Books of Accounts and Audit Requirements

Why is it Important to Maintain Books of Accounts?

The book of accounts is among the most important records for the income tax department as well as the tax-paying citizen. It can help regulate the tax slab you are in, the amount to be deducted as per specific payments and investments, the sources of income and also helps in keeping track of the income variations. They also help as a reference point for filling up IT return forms, and the audit proof of these accounts serves a very important purpose, especially for the high income businesses or professions.

Who is Required to Have Their Book of Accounts Maintained and Audited?

If the gross receipts for a company, business or even a newly-setup business is more than INR 1,50,000 in the three immediately preceding years, one has to be careful to maintain a book of accounts. These accounting records are said to be required under Rule 6F.

Under Section 44AA, one has to satisfy the following two conditions to maintain the books of account-

• If their gross receipts exceed INR 1,50,000 in any one or more of the three preceding years.
• If it’s a new profession and is expecting its gross receipts to exceed the limit of INR 1,50,000 in the previous year.

As per the rule, the following professions are obligated to maintain books of accounts or accounting records for the purpose of Income Tax.

• Accountancy
• Architectural
• Authorized representative – this implies a person who is paid to represent another person for a fee before a tribunal or any authority which is constituted under law. This doesn’t mean a person who is carrying an accountancy, or an employee of the person represented.
• Company secretary
• Engineering
• Film artist (includes being a producer, editor, director, actor, music director, art director, singer, lyricist, dance director, cameraman, story writer, screenwriter, dialogue writer, and costume designers)
• Interior decoration
• Legal services
• Medical
• Technical consultancy
• Any other profession that is notified by the Board in the Official Gazette

The same rules apply to a freelancer doing any of the above professions and earning more than INR 1,50,000. The professional won’t be required to maintain the books of accounts under section 44AA if the gross receipts of the above-mentioned professions are not more than INR 1,50,000 for any one or more of the preceding three years for any existing or newly set profession whose incomes are not expected to be more than the said amount. In such cases, some books of accounts are made so that the Accounts officer is able to compute the taxable income of the respective professional.

Here’s a summary -

What are the Specified Books of Accounts as Per Rule 6F?

There are several types of books of accounts that can be created in order to keep the records. The following are the specified books of accounts that must be maintained as per the Rule 6F of the IT Act.

• A journal, as per the mercantile system of accounting – it is a log of all the daily transactions. In the terms of accounts, this is a record where the total credits equals total debits. The system follows the double entry record where each debit has a corresponding credit and vice versa.
• A ledger is one large register where all entries flow from the journal and has the details of all the accounts which can be used to prepare the financial statements.
• The cash book which keeps the day to day record of cash receipts and payments showing cash balance at the end of each day and eventually at the end of each month but not later.
• Photocopies of all the bills and receipts as issued by the taxpayer which are not more than INR 25.
• The original bills of expenditure which are incurred by the taxpayer and that are less than INR 50.
• In the case of medical professionals, there are some additional requirements as the following –
  • The daily cash register which records all the details of the patients, services rendered, fees received, and the date of receipt.
  • The details of stock of drugs, medicines, and other consumables used.

All these books should be maintained at the Head Offices. It is essential that each year’s books must be kept for a period of six years. It is important to maintain these books to keep a record, and a failure to maintain these books can lead to a penalty of INR 25000. In the case of international transactions, 2% of the value of each transaction is charged as a penalty in case of failure to keep the accounts. Therefore, it is extremely important to maintain a record of these accounts in a diligent and responsible manner in the most methodical way for the best results.

When is Book-keeping Not Required?

Below mentioned taxpayers are exempt from the requirement of maintaining books of accounts -

• Professions and Businesses covered under sections 44AD and 44AE don’t need to maintain books of accounts. However, those taxpayers who claim to have an income from the business to be lower than the income calculated under Section 44AE must maintain the books of accounts as prescribed under Section 44AA and then have them audited as per section 44AB. The taxpayer may also shift from presumptive taxation as per Section 44AD/44ADA to normal taxation to have the claim that the income from their profession is lower than the presumed income under the given sections. Thereby, in these cases, when the income exceeds the basic exemption limit of INR 2,50,000, books of accounts become necessary.
• One must note that from the financial year 2018-19, the limit of INR 1,20,000 has been increased to INR 2,50,000, and the limit of INR 10 lakhs has been increased to INR 25 lakhs.
• When the income of the company or individual does not exceed the limit of INR 1,20,000 or the total sales or gross receipts are less than INR 10 lakhs in the entire period of the preceding three years. In the case when a new business is set up, the same rule is applied maintaining the same amount caps.
• The profession or businesses must maintain books of all accounts and other documents to enable the Accounting Officer to calculate their taxable income as per the Income Tax Act when the income is more than INR 120000 or total sales, turnover or gross receipts are more than INR 10 lakhs in all preceding three years. No specific records are required. The rules remain the same in the case of a newly set up business or profession.
• In the case when the taxpayer has a turnover of less than INR 25 lakhs but does have a total income above the maximum amount not chargeable to tax, the taxpayer is excluded from the act of maintenance of accounts as per 44AA.

Audit Requirements

It is mandatory to conduct an audit of the books of accounts under section 44AB for the following persons -

What is an Audit Report Form?

The Audit Report Form is the form that has to be filled by all the taxpayers by September of the Assessment year. The form has two variants – Form 3CA and Form 3CB. While form 3CA is filled by a person carrying on business or profession requiring a compulsory audit, form 3CB is filled by persons other than the professions enlisted in Section 44AD and Section 44AE. The statement form 3CD is given along the audit form 3CA, and the form 3CD is given along section 3CB. The Statement Form is also a mandatory one to be filled along with the Audit Form during the submission of the report before the deadline of 30th September of the respective Assessment year.

What are the Due Dates for Getting Records Audited and Submission of the Reports?

There are certain due dates that are prescribed for getting the records audited and then the submission of the audit report, which must be followed-

• For the taxpayer carrying on business or profession who is compulsorily required to get audited under the law, the audit form 3CA should be filled with the Statement Form 3CD. The due date for getting accounts audited and the due date for the submission of the report is September 30 of the assessment year.
• For the taxpayer other than those enlisted who are required by the Income Tax Law to get audited; they need to fill up Audit Form 3CB and the Statement Form 3CD. Their due date for Audit as well as submission of report is September 30 of the assessment year.
• In the case of specified domestic transactions as well as international transactions, the deadline for the audit and the submission of the report is November 30 of the assessment year.

Here’s a tabular representation of the same -

What is the Penalty if the Required Accounts are not Maintained?

There’s a fixed penalty if the taxpayer fails to maintain the accounting records as per the Section 44AA, and the penalty is levied under Section 271A. The maximum penalty is charged at the limit of INR 25,000. The penalty may also be avoided if the taxpayer can provide any reasonable justification for the failure in maintaining the records.

If the taxpayer fails to get the account records audited and furnish the entire report as per the requirements of Section 44AB, the penalty is charged under section 271 B. In this case, the minimum penalty levied is 0.5% of the total sales or turnover or gross receipts. Again, the maximum penalty charged is INR 150000. Also, if the taxpayer has a valid enough reason for the ill maintenance of accounts, the person may be exempted from paying the penalty.

Now that you know what the requirements are for maintaining books of accounts and when is it mandatory to get your accounts audited, you can start preparing accordingly.

Need to get your accounts audited? Get in touch with our tax experts who can not only help you audit your books of accounts but also file your ITR within the deadline. Book CA Now!