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Is it mandatory to maintain books of accounts by Professionals under Presumptive Taxation for Section 44ADA

is-it-mandatory-to-maintain-books-of-accounts-by-professionals-under-presumptive-taxation-for-section-44ada

Is it mandatory to maintain books of accounts by Professionals under Presumptive Taxation for Section 44ADA: Section 44ADA prescribes for the presumptive basis of tax on the receipts of Professionals having income from profession whereas section 44AA prescribes for compulsory maintenance of books of accounts for Professionals in certain cases. It is argued that both section 44AA and section 44ADA operate parallelly and simultaneously and thus a Professional declaring tax on professional income under section 44ADA needs to compulsorily maintain books of accounts as prescribed in section 44AA of the Income Tax Act, 1961 (the “Act”).



    In this article, we will discuss the legal provisions on the compulsory maintenance of books of accounts as specified in section 44AA of the Act by a Professional declaring tax under section 44ADA.


    Let us begin the discussion analyzing the provisions of section 44AA of the Act related to ‘Maintenance of accounts by certain persons carrying on profession or business’


    Legislative History of Section 44AA


    Section 44AA was introduced in the Act vide Taxation Laws (Amendment) Act, 1975 and has come into force with effect from 1-4-1976.


    Since then there is no major amendment carried on in this section till Finance Act, 2020.


    The bare provisions of section 44AA for the time being in force read as follows-


    4AA. (1) Every person carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board in the Official Gazette shall keep and maintain such books of account and other documents as may enable the Assessing Officer to compute his total income in accordance with the provisions of this Act.

    (2) Every person carrying on business or profession [not being a profession referred to in sub-section (1)] shall,—

    (i)  if his income from business or profession exceeds one lakh twenty thousand rupees or his total sales, turnover or gross receipts, as the case may be, in business or profession exceed or exceeds ten lakh rupees in any one of the three years immediately preceding the previous year; or

    (ii)  where the business or profession is newly set up in any previous year, if his income from business or profession is likely to exceed one lakh twenty thousand rupees or his total sales, turnover or gross receipts, as the case may be, in business or profession are or is likely to exceed ten lakh rupees, during such previous year; or

    (iii) where the profits and gains from the business are deemed to be the profits and gains of the assessee under section 44AE or section 44BB or section 44BBB, 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; or

    (iv) where the provisions of sub-section (4) of section 44AD are applicable in his case and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year,

    keep and maintain such books of account and other documents as may enable the Assessing Officer to compute his total income in accordance with the provisions of this Act:

    Provided that in the case of a person being an individual or a Hindu undivided family, the provisions of clause (i) and clause (ii) shall have effect, as if for the words "one lakh twenty thousand rupees", the words "two lakh fifty thousand rupees" had been substituted :

    Provided further that in the case of a person being an individual or a Hindu undivided family, the provisions of clause (i) and clause (ii) shall have effect, as if for the words "ten lakh rupees", the words "twenty-five lakh rupees" had been substituted.

    (3) The Board may, having regard to the nature of the business or profession carried on by any class of persons, prescribe, by rules, the books of account and other documents (including inventories, wherever necessary) to be kept and maintained under sub-section (1) or sub-section (2), 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.

    (4) Without prejudice to the provisions of sub-section (3), the Board may prescribe, by rules, the period for which the books of account and other documents to be kept and maintained under sub-section (1) or sub-section (2) shall be retained.


    The provisions of section 44AA can be summarized as under-

    Sub-section (1)Maintenance of books of account by ‘specified (including notified) professionals’
    Sub-section (2)Maintenance of books of account by a person carrying on business or non-specified profession based on income or turnover criteria
    Note: This sub-section has two provisos.
    Sub-section (3)Books of account and other documents to be kept and maintained as prescribed by the Board
    Note: The Board has prescribed Rule 6F in this regard.
    Sub-section (4)Period for which the books of account and other documents to be kept and maintained as prescribed by the Board.
    Note: The Board has prescribed Rule 6F in this regard.

    Each of the provisions is discussed below.


    Section 44AA(1) prescribes for compulsory maintenance of such books of accounts and other documents which will enable the Assessing Officer to compute his total income in accordance with the provisions of this Act. sub-section (1) applies to the followings-

    1. A person carrying on a legal profession

    2. A person carrying on a medical profession

    3. A person carrying on engineering or architectural profession

    4. A person carrying on the profession of accountancy

    5. A person carrying on the profession of  technical consultancy 

    6. A person carrying on the profession of  interior decoration

    7. Any other profession as notified by the Board.


    Professions notified by CBDT under section 44AA(1)


    The board has notified the following Professions under section 44AA(1)-


    1. A person carrying on the profession of an authorised representative or film artist. [Notification No. SO 17(E) dated 12-1-1977]


    "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 a legal profession or a person carrying on the profession of accountancy.


    "Film artist" 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 - 

    (i) an actor ;

    (ii) a cameraman ;

    (iii) a director, including an assistant director ;

    (iv) a music director, including an assistant music director ;

    (v) an art director, including an assistant art director ;

    (vi) a dance director, including an assistant dance director ;

    (vii) an editor ;

    (viii) a singer ;

    (ix) a lyricist ;

    (x) a story writer ;

    (xi) a screen-play writer ;

    (xii) a dialogue writer; and

    (xiii) a dress designer.


