Books-of-Accounts-and-Tax-Audit-Limit

Accounts Maintenance & Tax Audit Limit

Accounts Maintenance & Tax Audit Limit

A tax audit is an audit of books of accounts maintained by an enterprise for the purpose of satisfying the requirements of the Income Tax Act. The Act mandates professionals and businesses to obtain a tax audit from a Chartered Accountant and maintain accounts if the turnover or profit exceeds a certain amount. In this article, we look at the tax audit limit and accounts maintenance limit for businesses under the Income Tax Act.

Prior to understanding the requirement of accounts maintenance and tax audit limit under Income Tax Act, it is important to grasp the concepts of “specified professions” and “non-specified professions”.

Specified Profession – Income Tax

Specified profession under the Income Tax Act Section 44AA and Rule 6F include legal, medical, engineering, architectural, accountancy, technical consultancy, or interior decoration, film artist, company secretary or information technology professional or any other notified professional.

 

Tax Audit Limit – Section 44AB

As per Section 44AB of the Act, the requirement to submit the accounts for a tax audit will arise in the following circumstances:

BusinessIf total sales, turnover or receipts in business for the previous year is more than Rs.1 crore.
ProfessionalIf total sales, receipts in profession for the previous year is more than Rs.50 lakhs.
Presumptive Taxation – Section 44AD, 44E, 44AF, 44BB or 44BBBIf the person claims that the profits and gains from the business are lower than the profits and gains computed under the relevant sections.

Thus, a compulsory tax audit is required to be completed by a Chartered Accountant if a business has a total sales turnover of over Rs.1 crore. In case of a profession, if the profession has total gross receipts of more than Rs.50 lakhs, then tax audit by a Chartered Accountant is mandatory. In addition to the above limits based on the business turnover, businesses covered under presumptive taxation schemes and claiming income to be lower than the deemed profits as specified under the relevant sections is also required to obtain tax audit mandatorily.

Compulsorily Required to Maintain Accounts

Under Section 44AA, the following types of businesses and professions are required to maintain accounts compulsorily.

Existing Profession

In case of an existing profession, wherein gross receipts are more than Rs.1.50 lakhs in all three years immediately preceding the financial year, books of accounts must be maintained as per Rule 6F. If the gross receipts do not exceed Rs.1.50 lakhs in the preceding three years, then the profession must maintain books of account and other documents to enable an assessing officer to compute taxable income in accordance with the Income Tax Act.

New Profession

In case of a new profession in which the gross receipts are expected to exceed Rs.1.50 lakhs, books of accounts must be maintained as per rule 6F. If the gross receipts are not expected to exceed Rs.1.50 lakhs, then the profession must maintain books of accounts to enable an assessing officer to compute taxable income in accordance with the Income Tax Act.

Existing Business

An existing business where the profit exceeds Rs.2.50 lakhs or total sales or gross receipts exceeds Rs.25 lakhs in any of the 3 years immediately preceding the previous year must maintain books of accounts.

New Business

All new business where the profit is expected to exceeds Rs.2.50 lakhs or total sales or gross receipts exceeds Rs.25 lakhs must maintain books of accounts.

Rule 6F of Income Tax – List of Books and Accounts to be Maintained

The following books of accounts must be maintained by all professions and businesses mandatorily if they cross the threshold specified under the Income Tax Act.

  1. A cash book (i.e., a record of all cash receipts and payments, kept and maintained from day-to-day giving the cash balance in hand of each day or at the end of a specified period not exceeding a month).
  2. A journal, in case the assessee follows the mercantile system of accounting.
  3. A general ledger.
  4. Carbon copies of bills (whether machine numbered or otherwise serially numbered) exceeding Rs. 25 issued by the person and carbon copies or counterfoils of machine numbered or otherwise serially numbered receipts issued by the person.
  5. Original bills/receipts issued to the assessee in respect of expenditure (payment vouchers if bills/receipts are not issued and amount of expenditure does not exceed Rs. 50).

In addition to above, a person engaged in the medical profession (i.e., a practitioner of any system of medicine – physicians, surgeons, dentists, pathologists, radiologists, hakims, and so on) has to maintain following items:

  • A daily case register in the prescribed form (i.e. Form 3C), showing date, patient’s name, nature of professional services rendered (i.e., general consultation, surgery, injection, visit, etc.,) fees received and date of receipt; and
  • An inventory mechanism classified under general heads, as on the first and last day of the previous year, of the stock of drugs, medicines and other consumable accessories used for the purpose of the medical profession.

To know more about Section 44AB of the Act, click here.

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