Why is important for someone to maintain a book 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 serve 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 that previous year.
As per the rule, the following professions are obliged 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 which is notified by the Board in Official Gazette

The same rules apply for a freelancer doing any of the above profession 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 setup 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.


What are the specified books of accounts as per Rule 6F?

There are several types of books of accounts which can be created in order to keep the records. The following are the specified books of accounts which 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 are less than INR 50.
  • In the case of medical professionals, there are some additional requirements as the following –
    1. The daily cash register which records all the details of the patients, services rendered, fees received and the date of receipt.
    2. 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. The task of maintaining these books of accounts is an important one for various purposes for the sake of keeping a record, and the failure to maintain these books cause a penalty of INR 25000. In the case of international transactions, 2% of the value of each transaction is taken as penalty in case of failure of keeping the accounts. Thereby, 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 can one do away with the book-keeping?

Some taxpayers can be exempt from the hard-work of maintaining an account’s book in the following circumstances.
  • Professions and Businesses covered under the section 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 the section 44AB. The taxpayer may also shift from the 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 turnover less than INR 25 lakhs but does have the total income above the maximum amount not chargeable to tax, the taxpayer is excluded from the act of maintenance of accounts as per 44AA.

What is an Audit Report Form?

The Audit Report Form is the form which 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 the form 3CA is filled by a person carrying on business or profession requiring a compulsory audit, the form 3CB is filled by those persons other than the enlisted professions as defined 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 different audit requirements on the basis of the taxpayer?

It is important for certain taxpayers to have their accounts audited by a Chartered Accountant as follows-
  • For the person carrying on business, the taxpayer must compulsorily get audit if the total sales, turnover or gross receipts are more than INR 1 crore.
  • For the taxpayer who is carrying on a profession and the gross receipts are more than INR 50 lakhs.
    1. For a taxpayer who is covered under presumptive income scheme section 44AD, if the income of the business is lower than the presumptive income calculated as per Section 44AD, and also when the total income is more than the maximum income which is exempt from tax.
  • When the person is covered under the presumptive income scheme of Section 44AE and the income of the business is lower than the presumptive income calculated according to Section 44AE.
  • If the person is covered under the presumptive income scheme Section 44ADA and the income of the profession is lower than the presumptive income as calculated according to Section 44ADA and also the total income is more than the maximum income which is exempt from tax.

What are the due dates for getting records audited and submission of the reports?

There are certain due dates which 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.

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 excused of the penalty.


Conclusion

The booking of accounts and its auditing is an important procedure while getting the audit report and file an income tax return of an individual or a company. Several amendments have been made which have raised the limits of the amounts and it provides a greater margin to determine which persons and associations need to keep an account. Most changes have been given effect from the Assessment Year 2018-19 and are only applicable to individuals and HUFs (Hindu Undivided Family), who are residents of India. The audit report is extremely important for companies and business with larger incomes and greater turnover rates as defined above. There are cases of exception as defined under other sections of the income tax act, following which is necessary for the final procedure.


Frequently Asked Questions

Q- Who is required to maintain books of accounts under income tax?

Ans. Books of accounts/accounting records have to be maintained if the gross receipts are more than Rs. 1,50,000 in 3 preceding years for an existing profession.


Q- What turnover is required for audited accounts?

Ans. Turnover of business in trading/ manufacturing concern is Rs 2 crore.


Q- How do you keep books of accounts under GST?

Ans. Every registered person must maintain records of : Production or manufacture of goods, Inward and outward supply of goods or services or both (Purchase and Sales Register), Stock of goods (Inventory Register), Input tax credit availed (Electronic Credit Ledger), Output tax payable and paid and (Electronic Liability and Electronic Cash Ledger), Records of goods or services imported or exported or Records of supplies attracting payment of tax on reverse charge along with the relevant documents, including invoices, bills of supply, delivery challans, credit notes, debit notes, receipt vouchers, payment vouchers, refund vouchers and e-way bills.


Q- Can I audit my own accounts?

Ans. No, you cannot audit your own accounts.


Q- What is the difference between audited and unaudited accounts?

Ans. Audited accounts are prepared by an accountant and are then audited, which is process whereby they check a random number of transactions have been processed accurately. Unaudited accounts are also prepared by an accountant but such accounts are audited.


Q- Do auditors check every transaction?

Ans. No, auditor check the transactions on random basis.


CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.