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The history of accounting is thousands of years old and can be traced to ancient civilizations. The early development of accounting dates back to ancient Mesopotamia, and is closely related to developments in writing, counting and money; there is also evidence for early forms of bookkeeping in ancient Iran and early auditing systems by the ancient Egyptians and Babylonians. By the time of the Emperor Augustus, the Roman government had access to detailed financial information.

Double-entry bookkeeping developed in medieval Europe, and accounting split into financial accounting and management accounting with the development of joint-stock companies. The first work on a double-entry bookkeeping system was published in Italy, by Luca Pacioli. Accounting began to transition into an organized profession in the nineteenth century, with local professional bodies in England merging to form the Institute of Chartered Accountants in England and Wales in 1880. (1)

In India, the history of accounting dates back to 4th Century BC. It was Kautilya who gave broad classifications in accounting and auditing in his book Arthashastra. It covers accounting principles and standards, role and responsibilities of accountants and auditors, the methodology of accounting, auditing and fraud risk management, and the role of ethics in managing financial activities.

But then, what is the use, the Indian Income Tax Act, 1961 has not realised its importance.

The Committee on terminology setup by the American Institute of Certified Public Accountants formulated the following definition of accounting in 1961:

“Accounting is the art of recording, classifying, and summarising in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the results thereof.”

It says accounting is an art. The Income Tax Act, 1961 has spoiled the art given by our ancestors. Wonder how?  I’m damn sure this might have happened in almost all auditing firms in the country. An assessee whose turnover exceeds Rs. 1 Crore in any previous year is covered under section 44AB of the Act to get this accounts certified by a Chartered Accountant (Say this happens in A.Y 2015-16). In case, during the subsequent previous year or years, his total turnover falls below Rs. 1 Crore (say, 95 Lakhs), he wants to adopt for 44AD presumptive income scheme (say this happens in A.Y 2016-17), wherein his total income under the head Profits and Gains from Business or Profession is only 8% of his total turnover and he is not required to maintain any books of accounts. Does this reflect a true and fair view of financial position? Is this a correct financial reporting?

I don’t know. I cannot agree with this concept adopted by assesees or members of the institute. I feel that this is not a correct financial reporting. On what basis this law was framed stating that only 8% of total turnover shall be taken as Profits and Gains from business or Profession, I do not know. But then, this 44AD has been followed for many years, stating that it is a relief for small assesses.  Though there is a provision stating that, the assessee can declare income higher than 8%, who wishes to opt such income and pay tax on such income. May be one or two in hundred or thousand or lakh may adopt such scheme and pay tax on such higher income. By giving such a provision, the law itself encourages fraudulent financial reporting.

In fact, this sort of reporting is ultra vires accountancy.

People who are in this field should think of this. At this juncture we are speaking about IFRS, convergence of IND AS with IFRS etc. But then the Income Tax Act should not be against the art of accountancy and it should not encourage a fraudulent or erroneous financial reporting of the entity.

You may be bubbling with a counter attack that, no person will declare a net profit higher than 8% in tax audit and 8% in 44AD. I agree with you people. But, there are instances where say 11% of turnover be declared in tax audit and lower percentage be declared in 44AD that is 8%. And over and above all, when he comes under 44AB he has to prepare books of accounts. Then when he switches over to 44AD how can we say books not maintained.

Ok, then what is the solution would be the question running on your minds.

An assesee who has once come under Tax audit u/s 44AB should not switch over to 44AD unless there is a reasonable fall in the income of the assessee and that it affects the going concern of the business or the industry of the assessee should have a backlog as a whole due to political or social or technological factors.


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Category Income Tax, Other Articles by - Sundararajan S 



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