    2. The profession of company secretary [Notification No. SO 2675 dated 25-9-1992]


    "Company Secretary" means a person who is a member of the Institute of Company Secretaries of India in practice within the meaning of sub-section (2) of section 2 of the Company Secretaries Act, 1980 (56 of 1980).


    3. The profession of information technology [Notification No. SO 385(E) dated 4-5-2001]


    The term ‘profession of information technology’ is not defined in the Notification.


    Section 44AA provides for compulsory maintenance of accounts by certain categories of taxpayers. It provides that all taxpayers carrying on the profession of law, medicine, engineering, architecture, accountancy, technical consultancy or interior decoration or any other profession that may be notified by the Board shall maintain such books of account and other documents as may enable the Income-tax Officer to compute their total income, under the Income-tax Act. 


    It may be noted that in the case of persons carrying on professions listed above or professions notified by the Board, the requirement of maintenance of accounts is applicable irrespective of the income or gross receipts of the person. In other words, a person carrying on specified or notified profession shall have to compulsorily maintain books of account and other documents. No monetary limit is specified in section 44AA(1). Hence, every person carrying on specified or notified profession has to compulsory maintain books of account and other documents. Certain relaxation is provided in the Rule 6F to professionals specified in the section 44AA itself and for notified persons in the profession of authorized representative and film artists.


    Sub-section (3) to section 44A provides that the Board shall prescribe rules regarding the books of account and other documents (including inventories, wherever necessary) to be kept and maintained under sub-section (1) or sub-section (2), 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.


    In this regard, the Board has prescribed Rule 6F in the Income Tax Rules, 1962 which prescribes for books of account and other documents to be kept and maintained under section 44AA(3) by persons carrying on certain professions.


    It should be noted that Rule 6F has prescribed books of account and other documents only for specified professionals and certain notified professionals and not for persons carrying business. Hence, the rule does not specify any particular books of account or documents to be kept and maintained by the following persons-

    1. A person carrying on business, or 

    2. Professions not specified under section 44AA(1), or

    3. Notified professions under section 44AA(1) being the profession of company secretary and information technology.

     

    Persons compulsorily required to maintain books of account under the Income Tax Act


    According to section 44AA, every person, carrying on legal medical, engineering or architectural profession, or profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board is compulsorily required to keep and maintain such books of account and documents as may enable the Assessing Officer to compute his total income in accordance with the provisions of the Income-tax Act. 


    Authorised representatives, film artists, company secretaries and profession of Information Technology have been so far notified under this section. 


    Further, 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,-

    i. the books of account and other documents (including inventories wherever necessary) to be kept and maintained, 

    ii. the particulars to be contained therein and the form and the manner in which and 

    iii. the place at which they shall be kept and maintained. 


    In this context, the Board has prescribed Rule 6F and has prescribed the books of account to be maintained by specified persons.


    Prescribed books of account and documents to be kept and maintained under section 44AA(3) read with Rule 6F


    Rule 6F(1) states that 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 books of account and documents as prescribed in Rule 6F(2). 


    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 counterfoils of machine numbered or otherwise serially numbered receipts issued by him. However, an exception is provided where the amount of the bill or receipts is 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 Rs. 50, payment vouchers prepared and signed by the person. However, the requirements as to the preparation and signing of payment vouchers shall not apply in a case where the cash book maintained by the person contains adequate particulars in respect of the expenditure incurred by him.


    ‘Cash book’ means a record of all cash receipts and payments, kept and maintained from day to day and giving the cash balance in hand at the end of each day or at the end of a specified period not exceeding a month. [Explanation(b) to Rule 6F(2)]


    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, namely- 

    (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. 


    Conditions for maintenance of prescribed books of account 


    Section 44AA(1) and section 44AA(2) prescribes for conditions when a person carrying business and/or profession is required to maintain the books of accounts and other documents.


    Conditions for specified professions u/s 44AA(1)


    As stated above, section 44AA(1), which deals with specified professions and notified professions, do not prescribe for any conditions for maintenance of books of account and other documents. Therefore, every person carrying on specified and/or notified profession shall be required to keep and maintain the prescribed books of account and other documents as per Rule 6F(1).


    Rule 6F(1) has provided the following exception when the prescribed books of account and other documents are not required to be maintained-

    (a) Where the profession has been newly set up by a person in the previous year, his total gross receipts in the profession for that year are not likely to exceed Rs. 1,50,000.


    (b) In any other case, if the total gross receipts in the profession do not exceed Rs. 1,50,000 in any one of 3 years immediately preceding the previous year.


    “A plain reading of the proviso to Sub-rule (1) is that a person is not required to maintain books of account if the total gross receipts from the profession did not exceed Rs. 60,000 in any one of the three years immediately preceding the previous year and not vice versa. The rule would have read otherwise had that been the intention. The rule then would have been that if the income exceeds Rs. 60,000 in any one of the three years immediately preceding the previous year, then the assessee would be required to maintain the books of account. The proviso provides to the contrary and states that nothing in Sub-rule (1) would apply if the income does not exceed Rs. 60,000 in any one of the three years immediately preceding the previous year.” [A. Keshava Bhat vs. ITO (2001) 247 ITR 83 (Kar.-HC)]


    Note: The limit of Rs. 60,000 is now raised to Rs. 1,50,000.


    Therefore, if the gross receipts in all the three preceding previous years do not exceed Rs. 1,50,000, in that case, no books of accounts and other records shall be required to be kept and maintained by the person carrying on the specified profession.


