Important Keyword: Audit Report, Business and Profession Income, Section 44AB.
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Who is Required to Maintain Books of Accounts?
Section 44AA of the Income Tax Act outlines the requirement for certain professionals to maintain books of accounts. The provision applies to individuals engaged in specific professions where the gross receipts exceed a certain threshold. Here are the key points:
Applicable Professions:
Legal
Medical
Engineering
Architectural profession
Profession of accountancy
Technical Consultancy
Interior Decoration
Authorized Representative
Film Artist
Any other profession notified by the Board in the Official Gazette
Threshold for Maintenance:
If the total gross receipts in the profession exceed INR 1,50,000 in any one of the 3 years immediately preceding the previous year, or
If the profession is newly set up in the previous year, and the total gross receipts in that year are likely to exceed INR 1,50,000.
Books of Accounts to be Maintained:
Rule 6F specifies the books of accounts that need to be maintained, including:
Cash Book
Journal
Ledger
Carbon copies of bills and receipts issued by the professional
Non-Applicability:
Individuals engaged in these professions but falling below the prescribed threshold are not required to maintain books of accounts under Section 44AA.
Penalty for Non-Compliance:
Failure to maintain books of accounts as required by Section 44AA may lead to penalties under the Income Tax Act.
Total Gross Receipt in the profession exceeds INR 1,50,000 in any one of the 3 years immediately preceding the previous year. (where the profession has been newly set up in the previous year than in that case if his total gross receipts for that year are likely to exceed INR 1,50,000.)
–
Non- Specified Professions and Business
Income from business and profession exceeds INR 1,20,000. (In case newly set up business or profession if his income from business or profession is likely to exceed INR 1,20,000 during such previous year)
Total sales, turnover or gross receipts in business or profession exceeds INR 10,00,000 in any one of the 3 years immediately preceding the previous year. (In case of newly set up business or profession if his total sales, turnover or gross receipts is likely to exceed INR 10,00,000 during such previous year.)
Under Rule 6F of the Income Tax Act, certain specified professions have additional requirements for maintaining books of accounts and documents. Even if the gross receipts do not meet the threshold specified in Section 44AA, individuals in these professions must maintain proper records to enable the Assessing Officer to calculate taxable income. Here are the details:
Books of Accounts and Documents Required:
Cashbook: Records all day-to-day cash receipts, payments, and cash balances.
Journal: Records financial transactions in order by date, particularly if accounts are maintained under the mercantile system.
Ledger: Contains complete records of financial transactions, including assets, liabilities, equity, revenues, and expenses.
Carbon Copies of Bills: For bills issued exceeding INR 25.
Original Bills: For expenditure exceeding INR 50.
Additional Requirements for Medical Professionals:
Daily Case Registers (Form 3C): Includes details such as patient’s name, nature of service rendered, fees received, and date of receipt.
Inventory: Maintain records of stock of drugs, medicines, and other consumable accessories used in the profession, as on the first and last day of the previous year.
Location of Maintenance: The books of accounts and documents should be kept and maintained at the principal place of the profession or at the respective places where the profession is conducted.
Compliance with these rules ensures that professionals, especially in specified fields like medicine, maintain accurate financial records, facilitating tax assessment and compliance with income tax regulations.
Taxpayer
Profit/Loss
Applicable Taxing Section
Applicable as per Section 44AA
Business
Income > INR 1,20,000
Profit
Normal Provisions
Yes
Sales, turnover, gross receipts > INR 25 Lakh
Profit/Loss
Normal Provisions
Yes
Sales, turnover, gross receipts </= INR 25 Lakh
Proft/Loss
Presumptive Taxation – Section 44AD
No
Sales, turnover, gross receipts </= INR 25 Lakh
Profit/Loss
Normal Provisions
No
Turnover </= 2 Cr
Profit
Presumptive Taxation – Section 44AD
No
Turnover </= 2 Cr
Loss
Presumptive Taxation – Section 44AD
No
Turnover </= 2 Cr
Profit/Loss
Normal Provisions
Yes
Profession
Gross receipts </= 50 Lakh
Profit/Loss
Presumptive Taxation – Section 44AD
No
Gross receipts </= 50 Lakh
Profit/Loss
Normal Provisions
Yes
Under Section 44AA of the Income Tax Act, individuals engaged in certain professions are required to maintain books of accounts and other specified documents. These records must be preserved for a period of 6 years from the end of the relevant assessment year. Failure to maintain these records can result in a penalty of INR 25,000.
