REQUIREMENT OF MAINTENANCE OF BOOKS OF ACCOUNTS
While you set up your business with grand fanfare, reaching your dream turnover was just the first milestone, you have already begun to bother about the profitability. Maintenance of financial records is actually a way to know the true and fair position of your business. In reality, it is much more. It is also a legal requirement.
Let us understand the requirement and the necessity for compulsory maintenance of accounts and audit as per Indian Income Tax Act in a simplified manner.
There are basically two categories
1. Specified Professionals
2. Non Specified Professionals
A. Specified Professionals include persons rendering services and having technical degrees in legal, medical, engineering, architectural/interior, accountancy, technical consultancy, information technology, film artists or any other person as notified by government. E.g.: lawyers, doctors, architects, interior designers, engineers, chartered accountants, film artists, consultants etc. Specified Professionals are non traders.
REQUIREMENT TO MAINTAIN BOOKS AND AUDIT
- As per Income Tax Act, a person carrying on any profession as mentioned above is compulsorily required to maintain complete record of books of accounts if his gross receipts from profession exceed Rs 1,50,000 per annum in all the three preceding years.
- In case it is the first year of set up, you have to compulsorily maintain records if gross receipts are likely to exceed Rs150,000/-.
- In case the gross receipts of specified professionals is more than Rs 25 lakhs in the previous financial year, audit of financial records is compulsory as per Income Tax Act.
?The Implication of these provisions is that if in any one year your income goes below the threshold limit of Rs 150,000/-, you are not required to maintain books of accounts.
B. Non Specified Professionals include persons who render services to others but does not have a technical degree and are not covered in the above notified professionals and all the retailers and traders. In other words every business other than ones in specified category.
- As per Income Tax Act, a person carrying on any profession as mentioned above is compulsorily required to maintain complete record of books of accounts if his Income(profit) from business or profession exceed Rs 1,20,000 per annum or his sales/gross receipts exceed Rs 10 lakhs in any of the three preceding years.
- In case it is the first year of set up, you have to compulsorily maintain records if income is likely to exceed Rs120,000 /- or his total sales/gross receipts likely to exceed Rs 10 lakhs
- In case the gross receipts/turnover/total sale of non-specified professionals is more than Rs 100 lakhs in the previous financial year, audit of financial records is compulsory as per Income Tax Act.
The Implication of these provisions is that if in any one year your sales/income goes below the threshold limit, you are still required to maintain books of accounts unless sales/income falls continuously for three years in a row in which case in the fourth year the provision shall not be applicable.
ANALYSIS BASED ON TURNOVER AND INCOME
A. Turnover below Rs 10 lakhs and Income below 120,000– Maintenance of Books not Compulsory
B. Turnover Exceeding Rs 10 lakhs but below Rs 100 lakhs and Income above 8% of Turnover: Maintenance of Books Compulsory/ Audit Not Required
C. Turnover Exceeding Rs 10 lakhs but below Rs 100 lakhs and Income below 8% of Turnover: Maintenance of Books Compulsory/ Audit Required
D. Turnover exceeding 100 Lakhs : Maintenance of Books Compulsory/ Audit Compulsory
- Company under Companies Act: Maintenance of Books Compulsory
- Charitable Institute/NOT FOR PROFIT ORG: Maintenance of Books Compulsory. Maintenance of Books Compulsory for charitable/ not for profit companies, for the simple reason that they claim they are making no profit.
What books of accounts are required to be maintained by “persons?”
For Specified Professionals: As per Rule 6F (2) of the Income Tax Rules, the following books of accounts and documents are required to be maintained:
1) cash book,
2) Journal, if the accounts are maintained as per mercantile system of accounting,
4) carbon copies of bills, serially numbered and carbon copies or counterfoils of receipts
5) original bills for expenses exceeding Rs. 50 and payment vouchers for petty expenses
Books or books of accounts can be maintained both manually as well as in electronic form also in accounting software’s. (Print out is not compulsory)
Persons engaged in medical profession are, in addition, required to maintain daily case register in the prescribed Performa (Form No. 3C) and inventory, as at the beginning and end of the year, of stock of drugs, medicines and other consumables accessories used for the purpose of profession.
For Non Specified Professionals:
No List is provided by the Govt department which means you are required to maintain every possible document in relation to business.
1. Cash book/ Ledger/ Journal
2. Inventory Records
3. Bank statements
4. Original Bills
5. Receipts/Counterfoils of sales
6. Vouchers for payments
Where the books of accounts should be kept:
The current year’s books of accounts should be maintained and kept at the principal place of business or profession as per Rule 6F (3). There is no specific rule as to where the books of accounts of earlier years should be kept. In case you have branches, books of accounts can be either maintained at respective branches or at one place i.e. the registered office.
For how many years’ books of accounts are required to be preserved:
Every year the record of books of accounts grows up and the cupboards filled up more and more. Every assessee wants to know for how many years he should keep the records of his books of accounts.
Rule 6F (5) provides that the books of accounts and other documents are to be kept for at least 6 years from the end of relevant assessment year. In simple words, record for one financial year will be kept for 7 years and after that you are not required to keep it as per law. However, if assessment proceedings for a previous year are re-opened by the Income Tax department, its books have to be maintained till that is not completed and closed.
Consequences for failure to maintain books of accounts:
Failure to maintain books or documents invites a penalty of Rs 25,000/- and failure to get the accounts audited and furnish the tax audit report invites a penalty of 0.5% of total sales, turnover or gross receipts, or Rs. 1,00,000 whichever is less.