    It should be noted that Rule 6F(1) covers all the specified professions and only authorised representative or film artist notified professions. Hence, the exception of monetary limit from non-maintenance of books of accounts for other notified professions viz. the profession of company secretary and information technology is not applicable. These professionals have to keep and maintain books of accounts and other documents irrespective of their quantum of income.


    Conditions for non-specified professions and business u/s 44AA(2)


    Section 44AA(2), which deals with non-specified professions and business, prescribes the following conditions for maintenance of books of account and other documents-


    If the business or profession is newly set up in the previous year-


    In case of Individual or HUF(i) if income from the business or profession likely to exceed Rs. 2,50,000 in the previous year, or
    (ii) if total sales, turnover or gross receipts from the business or profession likely to exceed Rs. 25,00,000 in the previous year
    In case of other persons(i) if income from the business or profession likely to exceed Rs. 1,20,000 in the previous year, or
    (ii) if total sales, turnover or gross receipts from the business or profession likely to exceed Rs. 10,00,000 in the previous year.

    In any other case-


    In case of Individual or HUF(i) if income from the business or profession exceeds Rs. 2,50,000 in any one of 3 years immediately preceding the previous year or
    (ii) if total sales or gross receipts from the business or profession exceed Rs. 25,00,000 in any one of 3 years immediately preceding the previous year.
    In case of other persons(i) if income from the business or profession exceeds Rs. 1,20,000 in any one of 3 years immediately preceding the previous year or
    (ii) if total sales or gross receipts from the business or profession exceed Rs. 10,00,000 in any one of 3 years immediately preceding the previous year.

    Difference between section 44AA(1) and section 44AA(2)


    The difference between the threshold limit for section 44AA(1) and section 44AA(2) is noteworthy.


    1. Section 44AA(1) read with Rule 6F(1) provides for relaxation only on the gross receipts criteria whereas section 44AA(2) provides for relaxation on gross receipts/total sales/turnover as well as income from the business/profession criteria.


    2. Section 44AA(2) contains separate threshold limits for Individual/HUF whereas such differentiation is missing for section 44AA(1)/Rule 6F(1).


    3. Further, the conditions for applying the threshold limit is different for section 44AA(1)/Rule 6F(1) and section 44AA(2). 


    Section 44AA(1)/Rule 6F(1) provides that the monetary limit of Rs. 1,50,000 do not exceed in any one of 3 years immediately preceding the previous year for the applicability of Rule 6F(1). It means in all the last three years the gross receipts from the profession must exceed Rs. 1,50,000.


    Section 44AA(2) worded the conditions differently. It provides that the monetary limit of Rs. 1,20,000 or Rs. 10,00,000, as the case may be, exceeds in any one of 3 years immediately preceding the previous year for the applicability of section 44AA(2). It means if in any one year out of the last three years the income from the business or profession exceeds Rs. 1,20,000 or Rs. 1,50,000 or  total sales, turnover or gross receipts from the business or profession exceeds Rs. 10,00,000 or Rs. 25,00,000, section 44AA92) will apply.


    4. A profession not specified or notified under section 44AA(1) is covered under section 44AA(2).


    The above rule is illustrated as follows-


    A “Chartered Accountant” (specified profession u/s 44AA(1) and is covered under Rule 6F(1)) is required to keep and maintain books of accounts and other documents as prescribed in Rule 6F(2) if gross receipts from the profession exceeds Rs. 1,50,000/-.


    A “Doctor” (a notified profession u/s 44AA(1) and is covered under Rule 6F(1)) is required to keep and maintain books of accounts and other documents as prescribed in Rule 6F(2) if gross receipts from the profession exceeds Rs. 1,50,000/-.


    A “Company Secretary” (a notified profession u/s 44AA(1) but is not covered under Rule 6F(1)) is required to keep and maintain books of accounts and other documents as prescribed in Rule 6F(2) for any amount gross receipts from the profession.


    A “Teacher” (non-specified profession u/s 44AA(1) is covered u/s 44AA(2)) is required to keep and maintain books of accounts and other documents if the income from profession exceeds Rs. 2,50,000/- or gross receipts from the profession exceeds Rs. 25,00,000/-.  Further, no books of accounts or other documents are prescribed but are required to maintain such books of account and other documents as may enable the Assessing Officer to compute his total income. 


    The distinction between professions covered u/s44AA(1) and u/s 44AA(2) is not discriminatory so far as  between the professions not enumerated in sub-s. (1) of s. 44AA and other professions, as the professions enumerated are required to maintain books of account to be inspected by the ITO to ascertain their income while other professions not so enumerated in sub-s. (1) but falling under sub-s. (2) if the income exceeds the amount mentioned in the said sub-section are required to maintain the accounts. It does not violate Article 14 of the Constitution. [H.A.K. Rao vs. Union of India (1991) 189 ITR 322 (Kar.-HC)]


    5. A person carrying on business is always covered under section 44AA(2). No books of accounts or other documents are prescribed for a person carrying on business but is required to maintain such books of account and other documents as may enable the Assessing Officer to compute his total income.


    6. Though no books of accounts and other documents have been prescribed for section 44AA(2), the prescribed books of accounts in Rule 6F(1) are the minimum or basic requirements for any person carrying on business or profession and hence also applies to section 44AA(2). Since books are prescribed for professionals they are not required to maintain any other books or documents over and above the prescribed ones. But for persons carrying on business, the AO may ask for any books or documents which will enable him to compute his total income.


