Maintenance of Accounts for carrying Business or Profession (Section 44AA and Rule 6F)

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1. Person carrying on certain professions [Section 44AA(1)]:

To understand the provisions of compulsory maintenance of books of account by certain persons, one must know the meaning of the terms “specified professions” and “non-specified professions”.

 “Specified profession” –

For the purpose of section 44AA and rule 6F legal, medical, engineering, architectural, accountancy, technical consultancy, or interior decoration or any other notified profession [i.e., authorised representative, film artist, company secretary and (from the assessment year 2002-03) information technology] are specified professions. For this purpose “authorised representative” means a person, who represents any other person, on payment of any fee or remuneration, before any Tribunal or authority constituted or appointed by or under any law for the time being in force, but does not include an employee of the person so represented or a person carrying on legal profession or a person carrying on the profession of accountancy.

“Film artist”, for the aforesaid purpose, means any person engaged in his professional capacity in the production of a cinematograph film, whether produced by him or by any other person as an actor, a cameraman, a director, a music director, an art director, a dance director, an editor, a singer, a lyricist, a story writer, a screen play writer, a dialogue writer and a dress designer.

“Non-specified profession” –

A non-specified profession is a profession other than a “specified profession” mentioned above.

Section 44AA and Rule 6F-Maintenance of Accounts for Carrying Business or Profession
Section 44AA and Rule 6F-Maintenance of Accounts for Carrying Business or Profession

2. Requirement of Compulsory Maintenance of Books of Account under Section 44AA –

The requirement of section 44AA and rule 6F for compulsory maintenance of books of account may be summarised by grouping different taxpayers in the following categories:

Category A Taxpayer –

Persons carrying on a “specified profession” whose gross receipts in the profession do not exceed Rs. 1,50,000 in any (one or more) of the three years immediately preceding the previous year (or where the profession has been newly set up in the previous year, his gross total receipts in the profession for that year are not likely to exceed the said amount).

Persons coming under this category are required to maintain such “books of account and other documents” as may enable the Assessing Officer to compute their taxable income under the Income-tax Act. It may be noted that the Board has not prescribed books of account to be maintained for persons falling under this category.

Category B Taxpayer –

Persons carrying on a “specified profession” whose gross receipts in the profession exceed Rs. 1,50,000 in all the three years immediately preceding the previous year (or where the profession has been newly set up in the previous year, his gross total receipts in the profession for that year are likely to exceed the said amount).

Persons coming in this category are required to maintain such books of account as are prescribed by rule 6F

Category C Taxpayer –

Persons carrying on a “non-specified profession”. It also includes a business whose income from such business or profession does not exceed Rs. 1,20,000, or the total sales, turnover or gross receipts thereof are not in excess of Rs. 10,00,000, in all the three years immediately preceding the previous year (or when the business or profession is newly set up, income/total sales, turnover or gross receipts are not likely to exceed the said amount). Persons coming under this category are not required to maintain any books of account.

Category D Taxpayer –

Persons carrying on a “non-specified profession”. It also includes a business whose income from such business or profession exceeds Rs. 1,20,000 or the total sales, turnover, or gross receipts thereof are in excess of Rs. 10,00,000 in any of the three years immediately preceding the previous year (or when the business or profession is newly set up, income/total sales, etc., are likely to exceed the said amount).

3. Prescribed Books Of Account And Documents to be kept and maintained under section 44AA(3) by person carrying on certain Professions [Rule 6F]:

As per section 44AA(3), the Board may, having regard to the nature of the business or profession carried on by a class of persons, prescribe by rules, the books of account and other documents (including inventories wherever necessary) to be kept and maintained, the particulars to be contained therein and the form and the manner in which and the place at which they shall be kept and maintained. Rule 6F has prescribed the books of account to be maintained by specified persons

As per rule 6F(1), any person carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or authorised representative or film artist is required to maintain prescribed books of account and documents.

The prescribed books of account and other documents under Rule 6F(2) are as follows:

(a) a cash book;

(b) a journal, if the accounts are maintained according to the mercantile system of accounting;

(c) a ledger;

(d) carbon copies of bills, whether machine numbered or otherwise serially numbered wherever such bills are issued by the person and carbon copies or counter foils of machine numbered or otherwise serially numbered receipts issued by him excepting if the bill or receipts of an amount less than Rs. 25; and

(e) original bills wherever issued to the person and receipts in respect of expenditure incurred by the person or, where such bills and receipts are not issued and the expenditure incurred does not exceed fifty rupees, payment vouchers prepared and signed by the person.

The vouchers mentioned above may not be prepared if the cash book maintained by the person contains adequate particulars in respect of the expenditure incurred by him.

As per rule 6F(3) a person carrying on medical profession shall, in addition to the above books of account and documents, keep and maintain the following also:

(a) a daily case register in Form No. 3C;

(b) an inventory under broad heads, as on the first and the last day of the previous year, of the stock of drugs, medicines and other consumable accessories used for the purpose of his profession.

(1) Rule 6F(4):  

The specified books of account and other document specified in rule 6F(2) and (3) above (other than those relating to a previous year which has come to an end) shall be kept and maintained by the person at the place where he is carrying on the profession or, where the profession is carried on in more places than one, at the principal place of his profession. However, where the person keeps and maintains separate books of account in respect of each place where the profession is carried on, such books of account and other documents may be kept and maintained at the respective, places at which the profession is carried on.  