If the taxpayer is involved in international transactions or specified domestic transactions and fails to maintain the necessary information and documents, a penalty of 2% of the value of each international transaction may be imposed. However, if the taxpayer can demonstrate a reasonable cause for the failure, this penalty may not be levied.
Additionally, under Section 271A, a penalty may be imposed for failure to maintain accounting records as required by Section 44AA. The maximum penalty for this offense is INR 25,000. However, if the taxpayer can provide a reasonable cause for the failure, no penalty may be levied.
As for who needs to get their books of accounts audited under Section 44AB:
Businesses: If the turnover or gross receipts of a business exceed INR 1 crore in a financial year, they are required to undergo a tax audit.
Professionals: If the gross receipts from a profession exceed INR 50 lakhs in a financial year, they must undergo a tax audit.
Compliance with these requirements ensures proper record-keeping and tax compliance, minimizing the risk of penalties and ensuring smooth tax assessments.
Tax Payer
Audit of books of accounts when
An individual carrying on Business
Total sales, turnover or gross receipts, in business exceeds 1 Crore rupees in any previous year.
An individual carrying on Profession
Gross receipts in profession exceed 25 Lakh rupees in any previous year.
An individual covered under presumptive income scheme U/S 44AD
Income of business is lower than the presumptive income calculated as per section 44AD and the total income is more than the minimum income which is exempt from tax.
Which Tax Audit Reports to be Submitted and What are the Due Dates for the same?
Taxpayer
Audit Report
Prescribed particulars
Due Date of Audit
Due Date for Submission of Report
A person who carries on business or profession who is required to get his accounts audited
Form 3CA
Form 3CD
30th September of the assessment year
30th September of the assessment year
A person other than those listed above
Form 3CB
Form 3CD
30th September of the assessment year
30th September of the assessment year
In the case of international or specified domestic transactions, the time limit for audit and submission of report is November 30.
Failure to conduct the audit of accounting records as required by Section 44AB of the Income Tax Act may result in the imposition of a penalty under Section 271B.
The penalty amount is calculated as the lower of the following:
0.5% of the total sales, turnover, or gross receipts of the taxpayer’s business or profession, or
INR 1,50,000.
Taxpayers can avoid this penalty if they can demonstrate a reasonable cause for not having their accounting records audited. Providing a valid explanation for the failure can lead to the waiver of the penalty. However, it’s essential for taxpayers to ensure compliance with audit requirements to avoid penalties and maintain proper tax compliance.
Important Keyword: Business and Profession Income, Section 80C, Section 80D, Section 80E, tax deductions.
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Claim Expenses on Freelance Income
Exactly! Freelancers, often categorized under the income head “Income from Business and Profession,” can claim expenses related to their freelance work when filing their Income Tax Return (ITR) on the Income Tax e-Filing portal. This provision allows them to offset their taxable income by deducting legitimate business expenses, thereby reducing their overall tax liability.
Additionally, freelancers and professionals have the option to choose the presumptive taxation scheme under the Income Tax Act. This scheme simplifies the tax calculation process by allowing them to declare a specified percentage of their gross receipts as their income, without the need to maintain detailed books of accounts. It offers a more straightforward approach to taxation, particularly beneficial for small businesses and professionals with modest turnovers.
It seems like you’ve covered a comprehensive list of expenses that freelancers can claim against their income.
Let’s summarize the key points and reminders:
Rent: Expenses for rented premises used for business purposes can be claimed as deductions.
Repairs: Costs incurred for repairing equipment or tools essential for freelancing work are deductible.