    Once the Board in respect of the particular nature of the profession prescribed maintenance of certain books of account, it is not open to the assessing authority to desire some other books of account to be maintained over and above the books of account required by Rule 6F. Any view to the contrary will defeat the very purpose of introducing Section 44AA and Rule 6F. [CIT vs Rajni Kant Dave (2006) 281 ITR 6 (All.-HC)]


    This decision was rendered in respect of section 44AA(1) read with Rule 6F(1) for a profession covered u/s 44AA(1). 


    7. Certain Sports personnel (Sports Persons, Umpires and Referees, Coaches and Trainers, Team Physicians and Physiotherapists, Event Managers, Commentators, Anchors and Sports Columnists) were notified as professionals by CBDT vide Notification No. 88/2008 dated 21-08-2008. However, this is notified under section 194J of the Income Tax Act, 1961 and not under section 44AA(1). Hence, for the purpose of section 44AA, they will be covered under section 44AA(2).


    Place of keeping prescribed books of account and other documents


    As per Rule 6F(4) the books of account and other document specified in Rule 6F(2) and (3) (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.


    Period for which prescribed books of account and other documents needs to be kept


    As per Rule 6F(5), the books of account and other documents specified in Rule 6F(2) and Rule 6F(3) shall be kept and maintained for a period of six years from the end of the relevant assessment year.


    For example, for the Financial Year 2018-19, the relevant assessment year is AY 2019-20. Thus, the specified books of account and other documents shall be kept up to March 31, 2026. In other words, the specified books of account and other documents of a financial year shall be kept and maintained for the next 7 financial years.


    An exception is provided for the above period of six years rule. 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, 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.


    However, one should keep in mind that the above period so specified for retaining the books of accounts and other documents is the maximum statutory period for which one should keep these records. A person may keep the records for a longer period if he so wishes.


    Maintenance of books of accounts and other documents, period for which and place where such books are required to be maintained for non-specified profession and business


    Rule 6F is applicable for a profession specified in section 44AA(1). This is not applicable for a person carrying on business or profession covered under section 44AA(2).


    As per section 44AA(2), every other person carrying on a business or a profession (not being a profession specified in section 44AA(1)) shall keep and maintain such books of account and other documents as may enable the assessing officer to compute the total income of the person in accordance with the provisions of the Income-tax Act.


    The threshold limit for applicability of section 44AA(2) for Individual/HUF and other persons is already discussed above.


    No books of account and other documents have been prescribed for persons carrying on business or profession covered u/s 44AA(2). This does not mean that they are not required to maintain the books of accounts and other documents. They are also required to maintain the books of accounts and other documents. Actually, the purview for this category of persons is wider than the persons covered by section 44AA(1). In this case, the Assessing Officer can ask for any records which are reasonable for computing the total income of the person.


    Further, the rule regarding the place where such books of account and other documents are required to be kept and maintained is also not specified for these categories of persons. However, Rule 6F may act as a guide for these persons.


    Similarly, the rule regarding the period for which such books of account and other documents are required to be kept and maintained is also not specified for these categories of persons. One may take a clue from Rule 6F.


    One should know that section 2(12A) defines the term ‘Books of account’ in an inclusive manner. As per clause 12A of section 2, "books or books of account" includes ledgers, day-books, cash books, account-books and other books, whether kept in the written form or as print-outs of data stored in a floppy, disc, tape or any other form of electro-magnetic data storage device.


    Further, as per section 2(22AA),  "document" includes an electronic record as defined in clause (t) of sub-section (1) of section 2 of the Information Technology Act, 2000 (21 of 2000).


    Penalty for non-maintenance and non-retention of books of accounts


    Section 271A provides for penalty for failure to keep, maintain or retain books of account, documents, etc. as required under section 44AA or the rules framed thereunder. The penalty is fixed at Rs. 25,000 and shall be imposed by the Assessing Officer or CIT(A).


    Section 271A reads as follows-


    Failure to keep, maintain or retain books of account, documents, etc.


    271A. Without prejudice to the provisions of section 270A or section 271, if any person fails to keep and maintain any such books of account and other documents as required by section 44AA or the rules made thereunder, in respect of any previous year or to retain such books of account and other documents for the period specified in the said rules, the Assessing Officer or the Commissioner (Appeals) may direct that such person shall pay, by way of penalty, a sum of twenty-five thousand rupees.


    Section 44AA(4) empowers the CBDT to prescribe by rules the period for which the books of account are to be retained. As per Rule 6F the CBDT prescribes the books of account to be maintained by the person carrying on legal, medical, engineering or other professions. Sub-rule (5) of Rule 6F provides the period for which such books of account are to be retained by the person carrying on a specified profession. This rule is applicable only in respect of the person carrying on the profession specified in section 44AA(1). Thus, in the case of a person carrying on business or profession other than a specified profession, the CBDT has not prescribed any specific books of account which are required to be kept and maintained and also the period for which they are to be retained.


    Section 271A provides for penalty in respect of two defaults, one is for failure to keep and maintain the books as provided by the Act, second is for failure to retain such books of account as prescribed by rules. 


