Know when Individual and HUF has to maintain compulsory books of Accounts in Income Tax as per Section 44AA

Books or books of accounts basically includes ledgers, day-books, cash books, documents, account-books and other books, whether kept in the written form or as print-outs of data stored in floppy, disc, tape or any other form of electro-magnetic data storage device.

Books of accounts maintenance and retaining of supporting / relevant records are highly essential for proper control of the business operations. This will facilitate the correct receipt and payment of cash and other transactions encoded by the company. Maintaining books of accounts is essential as:

• Bookkeeping is important because it helps you budget. When income and expenses are properly organized, it makes it easier to review financial resources and expenses.
• With a bookkeeping process in place, you can have financial information ready for tax time. Instead of scrambling for receipts or invoices, all of your financial information is organized on one central system. 
• By definition, bookkeeping is the organization of financial information. Keeping your financial records organized makes it easier to locate and provide to appropriate parties
• It helps with business analysis. It is a tool used by management to analyze business performance.
• In order to make the best decisions possible, you need to have access to all available information. Bookkeeping provides this information.
• Bookkeeping not only helps with planning for strategic purposes but also plays a major role in tax planning. It provides the necessary information to properly categorize revenues and expenses.
• It allows investors to have up-to-date and accessible information which helps them to make better, well informed, decisions
• It helps track profit and growth
• Bookkeeping improves your cash flow. The routine recording of revenues, expenses, liabilities, and receivables, will allow you to track when your customer and vendor invoices are paid

Bookkeeping is important for helping you maintain accurate financial records. Yet still, many businesses fail to implement this integral process. The income tax law mandates the maintenance of accurate books and records in certain cases.

Who is required to maintain books of accounts as per income tax?

Section 44AA of the Income Tax Act pertains to maintenance of accounts by certain persons carrying on profession or business.

Maintenance by persons carrying out specific professions

According to 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 (AO) to compute his total income in accordance with the provisions of this Act.

According to Section 44AA (2), every person carrying on business or profession [except professions referred in Section 44AA (1)] shall:

• if his income from business or profession exceeds Rs 1,20,000 or his total sales/turnover/gross receipts, in business or profession exceeds Rs 10,00,000 in any one of the 3 years immediately preceding the previous year; or
• where the business or profession is newly set up in any previous year, if his income from business or profession is likely to exceed Rs 1,20,000 or his total sales, turnover or gross receipts, as the case may be, in business or profession are or is likely to exceed Rs 10,00,000, during such previous year; or
• where the profits and gains from the business are deemed to be the profits and gains of the assessee under section 44AE, 44BB or 44BBB 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
• where the provisions of section 44AD(4) 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 AO to compute his total income in accordance with the provisions of this Act.

In case of an individual, Business or a Hindu undivided family, the limit shall be as below:

• if his income from business or profession exceeds Rs 2,50,000 or his total sales/turnover/gross receipts, in business or profession exceeds Rs 25,00,000 in any one of the 3 years immediately preceding the previous year
• where the business or profession is newly set up in any previous year, if his income from business or profession is likely to exceed Rs 2,50,000 or his total sales, turnover or gross receipts, as the case may be, in business or profession are or is likely to exceed Rs 25,00,000, during such previous year

Books of account and other documents to be kept and maintained by persons carrying on certain professions

As per Rule 6F, every person carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or authorised representative or film artist shall keep and maintain the required books of account and other documents

Such persons carrying on the specified professions will not have to maintain any books if:

• his total gross receipts in the profession does not exceed Rs 1,50,000 in any one of the 3 years immediately preceding the previous year, or
• where the profession has been newly set up in the previous year, his total gross receipts in the profession for that year are not likely to exceed the said amount.

What books of accounts are to be maintained as per the Income Tax Law?

The accounting records to be kept have been prescribed in Rule 6F. The following books of accounts and documents are required to be maintained:

• Cash book
• Journal
• Ledger
• Carbon copies of the bills and receipts issued by the person in relation to sums exceeding Rs.25
• Original bills and receipts issued to the person in respect of the expenditure incurred

For how long are the books of accounts supposed to be maintained?

Books of accounts and other documents shall be kept and maintained for minimum 6 years from the end of relevant assessment year.

If an assessment in relation to any assessment year has been reopened u/s 147 all the books of accounts and other documents shall continue to be kept and maintained till the assessment so reopened has been completed.

Where shall the books of accounts be kept?

The books and documents shall be kept and maintained at the place where the person is carrying on the profession or where there is more than one place at the principal place of business.

Is there any penalty on not maintaining the books of accounts as required under Income Tax Law?

If the person fails to keep / maintain the books of accounts / documents or fails to retain the required books of accounts / documents, then, such person shall be liable to pay the penalty under section 271A to the extent of Rs 25,000.

Where you may have international transactions and you have failed to maintain information and documents for such transactions, the penalty shall be 2% of the value of each international transaction.

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