Office Supplies: Stationery and other office-related expenses are eligible for deduction.
Electricity: If you work from a home office, a proportion of your electricity bills can be claimed as expenses.
Fuel Expenses: Commuting costs related to work can be claimed, proportionate to the business use.
Membership Fees: Fees paid for professional memberships directly related to your work are deductible.
Advertisement Expenses: Costs incurred for advertising your freelance services can be claimed.
Books, Magazines, Reference Material: Expenses related to books and references necessary for work can be deducted.
Traveling Expenses: Travel-related expenses such as tickets, meals, and accommodation can be claimed for business trips.
Depreciation: Depreciation on assets used for business purposes can be claimed as an expense over their useful life.
It’s important to keep in mind a few points:
Maintain proper records and receipts of all expenses.
If turnover/gross receipts don’t exceed Rs. 50 lakhs, maintaining books of accounts is not mandatory.
Deduct TDS where applicable, especially for professional services.
Be mindful of the Rs. 20,000 limit for cash payments to a single person in a day.
Utilize deductions available under Chapter VI-A of the Income Tax Act for additional tax benefits.
By adhering to these guidelines, freelancers can maximize their tax deductions and ensure compliance with income tax regulations.
Important Keyword: Business and Profession Income, Presumptive Taxation Scheme.
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The presumptive taxation scheme for professionals is a beneficial provision aimed at providing relief to small taxpayers from the complexities of maintaining extensive books of accounts. This scheme operates under Section 44ADA of the Income Tax Act, offering professionals the option to declare their income at a prescribed rate, thereby simplifying their tax obligations.
What is Section 44ADA of the Income Tax Act?
In the Budget of 2016, the Finance Minister introduced the presumptive taxation scheme tailored for specific professionals, outlined under Section 44ADA of the Income Tax Act. Starting from the fiscal year 2016-17 onwards, professionals with gross receipts amounting to INR 50 lakhs or less became eligible to avail themselves of the presumptive taxation benefits as per Section 44ADA. Subsequently, in the Budget of 2023, the threshold under Section 44ADA was augmented to Rs 75 lakhs from the previous Rs 50 lakhs. However, this adjustment was subject to the condition that cash receipts should not exceed 5%.
Section 44ADA: Eligibility
Under Section 44ADA of the Income Tax Act, a resident in India engaged in certain specified professions can avail themselves of the benefits of the Presumptive Taxation Scheme. These professions include legal, medical, engineering, architecture, accountancy, technical consultancy, interior decoration, film artists, and authorized representatives. However, starting from the Assessment Year 2021-2022, only individuals and partnership firms, excluding Limited Liability Partnership Firms, are eligible to opt for the scheme.
To qualify for the Presumptive Taxation Scheme two conditions must be met:
Gross receipts of the profession should not exceed INR 75 lakhs.
The taxpayer must report 50% or more of the gross receipts as income in the Income Tax Return (ITR).
Let’s consider an example:
Arjun, a freelance designer, earned total receipts of 45 lakhs during the financial year 2022-2023. His total expenses amounted to INR 25 lakhs, covering various costs such as software subscriptions, salary, rent, electricity, and travel expenses.
If Arjun chooses not to opt for Presumptive Taxation:
He will pay tax on INR 20 lakhs as per the applicable slab rates.
Arjun must maintain books of accounts as per Section 44AA.
Since his profit is less than 50% of gross receipts and his total income exceeds the basic exemption limit of INR 2.5 lakhs, he must undergo a Tax Audit.
Alternatively, if Arjun opts for Presumptive Taxation under Section 44ADA:
He will pay tax on INR 22.5 lakhs as per the slab rates.
Arjun is not required to maintain books of accounts as per Section 44AA.
Since his profit is at least 50% of gross receipts, he is exempt from Tax Audit requirements.
Income Tax on Presumptive Income under Section 44ADA:
Income under this scheme is classified under the head PGBP (Profits and Gains from Business or Profession) and is taxable at slab rates.