    In the case of Income Tax Officer vs. Dinesh Paper Mart (1999) 70 ITD 274 (Nag-Trib), the Assessing Officer levied the penalty of Rs. 15,000 under section 271A for the assessee's failure to retain the books of account. The assessee was a partnership firm which had maintained the books of account, which was audited as per section 44AB of the Income Tax Act. However, during the course of assessment proceedings the assessee did not produce the books of account despite several opportunities. Therefore, the AO came to the conclusion that the assessee has not retained the books of account.


    The Tribunal held as follows-


    In this case the penalty has been levied for the second default i.e., failure to retain the books of account. As the rules provide only for maintenance and retention of the books of account by the person carrying on a specified profession, if the person other than the person carrying on the specified profession has not retained the books of account, he cannot be penalised under section 271A. It is because the section 271A provides for levy of penalty for the failure of the persons to retain the books as prescribed by Rules.


    Thus, unless rules prescribed for the retention of the books of account, there cannot be failure of the assessee to retain as per rules. We agree with the contention of the learned Departmental Representative that unless the books of account are retained till the assessment proceedings, the purpose of maintaining such books of account is defeated. However, the assessee can be penalised only if a penalty is prescribed under the Income Tax Act for such default. As we have already mentioned earlier that the penalty under section 271A is leviable only for two types of default and in none of such defaults the assessee's case is covered, we hold that the assessee is not liable for any penalty under section 271A of the Income Tax Act.


    It is indeed a peculiar situation where the Act penalizes a set of the professions for non-retention of books of account and other documents and leaves the others scot-free for the same offence.


    A similar decision was held in the case of Sujan Singh vs. Assessing Officer  (2007) 110 TTJ Asr 818 (Amritsar-Trib.). In this case, it was decided that Rule 6F has not been made applicable to the persons carrying on business or Profession other than those mentioned under section 44AA(1) and covered under section 44AA(2). The case of the assessee falls under section 44AA (2), as the assessee was carrying on a business of poultry farm. The board has not specified or notified the books of account to be maintained by persons covered under section 44AA(2). Therefore, Rule 6F is not applicable to the case of the assessee and thus penalty under section 271A cannot be imposed on the assessee.


    In the case of Surajmal Parsuram Todi vs. CIT (1996) 222 ITR 691, the Gauhati High Court held that once penalty under section 271A is levied for non-maintenance of books of accounts, penalty under section 271B for failure to get its accounts audited cannot be imposed. When a person commits an offence by not maintaining the books of account as contemplated by Section 44AA the offence is complete. After that there can be no possibility of any offence as contemplated by Section 44AB and, therefore, in our opinion, the imposition of penalty under Section 271B is erroneous.


    Apart from the Income Tax Act, there are other laws under which a person, under which it is governed, is required to maintain and retain the books of accounts and other documents. For example, a company is governed by the Companies Act, 2013. An LLP is governed by the Limited Liability Partnership Act, 2008. A society registered under the Societies Registration Act, 1860 or equivalent state laws is governed by the respective law and so on.



    The summarized version of the requirement of maintenance of books of account and other records under section 44AA(1) read with Rule 6F and section 44AA(2) is tabulated below -

    ProfessionsBooks of accountProvisionsConditions
    Legal
    (i) a cash book;
    (ii) a journal, if the accounts are maintained according to the mercantile system of accounting;
    (iii) a ledger;
    (iv) serially numbered carbon copies or counterfoils of bills or receipts except where the amount of the bill or receipt is less than Rs. 25 issued by the person;
    (v) original bills and receipts in respect of expenditure incurred issued to the person or,
    where such bills and receipts are not issued and the expenditure incurred does not exceed Rs. 50, payment vouchers prepared and signed by the person:
    The payment vouchers are not required to be prepared in a case where the cash book maintained by the person contains adequate particulars in respect of the expenditure incurred by him.
    Specified Profession as per section 44AA(1)
    Required to maintain the books- The proviso to Rule 6F(1)
    If the profession is newly set up in the previous year-
    If total gross receipts in the profession are not likely to exceed Rs. 1,50,000 in the previous year.
    In any other case-
    If total gross receipts in the profession do not exceed Rs. 1,50,000 in all the last 3 previous years immediately preceding the previous year
    Medical
    Engineering or architectural profession
    Profession of accountancy
    Technical consultancy
    Interior decoration
    Authorised representativeNotified Profession under section 44AA(1)
    Film artist
    Other notified professions u/s44AA(1) viz. company secretary, information technologyNo books of account prescribed, but are required to maintain such books of account or other documents which will enable the Assessing Officer to compute the total income.Notified Profession under section 44AA(1)Irrespective of the income or gross receipts of the person
    Persons carrying other professions (not specified in sec. 44AA(1)) or businessNo books of account prescribedCovered u/s 44AA(2)
    Required to maintain the books-
    If the business or profession is newly set up in the previous year-
    (i) if income from the business or profession likely to exceed Rs. 1,20,000 (Rs. 2,50,000 for Ind./ HUF) in the previous year, or
    (ii) if total sales/turnover or gross receipts from the business or profession likely to exceed Rs. 10,00,000 (Rs. 25,00,000 for Ind./HUF) in the previous year
    In any other case-
    (i) if income from the business or profession exceeds Rs. 1,20,00 (Rs. 2,50,000 for Ind./ HUF) in any one of 3 years immediately preceding the previous year or,
    (ii) if total sales/turnover or gross receipts from the business or profession exceed Rs. 10,00,000 (Rs. 25,00,000 for Ind. /HUF) in any one of 3 years immediately preceding the previous year

    Hence we have the following four categories of persons carrying on business or profession as per section 44AA read with Rule 6F-

    Section 44AA(1)Professions specified in section 44AA(1) itself
    Section 44AA(1) notified professionsProfessions notified under section 44AA(1)
    Rule 6F(1)
    Professions specified in section 44AA(1) itself and one notified profession viz. authorised representative or film artist

    (Actually when Rule 6F was prescribed then only these two professions were notified. Rule 6F was not amended after notifying other professions)
    Non-specified or non-notified professions or persons carrying on business Section 44AA(2)Those which are not specified or notified under section 44AA(1). In other words, these are covered under section 44AA(2).

