Maintaining proper books of accounts is essential for businesses and professionals to ensure compliance with income tax laws in India. Section 44AA of the Income Tax Act, 1961, lays down the requirements for maintaining books of accounts by certain individuals and entities engaged in business or profession. This blog explains the provisions of Section 44AA, its applicability, and the importance of compliance.
Applicability of Section 44AA
1. Professionals Required to Maintain Books of Accounts
As per Section 44AA(1), the following professionals must mandatorily maintain books of accounts:
- Legal professionals (Advocates, Lawyers)
- Medical professionals (Doctors, Dentists)
- Engineering professionals
- Architects
- Accountants (Chartered Accountants, Cost Accountants)
- Technical consultants
- Interior decorators
- Any other profession notified by the CBDT
These professionals must maintain such books and documents that enable the Assessing Officer (AO) to calculate their taxable income under the Income Tax Act.
2. Businesses & Other Professionals Required to Maintain Books of Accounts
As per Section 44AA(2), businesses and professionals (not covered under Section 44AA(1)) must maintain books of accounts if:
For existing business/profession:
- Income exceeds ₹1,20,000 in any of the last three financial years.
- Total sales, turnover, or gross receipts exceed ₹10 lakh in any of the last three financial years.
For newly set up business/profession:
- Expected income exceeds ₹1,20,000 in the first year.
- Expected sales, turnover, or gross receipts exceed ₹10 lakh in the first year.
Note: If the assessee is an individual or Hindu Undivided Family (HUF), these limits are:
- Income threshold: ₹2,50,000 instead of ₹1,20,000.
- Sales/Turnover threshold: ₹25 lakh instead of ₹10 lakh.
3. Special Cases Where Maintenance of Books is Required
Books of accounts are also required in the following cases:
- If a business is opting for presumptive taxation under Section 44AE, 44BB, or 44BBB but declares lower income than the presumptive amount.
- If a business falls under Section 44AD (presumptive taxation for small businesses) and claims income lower than the presumptive rate while exceeding the basic exemption limit.
What Books of Accounts Need to Be Maintained?
The Central Board of Direct Taxes (CBDT) prescribes the types of books of accounts required for various businesses and professions. Common books include:
- Cash Book – Records daily cash transactions.
- Journal – Maintains accounting entries following the double-entry system.
- Ledger – Summarizes financial transactions.
- Purchase & Sales Register – Keeps track of purchases and sales.
- Receipts & Payment Vouchers – Records all receipts and payments.
- Stock Register – Tracks inventory for businesses dealing in goods.
- Bills & Invoices – Maintains copies of all bills issued and received.
For medical professionals, additional records such as patient registers, details of tests, and prescriptions may be required.
Period for Retaining Books of Accounts
As per Section 44AA(4), the books of accounts must be retained for a minimum of 6 years from the end of the relevant assessment year. However, if a case is under litigation or scrutiny, the records should be kept until the resolution of the case.
Penalty for Non-Maintenance of Books of Accounts
If an assessee fails to maintain books of accounts as per Section 44AA, a penalty of ₹25,000 may be levied under Section 271A of the Income Tax Act.
Key Takeaways
✔ Mandatory for professionals: Legal, medical, engineering, accounting, and other notified professionals must maintain books.
✔ Income & turnover threshold: Businesses & non-notified professionals must maintain books if income exceeds ₹2.5 lakh or turnover exceeds ₹25 lakh (for individuals/HUFs).
✔ Required books: Cash book, ledgers, purchase/sales register, and other relevant records.
✔ Retention period: Minimum 6 years from the end of the assessment year.
✔ Penalty: ₹25,000 for non-compliance under Section 271A.
Conclusion
Maintaining proper books of accounts is not just a legal obligation but also essential for smooth financial management. Startups, MSMEs, and professionals should ensure compliance with Section 44AA to avoid penalties and ensure accurate tax filings. If you need expert assistance with bookkeeping and tax compliance, consult a Chartered Accountant (CA) like us to stay compliant with the latest tax regulations.
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