While meandering through the income tax filing process and requirements might seem daunting, it is helpful to be aware of the legalities surrounding the income tax act, especially those pertaining to accounting and bookkeeping, as these are the crucial aspects for auditing. Section 44AA of the income tax act specifies the bookkeeping requirements and other aspects of accounting. Here is a quick overview of Section 44AA of the income tax act 1961 and the important know-how of this section in the income tax act.
Section 44 AA of the income tax law, deals with the aspects of bookkeeping for professionals and businesses that have a certain income, overall turnover, and total sales bracket. These individuals have to compulsorily maintain their books of accounts for audit purposes. Section 44AA is also linked to other sections that detail the audit process, audit requirements, and the penalties in case Section 44AA is flouted.
To whom is Section 44AA applicable and why?
This section of the income tax act is applicable to businesses and professionals belonging broadly to particular sectors and professions, these include:
- Company secretary
- Interior decoration and
- Technical consultancy
Professionals belonging to the aforementioned industries must maintain a book of accounts and other relevant receipts and documents which will be audited by the designated Assessment officer (AO).
Apart from these businesses, certain other businesses and professionals fall under the ambit of Sec 44AA. These include businesses that have a total sales turnover of over 1.2 lakh which can also include domestic gross receipts and total income. Or, if a business has a total turnover of over 10 lakhs, for the preceding three years, consecutively.
Other businesses that fall under section 44AA include:
- Those with an overall turnover, total sales, and gross receipts amount higher than 25 lakhs or with an overall turnover lesser or equal to 2 crores or gross receipts lesser or equal to 50 lakhs.
- Freelancers, whose gross receipts are over 1.5 lakhs, and if the income exceeds the amount which is not chargeable under the income tax slab.
- Newly set up businesses are required to maintain books of accounts if the total income/gross receipts are likely to exceed 1.2L/10L respectively.
What are the records and books to be maintained under Section 44AA?
Under Sec 44AA of the income tax act, there are certain rules and requirements listed out for bookkeeping. Section 6 F specifies the type of books of accounts and documents to be maintained by individuals who fall under this section. Some of these documents include:
This will contain the details of the day to day receipts or gross domestic receipts that reflect the cash balance on a daily or on a monthly basis.
2. An account journal:
This could include either a mercantile type of accounting or a daily log that reflects the total credits and total debits, which shows an equal number of debits against each credit. This is an effective measure to ensure transparency and will go a long way in easing the audit process and filing for income tax at the end of the financial year.
3. A ledger
This will account for the expenses and the details of the transaction. This will aid in preparing various financial statements.
A copy or the original bills of the transactions. While bills for Rs. 25 or higher can be presented as photocopies, original bill copies are recommended for bills for transactions higher than Rs.50.
Certain exclusive documents are required in case of professionals from certain domains such as medicine, as the nature of their transaction is varied from a business point of view.
They are required to keep a ledger or a file of all the transactional receipts and bills pertaining to patients. And maintain a registry of the pharmaceutical transactions for medicines and drugs that are bought and sold on an everyday basis.
When is section 44A or bookkeeping not applicable?
- When the overall business income is not more than 1.2 lakhs or the gross receipts and the total sales are not more than 10 lakhs for the preceding three years, consecutively.
- Presumptive taxation will be applicable if the gross domestic receipts are lesser or equal to 50 lakhs, and the business will not fall under the ambit of Section 44 AA. Additionally, those businesses that come under section 44AD and 44E are not required to maintain books under section 44 AA. If the taxpayers decide to opt out of presumptive taxation to normal taxation and if the income exceeds the non-chargeable income tax slab of Rs 2.5 lakhs then section 44AA will be applicable, and such an individual will have to maintain a book of accounts for their transactions and monetary dealings.
- In case the overall turnover is less than 25 lakhs, but income is lesser than the non-chargeable income tax slab then they will be not liable under sec 44AA of income tax i.e. they are excluded from maintaining a book of accounts. Or if a business or profession is relatively new and the gross domestic receipts do not go beyond 1.5 lakhs, then such an individual will not come under Section 44AA.
What is the audit requirement?
The audit requirement specifications under section 44AE, 44AD and 44ADA are applicable to businesses with an income lower than the presumptive income as per section 44AD, and if the total income of the individual is higher than the income that is exempt from tax.
And, if the income of a business has a presumptive income lower than what is calculated under as per section 44AE, they will require auditing.
If an individual’s income is lesser than the presumptive income as per section 44 ADA but their total income is higher than the amount exempt from tax. Any business or professional, whose total sales, gross receipts, and turnover is more than 1 crore or the gross receipts are more than 50 lakhs, respectively.
These concerned businesses and professionals are required to compulsorily have a periodic and yearly audit of their financial statements and as per section 44AA need to follow the bookkeeping requirements.
What is the due date to audit the records and submit the reports?
The due date for the audit and submission of the reports are varied and depend on the nature of the business or profession and can be divided into two main slots.
Any individual or business who is required to audit, mandatorily under certain statutes or law must submit the Form 3CA Audit form by September 30th of each financial year.
Other individuals or businesses who are required to be audited, as aforementioned under audit requirements must submit the Form 3CB audit form by September 30 of each financial year.
The due date for audit for both these scenarios is September 30th.
In the case of individuals having international or certain domestic transactions, the date for audit report submission is extended to November 30.
What is the penalty for failing to abide by Section 44AA?
The penalty for flouting or incorrect bookkeeping under section 44AA requirements is as per section 271 A. Section 271 A details the penalty legalities and specifies that a penalty of Rs 25,000 is the maximum. If the taxpayer is unable to submit the audit reports as per section 44AB, then as per section 271 B, a penalty of 0.5 % of the total sales, turnover or gross receipts, which is the minimum penalty will be levied on the taxpayer. The maximum penalty of 1.5 lakhs can be levied depending on the overall turnover, sales, and gross receipts of the business or professionals.
An exemption on the penalty is possible if the taxpayer is able to accurately justify their failure or inability to maintain the right records for bookkeeping. In such an occasion, the penalty will not be levied. This is only if the taxpayer is able to logically defend his circumstance.
So while it is paramount to understand the legalities involved in the income tax act, especially sections like Section 44AA, which is crucial for businesses and professionals to maintain a book of accounts, it is equally important to use the right kind of resources to help you maintain these records diligently.
Giddh offers business owners a convenient and secure way of storing their records and transactions that can be easily sorted, filtered and retrieved with just a click. Reach out to us to better understand how cloud accounting software can transform your business and save you from unnecessary tax penalties.