    Case Laws on Section 44AA


    1. All actors are not Professionals for Section 44AA(1): A film artist is also notified as professional and an actor engaged in his or her professional capacity in the production of a cinematograph film is a professional. Essentially, the above list of artists is those who are engaged in the production of a cinematograph film. An actor who is engaged in modelling should not be deemed to be engaged in the production of a cinematographic film. Therefore, the actors who are not engaged in production of film are outside the scope of the said notification [Kodak India P. Ltd v. Deputy Commissioner of Income-Tax (ITA No. 9080/Mum/2010) (Mum.-Trib.)


    Similarly, a "stunt actor" does not qualify to be a film artist. [Deputy CIT v. Movies Stunt Artists Association : (2006) 6 SOT 204 (Mum.-Trib)]


    The work of photography and artwork not done in production of a cinematographic film are outside the scope of the notification. [EMC v. ITO : (2010) 37 SOT 31 (Mum.-Trib)]


    2. Books of Accounts: Maintenance of books of account and documents as required u/s 44AA means books which are true and correct and are accepted under commercial parlance and which would enable AO to compute the total income of the assessee. [Blue Heaven Construction v. ITO (2010) 39 SOT 39 (Kol.-Trib)]


    Pacca book of cash sales and purchase register are account books as defined u/s 2(12A). [CIT v S.C. Naregal (2011) 16 taxmann.com 420 (Karnataka)]


    Bank statements cannot be considered as the assessee's books of account [Manoj Aggarwal & Ors. vs. Dy. CIT (2008) 113 ITD 377 (Delhi) (SB)]


    Assessing authority could not have referred the matter to the Departmental Valuation Officer (DVO) without the books of account being rejected. [Sargam Cinema vs. CIT  (2010) 328 ITR 513 (SC)]


    Illustration:


    Mr. Rakesh is an interior decorator. He gives the details of his gross receipts from profession:

    FY 2017-18: Rs. 1,05,000

    FY 2018-19: Rs. 1,40,000

    FY 2019-20: Rs. 2,00,000

    Is he required to maintain any books of account u/s. 44AA in FY 2020-21?


    Mr. Rakesh is carrying on the profession of interior decorator which is a profession covered by Rule 6F(1) and the proviso thereto.


    Since the gross receipts from the profession does not exceed Rs. 1,50,000 in all the three previous years immediately preceding the financial year 2020-21, he is not required to maintain any specified books of accounts in FY 2020-21.


    However, he has to maintain minimum documents to prove his gross receipts from the profession like copies of bills, bank statements, etc.


    Will the answer be the same if Mr. Rakesh is a qualified Company Secretary?


    The profession of Company Secretary is notified by CBDT and hence covered under section 44AA(1) but does not find a place in Rule 6F(1). Hence, the proviso to Rule 6F(1) will not apply. The monetary limit of Rs. 1,50,000 will not apply to him. In this case, he has to maintain such books of accounts and other documents which will enable AO to compute his total income as stated in section 44AA(1).


    A contrary view, in this case, cannot be ruled out. One may argue that the profession of a company secretary is covered u/s 44AA(1) and hence Rule 6F(1) shall also apply to him. In my view, this is not the correct interpretation. Undoubtedly the profession of a company secretary is notified u/s 44A(1) but it is the section 44AA(3) which empowers the Board to prescribe the books of account in the case of business or profession carried on by any class of persons. These ‘class of persons’ may be different from section 44AA(1) or section 44AA(2) but must be covered in these two sub-sections. In other words, the rules to be prescribed under section 44AA(3) cannot include any class of persons not covered by section 44AA(1) or section 44AA(2). The profession of a company secretary is covered u/s 44AA(1). Rule 6F in its sub-Rule (1) has separately specified the class of persons who shall maintain the prescribed books of accounts. These “Class of persons’ are covered under section 44AA(1). Rule 6F(1) does not cover all the persons specified or notified under section 44AA(1); it excludes the profession of company secretary and information technology. Hence, Rule 6F(1) and the proviso thereunder shall not apply to Mr. Rakesh in the given case. It should be noted that both section 44AA(1) and section 44AA(2) requires compulsory maintenance of books of account for different persons. Similarly, Rule 6F prescribes maintenance of books of account for persons carrying on certain professions.


    Maintenance Books of Accounts under section 44ADA


    After discussing the provisions related to maintenance of books of accounts under section 44AA, its turn to discuss on the main topic related to maintenance of books of account for a person carrying on the profession and opting presumptive taxation under section 44ADA.


    In discussing section 44ADA, a reference to section 44AD is also imperative which is discussed at appropriate places.