(2) Rule 6F(5):  

(i) The specified books of account and other documents specified in rule 6F(2) and (3) above shall be kept and maintained for a period of six years from the end of the relevant assessment year:  

(ii) Where the assessment in relation to any assessment year has been reopened under section 147 of the Act within the period specified in section 149 of the Act, all the books of account and other documents which were kept and maintained at the time of reopening of the assessment shall continue to be so kept and maintained till the assessment so reopened has been completed.

4. Circumstance where maintaining the prescribed Books of Account shall Not be necessary:

The above rule 6F(2) of maintaining the prescribed books of account and other documents shall not apply in relation to any previous year in case of any person—

(a) if his total gross receipts in the specified profession do not exceed Rs. 1,50,000 in any one of 3 years immediately preceding the previous year, or

(b) where the specified profession has been newly setup in the previous year, his total gross receipts in the profession for that year are not likely to exceed Rs. 1,50,000.

However, such person shall have to maintain such books of account and other documents as may enable the Assessing Officer to compute his total income.

Thus a person carrying on a specified profession shall be required to maintain specified books of account:

(a) if his gross receipts in all the three preceding previous years exceed Rs. 1,50,000, or

(b) if it is a new profession which is set up in the previous year, it is likely to exceed Rs. 1,50,000 in that previous year.

5. Person carrying on a Non-specified Profession or Carrying on Business [Section 44AA(2)]:

Every other person carrying on a Non-specified Business or a Profession,—

(i) if his total income from business or profession exceeds Rs. 1,20,000 or his total sales or gross receipts from such business or profession exceed Rs. 10,00,000 in any of the three years immediately preceding the relevant previous year shall keep and maintain books of account and other documents.

(ii) where the business or profession is newly set up in any previous year, he shall keep and maintain books of account and other documents if, during the relevant previous year, either his total income is likely to exceed Rs. 1,20,000 or the total sales or gross receipts are likely to exceed Rs. 10,00,000.

However, in the case of individuals and Hindu undivided family carrying on business or profession, the monetary limits of income and total sales or turn over or gross receipts, etc specified above for maintenance of books of accounts has been increased from Rs. 1,20,000 to Rs. 2,50,000 and from Rs. 10,00,000 to Rs. 25,00,000, respectively.

(iii) where the profits and gains from the business are deemed to be the profits and gains of the assessee under section 44AE (relating to goods carriages) or section 44BB (relating to business of exploration, etc. of mineral oils in case of non-resident) or section 44BBB (relating to foreign companies engaged in the business of civil construction, etc. in certain turnkey power projects), as the case may be, and the assessee has claimed his income to be lower than the profits or gains so deemed to be the profits and gains of his business, as the case may be, during such previous year, he shall keep and maintain books of account and other documents.

(iv) where the provisions of section 44AD(4) (see box below) are applicable in his case and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year, he shall have to keep and maintain books of account and other documents.

As per section 44AD(4) Where an eligible assessee declares profit for any previous year in accordance with the provisions of this section and he declares profit for any of the five assessment years relevant to the previous year succeeding such previous year not in accordance with the provisions of section 44AD(1), he shall not be eligible to claim the benefit of the provisions of this section for five assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been declared in accordance with the provisions of section 44AD(1).

6. When maintenance of Books of Account Not necessary

There is no need to maintain any books of account and documents if the following conditions are satisfied:

(i) Assessee is carrying on a business or a profession (not being a profession referred to in para 6.36a above); and the income or total sales or gross receipts, as the case may be, is less than the specified amount.

(ii) If he is covered under sections 44AD, 44ADA, 44AE, 44BB or 44BBB, he should not declare income lower than that which is prescribed under these relevant sections

7. Consequences of failure to keep Books or Accounts, etc. (Section 271A):

Section 271A prescribes penalty provisions for failure to keep and maintain books of account, etc., and also for not retaining them for the prescribed period. The quantum of penalty imposable is fixed at Rs. 25,000.

8. Method of accounting in Certain Cases [Section 145A] –

For the purpose of determining the income chargeable under the head “Profits and gains of business or profession”, the following valuation rules are applicable with effect from the assessment year 2017-18 —

  1. The valuation of inventory shall be made at lower of actual cost or net realizable value computed in the manner provided in ICDS.
  2. The valuation of purchase and sale of goods or services and of inventory shall be adjusted to include the amount of any tax, duty, cess or fee actually paid or incurred by the assessee to bring the goods or services to the place of its location and condition as on the date of valuation.
  3. Inventory (being securities not listed, or listed but not quoted, on a recognised stock exchange) shall be valued at actual cost initially recognised in the manner provided in ICDS.
  4. Inventory (being securities held by a scheduled bank or financial institution) shall be valued in accordance with ICDS after taking into account extant guidelines issued by the RBI.
  5. Inventory (being listed securities) shall be valued at lower of actual cost or net realisable value in the manner provided in ICDS and for this purpose the comparison of actual cost and net realisable value shall be done category-wise.
  6. Any tax, duty, cess or fee, by whatever name called, under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence of such payment for the purposes of the said section.

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