Taxpayers cannot claim expenses, but they can avail deductions under Chapter VI-A.
Payment of Advance Tax:
Taxpayers opting for the presumptive taxation scheme under Section 44ADA should pay the entire advance tax amount by March 15 of the financial year. Failure to do so may result in interest levied under Section 234C if the tax liability exceeds INR 10,000.
Income Tax Return Form:
Taxpayers should report such income as PGBP Income and file Form ITR-4 on the Income Tax Website, mentioning the specified Business and Profession Codes.
Tax Audit and Books of Accounts for Presumptive Income:
Taxpayers reporting income at 50% or more of gross receipts are not required to maintain books of accounts under Section 44AA.
Tax Audit is applicable if the declared income is less than 50% of gross receipts and the total income exceeds INR 2,50,000, as per Section 44AB(d).
Important Keyword: Business and Profession Income, Presumptive Taxation Scheme, Section 44AD.
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Section 44AD: Presumptive Taxation for Business
The Presumptive Taxation Scheme, introduced by the Central Board of Direct Taxes (CBDT), aims to alleviate the burden on small taxpayers by simplifying the process of maintaining books of accounts and undergoing audits. Section 44AD of the Income Tax Act outlines this scheme, which is specifically designed for businesses.
Under Section 44AD, businesses with a turnover of up to INR 3 Crore are eligible to avail the benefits of presumptive taxation. This scheme offers a simplified method for calculating taxable income, allowing eligible businesses to declare their income at a prescribed rate based on their turnover, without the need for detailed accounting records or audits.
Section 44AD: Eligibility
Under Section 44AD of the Income Tax Act, certain taxpayers engaged in business activities are eligible to opt for the Presumptive Taxation Scheme. Eligible taxpayers include resident individuals, resident Hindu Undivided Families (HUFs), and resident partnership firms (excluding Limited Liability Partnerships or LLPs).
However, there are certain categories of taxpayers who cannot avail of the benefits of the Presumptive Taxation Scheme under Section 44AD. These include non-resident taxpayers, LLPs, and entities other than individuals, HUFs, or partnership firms. Additionally, taxpayers claiming deductions under specified sections such as Section 10A, 10AA, 10B, 10BA, or Section 80H to 80RRB are not eligible for this scheme.
Furthermore, businesses engaged in specific activities such as plying, hiring, or leasing of goods carriages under Section 44AE, agency business, or earning brokerage or commission income are also excluded from opting for the Presumptive Taxation Scheme under Section 44AD.
To calculate the presumptive income under Section 44AD of the Income Tax Act, taxpayers need to fulfill two conditions:
Gross Sales or Turnover: The gross sales or turnover of the business should be equal to or less than INR 3 Crore.
Reporting Income: The taxpayer should report 6% or 8% (depending on the nature of transactions) or more of the gross sales or turnover as income in their Income Tax Return (ITR).
For non-digital transactions, the prescribed rate is 8%, while for digital transactions, it is 6%. This means that taxpayers engaged in businesses with non-digital transactions can consider 8% of their gross sales or turnover as their presumptive income. Similarly, for businesses with digital transactions, 6% of the gross sales or turnover can be considered as presumptive income.
Taxpayers meeting these conditions can opt for the Presumptive Taxation Scheme under Section 44AD and calculate their income accordingly for tax purposes.
Given the scenario, Akshay’s trading business meets the eligibility criteria to opt for the Presumptive Taxation Scheme under Section 44AD:
Gross Sales: Akshay’s gross sales for FY 2023-24 are INR 1.8 Crore, which is less than INR 3 Crore, making him eligible for the scheme.
Reporting Income: Akshay needs to report 6% or 8% of the gross sales as income, depending on the nature of transactions. Since the sales include both cash and non-cash payments, and there is no indication of the nature of transactions (digital or non-digital), we’ll consider the higher rate of 8% for calculation purposes.
