While financial accounting is the pillar for running a successful business, there has always been confusion regarding the need and importance of maintaining books of accounts. This has led to several misconceptions, making people who are required to maintain books of account avoid it (and vice versa).

To understand who needs to maintain their books of accounts, it is important to understand Section 44AA of Income Tax Act. Brough to action in 1961, the act provides specific criteria regarding people (and businesses) who are required to maintain books of accounts.

Who Should Maintain Books Of Accounts As Per Section 44AA Of Income Tax Act, 1961?

Under Section 44AA of the Income Tax Act, 1961, people carrying out professions in the following domains are required to maintain books of accounts:

Architecture
Law
Accountancy
Medicine
Interior decoration
Film artistry
Company Secretary
Technical consultancy
Authorized Representative

Moreover, please note the following:

Film artistry involves professionals working as film producers, editors, music directors, actors, choreographers, art directors, camerapersons, singers, lyricists, story writers, directors, screenplay writers, costume designers, or dialogue writers.
The authorized representative mentioned above includes any individual representing another individual for a fee before an authority constituted under law.

Under Section 44AA of Income Tax Act, 1961, it is mandatory for an individual to maintain books of accounts if their gross receipts exceed ₹1,50,000 for three preceding years while carrying on their profession. The same applies to an individual carrying out a newly established profession wherein the gross receipts are expected to exceed ₹1,50,000.

What Do Books Of Accounts Include?

People often possess incomplete knowledge about the books of accounts they are required to maintain. Here are the documents and statements that are included in the books of accounts according to Rule 6F of the Income Tax Act:

A cashbook
A record of daily cash receipts and payments showing cash balance at the end of each day (or not later than the end of each month)
A journal if the accounts are maintained as per the mercantile system (a journal is an organised log of all financial transactions taking place on a daily basis. It is an accounting record where the total debits are equal to the total credits based on the double-entry system of accounting.)
A ledger where all journal entries are transferred to the respective accounts before preparing financial statements
Photocopies of receipts and bills issued whose value exceeds ₹25
Original bills for expenses incurred whose value exceeds ₹50

In the case of an individual carrying on a profession in the field of medicine (as a physician, surgeon, dentist, pathologist, radiologist, etc.), here are the additional documents that are included in their books of accounts:

Day-to-day cash register containing details of patients, fees received, services offered, and the date of each receipt
Details of the stock of medicines and other consumables purchased for medical use

Is There A Penalty For Not Maintaining Books Of Accounts?

If you fail to maintain books of accounts despite being eligible for doing so, you may be charged a penalty under section 271 A of Income Tax Act, 1961 up to ₹25,000. In case you have been carrying out international transactions without maintaining books of accounts, you would be charged a penalty amounting to 2% of the value of the transactions.

When Is Maintaining Books Of Accounts Not Required?

Maintaining books of accounts is not mandatory under all circumstances. Here are the situations wherein there is no need to maintain the accounting books under the Income Tax Act of 1961:

If the total sales, gross receipts, or turnover is not over ₹10,00,000 in all three preceding years or if the total income is not more than ₹1,20,000, you will not need to maintain books of accounts.
If the total estimated sales, gross receipts, or turnover of a newly established profession are not over ₹10,00,000 in three years or if the total projected income is not more than ₹1,20,000, you will not need to maintain books of accounts.
In the case of a sole proprietorship or a Hindu Undivided Family managing a business, the minimum limits are increased from ₹1,20,000 to ₹2,50,000 for total income and from ₹10,00,000 to ₹25,00,000 for gross receipts, turnover, and total sales for three preceding years.
If a taxpayer records a turnover of less than ₹25,00,000 with the total income exceeding the basic exemption, they are not required to maintain books of accounts as per section 44AA.
All professional businesses falling under section 44E relating to goods carriages and section 44AD are not required to maintain books of accounts. However, in the case of taxpayers claiming that their business income is lower than the presumed income as per the concerned section, they are required to maintain books of accounts.

Can You Adopt The Presumptive Taxation Scheme Under Section 44AD As An Individual Carrying Out A Profession Listed Under Section 44AA (1)?

If you are engaged in carrying out a profession mentioned under section 44AA(1), you cannot move on to the presumptive taxation scheme under Section 44AD. However, you can adopt the taxation scheme under section 44ADA. In such cases, you would also be required to declare 50% of your gross receipts as your presumptive income.

Is It Necessary For An Individual To Maintain Records Or Proof Of Their Earnings?

While maintaining books of accounts, it is important for an individual to maintain all proofs and records for every source of income to calculate their income and the tax to be paid for the same. Even if you fail to maintain accounting records and documents, it is important to have clear and evident proof of income for calculating your income, especially if the same is to be assessed by an assessing officer.

The Final Word

These were some of the most important details about maintaining books of accounts per section 44AA of Income Tax Act, 1961. If you are planning to enter a profession or start a business, it is important to be aware of the books you will be required to maintain to ensure smooth, efficient, and legal accounting activities.

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