (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.

Professional is defined as a person carrying on profession of:

– Legal,

– Medical,

– Engineering

– Architectural profession

– Accountancy

– Technical consultancy

– Interior decoration

 – Authorised representative or

– Film artist

The books of account and other documents to be maintained shall be the following, namely:—

i  a cash book;
ii  a journal, if the accounts are maintained according to the mercantile system of accounting;
iii  a ledger;
iv  carbon copies of bills, whether machine numbered or otherwise serially numbered, wherever such bills are issued by the person, and carbon copies or counterfoils of machine numbered or otherwise serially numbered receipts issued by him:
 [Provided that nothing in this clause shall apply in relation to sums not exceeding twenty-five rupees]
v  original bills wherever issued to the person and receipts in respect of expenditure incurred by the person or, where such bills and receipts are not issued and the expenditure incurred does not exceed fifty rupees, payment vouchers prepared and signed by the person:
 [Provided that the requirements as to the preparation and signing of 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.]

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