Now, let’s calculate Akshay’s presumptive income under Section 44AD:
Presumptive Income = 8% of Gross Sales Presumptive Income = 8% of INR 1.8 Crore Presumptive Income = INR 14,40,000
Since Akshay’s presumptive income (INR 14,40,000) is at least 6% of the gross receipts, he can opt for the Presumptive Taxation Scheme under Section 44AD. As a result:
Akshay can pay tax on INR 14,40,000 as per the applicable slab rate without maintaining books of accounts as per Sec 44AA.
He is not required to undergo Tax Audit since the income reported meets the minimum threshold required under the scheme.
Under the Presumptive Taxation Scheme outlined in Section 44AD, the following considerations apply:
Income Tax Calculation:
Income generated under the presumptive taxation scheme falls under the category of business income classified as Profits and Gains of Business or Profession (PGBP). This income is subject to taxation at the slab rates specified in the Income Tax Act.
Expense Claiming:
Taxpayers reporting income under the presumptive taxation scheme cannot claim expenses against the reported income. However, they are eligible to claim deductions under Chapter VI-A of the Income Tax Act. For instance, in the case of a partnership firm opting for presumptive taxation, partner’s remuneration and interest on capital can be claimed as expenses.
Advance Tax Payment:
Taxpayers who opt for the presumptive taxation scheme must ensure the payment of the entire advance tax amount on or before the 15th of March of the financial year. Failure to make advance tax payments by the due date may result in the imposition of interest under Section 234C. However, interest is levied only if the tax liability exceeds INR 10,000.
ITR Filing:
Taxpayers choosing presumptive taxation under Section 44AD are required to report such income as Profits and Gains of Business or Profession (PGBP) and file Form ITR 4 on the Income Tax Website. They must specify the relevant Business and Profession Codes based on the nature of their profession. If the taxpayer earns income from capital gains in addition to presumptive income, they should file Form ITR 3.
Under Section 44AD, income taxed presumptively is categorized as business income under the head “Profits and Gains of Business or Profession” (PGBP). This income is subject to taxation at the slab rates specified in the Income Tax Act.
Expense deductions against this income are limited. Taxpayers reporting a fixed percentage of gross receipts as income cannot claim expenses directly. However, they can still avail of deductions under Chapter VI-A of the Income Tax Act. In the case of a partnership firm opting for presumptive taxation, partner’s remuneration and interest on capital can be claimed as expenses.
Advance tax payments are a crucial aspect for taxpayers opting for the presumptive taxation scheme under Section 44AD. The entire advance tax amount must be paid on or before the 15th of March of the financial year. Failure to do so may result in interest being levied under Section 234C. However, interest is charged only if the tax liability exceeds INR 10,000.
Tax Audit and Books of Accounts for Presumptive Income under Section 44AD
For filing income tax returns (ITR), taxpayers under presumptive taxation (Section 44AD) should report their income as PGBP Income and utilize Form ITR 4 on the Income Tax Website. They are required to specify the relevant Business and Profession Codes based on the nature of their profession. If the taxpayer has income from capital gains in addition to presumptive income, they should file Form ITR 3.
Adhering to these guidelines ensures compliance with income tax regulations and facilitates a smooth tax filing process for taxpayers opting for the presumptive taxation scheme under Section 44AD.
Under Section 44AA of the Income Tax Act, if a taxpayer chooses the presumptive taxation scheme under Section 44AD and reports income at a rate of 6% or 8% or more of the gross receipts, they are relieved from the obligation to maintain books of accounts.
However, if the taxpayer reports income lower than 6% or 8% of gross receipts and their total income exceeds the basic exemption limit of INR 2,50,000, they must maintain books of accounts and have them audited under Section 44AB(e).
Section 44AD of Income Tax: 5 Year Rule
Additionally, there’s a provision known as the “5 Year Rule” under Section 44AD. According to this rule, if a taxpayer opts for the presumptive taxation scheme in a particular financial year, they are required to continue opting for it for the subsequent five financial years continuously. Failure to comply with this rule will render the taxpayer ineligible to avail the benefits of the presumptive taxation scheme for the next five assessment years. For instance, if a taxpayer chooses the Section 44AD scheme for the assessment years 2018-19 and 2019-20 but opts out of it for the assessment year 2020-21, they will lose eligibility for the scheme for the subsequent five assessment years, from 2021-22 to 2025-26.