    Section 44AA(2)(iv) provides that where the provisions of section 44AD(4) are applicable in the case of a person carrying on business or profession which is not covered by section 44AA(1) and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year, he shall keep and maintain such books of account and other documents as may enable the Assessing Officer to compute his total income in accordance with the provisions of this Act.


    This is related to section 44AD but there is no such provision for section 44ADA in section 44AA. However, section 44ADA(4) contains a similar provision which states that where an assessee carrying on a profession referred to in section 44ADA and who claims that his profits and gains from the profession are lower than 50% of his total gross receipts from the profession and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and maintain such books of account and other documents as required under section 44AA(1) and get them audited and furnish a report of such audit as required under section 44AB.


    In other words, where a person is carrying on a profession referred to in section 44ADA and claims that-

    (i) his profits and gains/income from such profession is lower than  50%  of the total gross receipt of the profession;  and

    (ii) his income exceeds the maximum amount which is not chargeable to income tax in any previous year

    he shall be required to keep and maintain such books of account and other documents as required under section 44AA(1). Both the conditions need to be satisfied 


    But the problem is that nowhere it is mentioned that a person carrying on a profession referred to in section 44ADA shall not be required to maintain books of accounts. Nowhere it is mentioned that if a person carries on a profession as referred to in section 44ADA and declares his income as per section 44ADA(1) is not required to maintain books of accounts.


    To discuss the issue, let us revisit the provisions of section 44ADA. The text of the section 44ADA is reproduced below for the ready reference:


    Special provision for computing profits and gains of profession on presumptive basis.


    44ADA. (1) Notwithstanding anything contained in sections 28 to 43C, in the case of an assessee, being a resident in India, who is engaged in a profession referred to in sub-section (1) of section 44AA and whose total gross receipts do not exceed fifty lakh rupees in a previous year, a sum equal to fifty per cent of the total gross receipts of the assessee in the previous year on account of such profession or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the assessee, shall be deemed to be the profits and gains of such profession chargeable to tax under the head "Profits and gains of business or profession".


    (2) Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed.


    (3) The written down value of any asset used for the purposes of profession shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.


    (4) Notwithstanding anything contained in the foregoing provisions of this section, an assessee who claims that his profits and gains from the profession are lower than the profits and gains specified in sub-section (1) and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and maintain such books of account and other documents as required under sub-section (1) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB.


    Section 44ADA was introduced by the Finance Act, 2016 and effective from assessment year 2017-18 One of the essential characteristics of a presumptive taxation scheme is that books of account is not required to be maintained-be it section 44AD, section 44AE or section 44ADA.


    Section 44ADA overrides section 28 to section 43C but does not override section 44AA. Section 44AA(1) provides for compulsory maintenance of books of accounts by a person carrying on specified profession. Further, section 44ADA can be opted only by a person carrying on a specified profession in section 44AA(1). Therefore, on the plain reading of the law, it appears that it is mandatory for a  person carrying on a specified profession as per section 44AA(1) has to compulsorily maintain books of accounts even if such a person declares his income as per section 44ADA(1).


    If this interpretation is invoked, then the purpose of simplification will get defeated. The purpose of introducing the presumptive taxation is to provide relief to small taxpayers from the burden of maintaining the detailed books of account and reducing the cost of compliances.


    The memorandum to Finance Bill 2016 states that in order to rationalize the presumptive taxation scheme and to reduce the compliance burden of the small taxpayers having income from profession and to facilitate the ease of doing business, it is proposed to provide for presumptive taxation regime for professionals.It further states that the assessee will not be required to maintain books of account under sub-section (1) of section 44AA and get the accounts audited under section 44AB in respect of such income unless the assessee claims that the profits and gains from the aforesaid profession are lower than the profits and gains deemed to be his income under sub-section (1) of section 44ADA and his income exceeds the maximum amount which is not chargeable to income-tax.


    Further, the ‘FAQs on Tax on Presumptive Taxation Scheme’ published on income tax portal clarifies the same in the following manner-


    If a person adopts the presumptive taxation scheme of section 44ADA, then he is required to maintain books of account as per section 44AA?

    ​​​​​​​​In case of a person engaged in a specified profession as referred in sections 44AA(1​) and opts for presumptive taxation scheme of sections 44ADA, the provision of sections 44AA relating to maintenance of books of account will not apply. In other words, if a person opts for the provisions of sections 44ADA and declares income @50% of the gross receipts, then he is not required to maintain the books of account in respect of the specified profession.


    Even though the FAQ is not the law but still it can be an aid to interpretation on the issue. This view shall further fortify from the speech of the Finance Minister.


    In the Budget Speech of the then Finance Minister while presenting the Union Budget 2016 stated as follows-


    At present about 33 lakh small business people avail of this (presumptive taxation scheme under section 44AD) benefit, which frees them from the burden of maintaining detailed books of account and getting audit done.


    I also propose to extend the presumptive taxation scheme to professionals with gross receipts up to Rs. 50 lakh with the presumption of profit being 50% of the gross receipts.”


    From the speech, it is also suggested that professionals opting the presumptive taxation scheme with gross receipts up to Rs. 50 lakh with the presumption of profit being 50% of the gross receipts are not required to maintain books of accounts.


    The legislative intent is very clear that such a professional is not required to maintain books of account under section 44AA. Although, it can be said that when the plain meaning of the words of the statute is unambiguous, there is no need to resort to external aid for interpretation. However, one should not forget that it is a beneficial provision provided to small taxpayers and hence is required to be interpreted liberally.


