Section 44AA of the Income Tax Act – Who Needs to Maintain Books of Accounts?

Section 44AA of the Income Tax Act – Who Needs to Maintain Books of Accounts?

Section 44AA of the Income Tax Act mandates certain businesses and professionals to maintain proper books of account. This provision is often overlooked by small businesses and professionals, but ignoring it can result in penalties. Let's understand what Section 44AA means, who it applies to, and what type of records one must maintain.

What is Section 44AA of the Income Tax Act?

Section 44AA of the Income Tax Act deals with the maintenance of accounts by certain persons carrying on a profession or business. Simply put, if you are engaged in certain notified professions or businesses, then you must maintain proper accounting records as per the guidelines laid down under this section.

The aim is to keep a transparent trail of financial transactions and income so the Income Tax Department can assess your taxable income accurately.

Applicability of Section 44AA of the Income Tax Act

Section 44AA becomes applicable to:

• Every person carrying on a legal, medical, engineering or architectural profession
• Any person in accountancy, interior decoration, technical consultancy, film, or information technology
• Any business or profession whose income exceeds ₹2.5 lakhs in any of the three preceding years

If your turnover exceeds ₹25 lakh in business or gross receipts exceed ₹10 lakh in profession, you're also covered under this section.

The applicability of Section 44AA of the Income Tax Act is not restricted only to professionals but also includes businesses falling under these thresholds. "

Professions Covered Under Section 44AA(1)

Here is the list of specified professions under Section 44AA(1):

• Legal
• Medical
• Engineering
• Architectural
• Accountancy
• Interior Decoration
• Technical Consultancy
• Film Artists (Actors, Directors, etc.)
• Authorized Representatives
• Company Secretaries
• Information Technology Professionals

So, if you belong to any of the above categories, you're required to maintain books—even if your income is below the threshold.

Books of Accounts Required Under Section 44AA

The books of accounts under Section 44AA of the Income Tax Act include:

• Cash book
• Journal (if accounts are maintained on a mercantile basis)
• Ledger
• Carbon copies of bills issued (over ₹25)
• Original bills received (over ₹50)
• Bank statements
• Inventory records

Professionals like doctors may also be required to maintain a daily patient register and inventory of medicines.

The maintenance of books of accounts as per the Income Tax Act is critical not just for compliance but also for accurately computing income and tax liability.

Section 44AA vs Presumptive Taxation

If you opt for Section 44ADA (presumptive taxation), then you're not required to maintain books of accounts under Section 44AA, provided your income is presumed as per law (i.e., 50% of gross receipts) and does not exceed ₹50 lakhs.

However, if you declare income lower than what is presumed, then Section 44AA becomes applicable and proper records must be kept.

Penalty for Non-Compliance

Failing to maintain required books under Section 44AA of the Income Tax Act can attract a penalty under Section 271A, which is ₹25,000.

In case of repeated default, stricter scrutiny and penalty provisions under the Income Tax Act may be invoked. That’s why it’s advisable to keep proper documentation, either by yourself or through a professional.

Real-Life Scenario

Let’s say Mr. Sharma is a freelance architect earning ₹8 lakh a year. As per Section 44AA of the Income Tax Act for AY 2024-25, since his income is above ₹2.5 lakh and he’s engaged in a notified profession, he must maintain books of accounts like cash book, bills, and ledger.

If he ignores this and gets a notice from the Income Tax Department, he may face a penalty and detailed scrutiny. "

Filing and Documentation Tips

• Keep soft and hard copies of all major transactions.
• Ensure invoices are numbered and dated.
• Separate business and personal transactions for clarity.
• Maintain records for at least 6 years for audit purposes.

Conclusion

Section 44AA of the Income Tax Act ensures transparency and financial discipline among professionals and small businesses. If you're earning above certain limits or belong to specified professions like medical, legal, or technical consultancy, you are required to maintain proper accounting records.

Not maintaining books can lead to notices, penalties, and unnecessary stress during assessments. It's always better to consult a CA and stay compliant.

Need help drafting books of accounts or clarifying if Section 44AA applies to you? Connect with our experts at CallMyCA.com today!