Important Keyword: AMT, Business and Profession Income, Chapter VI-A, Slab Rates.
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AMT – Alternative Minimum Tax under Section 115JC
The Income Tax Department introduced the Alternate Minimum Tax (AMT) as a measure to ensure that taxpayers, excluding companies, contribute a minimum amount of tax, particularly those who exploited incentives and deductions excessively, resulting in zero tax liability. To curb misuse and promote fair taxation, the government implemented Minimum Alternate Tax (MAT) for companies and AMT for other taxpayers.
AMT aims to collect a minimum level of tax from eligible taxpayers, with provisions allowing for the carry-forward of AMT credits to offset future tax liabilities.
Applicability of Alternative Minimum Tax:
Individual, Hindu Undivided Family (HUF), Association of Persons (AOP), or Body of Individuals (BOI) with adjusted total income exceeding INR 20 lakhs.
Any taxpayer, excluding companies, regardless of total income.
AMT provisions apply to eligible taxpayers under the following conditions:
Claiming deductions under Sections 80H to 80RRB, excluding Section 80P.
Claiming deductions under Section 35AD.
Claiming deductions under Section 10AA.
AMT Rate & Adjusted Total Income
Rate of Alternative Minimum Tax is 18.5% of the Adjusted Total income. In addition to this, surcharge and cess are applicable. Calculate the adjusted total income in the following manner:
Particulars
Amount (INR)
Taxable Income
XXXX
Add
Deduction claimed u/s 80H to 80RRB (except 80P)
XXXX
Add
Deduction claimed u/s 35AD reduced by regular depreciation allowed as per Section 32
XXXX
Add
Deduction claimed u/s 10AA
XXXX
Adjusted Total Income
XXXX
AMT – 18.5% of Adjusted Total Income
XXXX
If the provisions of Alternative Minimum Tax (AMT) apply to a taxpayer, the tax liability would be higher of the following:
Tax Liability as per the normal provisions of the Income Tax Act:
Calculate the Total Income of the taxpayer from all sources of income. After claiming deductions under Chapter VI-A, compute the Tax Liability on the Total Income as per the applicable slab rates.
Tax Liability under AMT:
Calculate the Adjusted Total Income by adding back the deductions claimed under specified sections. Apply the AMT rate of 18.5% to the Adjusted Total Income. Additionally, surcharge and cess, if applicable, are added to the AMT amount for final computation. Compare the tax liability calculated under both methods, and the higher amount will be the taxpayer’s tax liability for that financial year.
This ensures that if the tax liability computed under the normal provisions of the Income Tax Act is lower than the tax liability under AMT, the taxpayer will be required to pay tax as per the AMT provisions, ensuring a minimum level of tax payment.
Scenario Analysis:
Samir’s Taxable Income and AMT applicability.
Aryan Enterprises’ AMT Credit and utilization.
Samir’s Case:
Taxable Income: INR 18,00,000.
Deduction under Section 80QQB: INR 3,00,000.
Adjusted Total Income: INR 21,00,000.
AMT Applicability: Adjusted Total Income > INR 20 lacs.
Tax Liability Calculation:
Normal Provisions: INR 3,66,600.
AMT Provisions: INR 4,04,040.
Final Tax Liability: Higher of the two: INR 4,04,040.
AMT Credit Utilization:
Aryan Enterprises’ FY 2019-20: Normal Tax – INR 15,00,000, AMT – INR 18,00,000.
Carry Forward AMT Credit: INR 3,00,000.
FY 2020-21: Normal Tax – INR 10,00,000, AMT – INR 9,00,000.
Utilized AMT Credit: INR 1,00,000, Remaining: INR 2,00,000.
CA Report:
Obtain Form 29C from a Chartered Accountant.
Certification of Adjusted Total Income and AMT compliance.