    Though the intention is very clear on the issue, however, a similar provision in the law is missing.


    If one interprets that a person opting for a presumptive scheme under section 44ADA is not required to maintain books of accounts then it is desired that he at least maintain minimum records like a copy of bills, bank statements, etc. to prove its gross receipts from the profession.


    There is no judicial precedent on the issue. One may rely on the judicial decisions rendered in the context of section 44AD wherein it was categorically held that maintenance of books of account is not necessary for a person opting presumptive taxation. However, the legal provisions for section 44AD and section 44ADA are not analogous but one may draw a purposive conclusion of the real intention of the legislation behind the introduction of this presumptive taxation for small taxpayers.


    Once exemption from the maintenance of books of accounts has been provided under the special provisions of section 44AD and presumptive tax basis is adopted for determining taxable income, the assessee is not under any obligation to explain individual entry of cash deposits found to be made in his bank account.

    [CIT v Surinder Pal Anand (2010) 192 Taxman 264 (P&H)]

    [Kapil Dey vs ITO (ITA No. 854 - 856/Kol/2010 (Kol-Trib.)]

    [Naresh Kumar Sharma vs. ITO (ITA. No. 1486/Kol/2017) (Kol.-Trib.)]


    Since assessee declared return of income under section 44AD of the I.T. Act, therefore, there was no necessity for the assessee to maintain books of account or bills and vouchers of sales and purchase. [Pradeep Jain vs. ITO (ITA.No.8001/Del/2018) (Delhi-Trib.)]


    If 8% of gross receipts are 'deemed' income of the assessee, the remaining1 92% are also 'deemed' expenditure of the assessee. Meaning thereby that actual expenditure may not be 92% of gross receipts, only for the purposes of taxation, it is considered to be so. To take it further, it can be said that the expenditure may be less than 92% or it may also be more than 92% of gross receipts.


    The section also does not put obligation on the assessee to maintain books of account, more so, in view of the fact that his income has been assessed as per section 44AD of the Act, he cannot be punished for not maintaining the same.

    [Shri Thomas Eapen vs ITO (ITA No. 451/Coch/2019):(2020) 180 ITD 741 (Cochin-Trib)]


    Conclusion


    Hence, on the basis of the above discussion, it can be concluded that a person carrying on a profession specified under section 44AA(1) and opting for section 44ADA is not required to maintain the books of accounts as required under section 44AA read with Rule 6F provided he declares at least 50 per cent of his total gross receipts from the profession as income.


    Bare text of Rule 6F of the Income Tax Rules, 1962


    Books of account and other documents to be kept and maintained under section 44AA(3) by persons carrying on certain professions.


    6F. (1) Every 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 shall keep and maintain the books of account and other documents specified in sub-rule (2) :


    Provided that nothing in this sub-rule shall apply in relation to any previous year in the case of any person if his total gross receipts in the profession do not exceed one lakh fifty thousand rupees in any one of the three years immediately preceding the previous year, or, where the profession has been newly set up in the previous year, his total gross receipts in the profession for that year are not likely to exceed the said amount.


    (2) The books of account and other documents referred to in sub-rule (1) shall be the following, namely:—


    (i) a cash book;


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


    (iii) a ledger;


    (iv) carbon copies of bills, whether machine numbered or otherwise serially numbered, wherever such bills are issued by the person, and carbon copies or counterfoils of machine numbered or otherwise serially numbered receipts issued by him:


    Provided that nothing in this clause shall apply in relation to sums not exceeding twenty-five rupees;


    (v) 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:


    Provided that the requirements as to the preparation and signing of payment vouchers shall not apply in a case where the cash book maintained by the person contains adequate particulars in respect of the expenditure incurred by him.


    Explanation : In this rule,—


    (a) “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;


    (b) “cash book” means a record of all cash receipts and payments, kept and maintained from day-to-day and giving the cash balance in hand at the end of each day or at the end of a specified period not exceeding a [month];


    (c) “film artist” 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—

    (i) an actor;

    (ii) a cameraman;

    (iii) a director, including an assistant director;

    (iv) a music director, including an assistant music director;

    (v) an art director, including an assistant art director;

    (vi) a dance director, including an assistant dance director;

    (vii) an editor;

    (viii) a singer;

    (ix) a lyricist;

    (x) a story writer;

    (xi) a screen-play writer;

    (xii) a dialogue writer; and

    (xiii) a dress designer.


    (3) A person carrying on medical profession shall, in addition to the books of account and other documents specified in sub-rule (2), keep and maintain the following, namely :—


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


    (ii) 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.


    (4) The books of account and other documents specified in sub-rule (2) and sub-rule (3) [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:


    Provided that 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.


    (5) The books of account and other documents specified in sub-rule (2) and sub-rule (3) shall be kept and maintained for a period of [six] years from the end of the relevant assessment year:


    Provided that 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.


    (6) Notwithstanding anything contained in sub-rules (1) to (3), it shall not be necessary for any person carrying on any of the professions specified in sub-rule (1) to keep and maintain the books of account and other documents specified in sub-rule (2) or sub-rule (3) in relation to any previous year commencing before the first day of March, 1983.


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    2 Comments

    1. Thank you for your exhaustive coverage on this topic.

      I was guided by the FAQ on this topic on the IT Department portal. Good to note that the same is captured in the concluding paragraph here.

      ReplyDelete