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Most of the people are very much confused about the maintenance of books of accounts and audit requirement thereof. There are many misconceptions about the legal requirement for books of accounts as per the income tax act. The books are not mandatorily required to maintain in case of every single business rather there are certain criteria which must be seen before deciding whether to keep and maintain books or not. Similarly, there are certain criteria for the audit requirement as well. So, today we are going to dig deeper into the details for maintenance of books of accounts and audit requirement thereof. Let's take that step by step:

1. What are the books of accounts?

This is a pretty easy question which can be easily understood by the very name itself. It is the books (i.e. record) which contains the details of all which accounts for the business. It is basically record of transactions of the business which has been carried on in the previous year. The books of accounts requirement are governed by Section 44AA of the Income Tax Act, 1961.

2. What is Tax Audit of accounts?

Audit means checking of books validity, authenticity and assuring that all which has been entered into the books are true and correct. The Tax Audit requirement is governed as per Section 44AB of the Income Tax Act, 1961.

3. When it is required to maintain books as per Section 44AA?

The maintenance of books of accounts can be categorized in the following categories:

(i) By Certain Professionals: Every person carrying on Legal, Medical, Engineering, Architectural, Accountancy, Technical Consultancy, or Interior decoration Profession or any other profession notified by Govt. shall be required to keep and maintain books of accounts. [Clarification- Film Artists, Authorised Representative other than an employee, and Freelancers professionals shall also be covered under this category.]

Exception: These professionals do not require to keep and maintain books if their GROSS RECEIPTS (i.e. Turnover, not profit) in any of the last 3 preceding year (i.e. excluding the current year) does not exceed Rs. 1,50,000. In the case of new business, expected turnover of the current year shall be seen. [Note: Although they are not mandatorily required to keep and maintain the books still even when their Gross receipts are below Rs. 1,50,000 they shall have to maintain such books/records (e.g. Ledger and cash book) which will enable the AO to assess their total income.]

(ii) Other businesses and professions [excluding above in point (i)]: Every person carrying on business or any profession (other than given in (i) above) then s/he shall keep and maintain books of accounts if:

- Profit (not turnover) of such business exceeds Rs. 1,20,000; OR
- Gross Receipts (i.e. Turnover) of such business/profession exceeds Rs. 10,00,000/-.

in any one of the 3 preceding years. In the case of new business, expected profit/turnover shall be seen.

[Important Note- As Per FA, 2017, the limit of Rs. 1,20,000 and Rs. 10,00,000 has been increased to Rs. 2,50,000 and Rs. 25,00,000 respectively for Individual & HUF only.]

4. When it is required to get books of a/cs audited u/s 44AB?

Every person carrying on:

- Business and his Gross receipts (i.e. turnover) exceeds Rs. 1 Crore in the previous year; OR
- Profession and his Gross Receipts exceed Rs. 50 Lakhs in the previous year.

Then such business/profession has to get its accounts audited u/s 44AB.

5. Special Cases for Books and Audit:

The above-mentioned situations are normal cases under which books are required to maintain and audit is required to be done. But, there are also specific cases under which maintaining books and getting account audited becomes mandatory. These are as follows:

(i) Assessee showing lower income than the specified minimum % under presumptive income sections: This means whenever assessee opt for any Presumptive taxation scheme under Section 44AD/44ADA/44AE/44BB/44BBB and assessee shows income below the minimum % specified under these sections then Assessee has to MAINTAIN BOOKS & GET THOSE BOOKS AUDITED AS WELL.

(ii) Special Audit under section 142(2A): When the Assessing officer has the doubt about the authenticity of the books of accounts or he believes that special checking is required due to volume of transaction, nature and complexity of accounts, multiplicity of transaction then the AO may pass the order for the Special Audit u/s 142(2A). This audit may be ordered only when the case is pending with the AO.

6. Some Important Points:

  • If the books of accounts are not maintained as such then the AO may levy penalty u/s 271A which may extend up to Rs. 25,000/-.
  • Similarly, if the books of accounts are not audited u/s 44AB then there is a penalty u/s 271B which is 1/2% of Turnover subject to the maximum of Rs. 1,50,000/-.
  • Each year's books must be kept for a period of 6 years from the end of that year.

In case of any ideas, suggestions, or queries please do comment below. Also, share this article to all the students as well as the other stakeholder.

The author can also be reached at Taxeffects.blogspot.com or niteshkbind@gmail.com

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Category Income Tax, Other Articles by - Nitesh bind