Pay penalty for failing to keep books of accounts, say analysts

The Pune Bench of the Income-Tax Appellate Tribunal recently confirmed the penalty imposed on a doctor under Section 271A of the Income-Tax (I-T) Act, 1961, for not maintaining books of accounts.  

Suresh Surana, founder, RSM India, says, “According to Section 271A of the I-T Act, if any person fails to maintain books of accounts and other documents for any financial year, as required by Section 44AA and Rule 6F, or retain them for seven financial years, tax authorities can direct him/her to pay penalty.”

Sections 44AA and 271A of the Act, are interconnected. The for­mer requires professionals and business perso­ns to maintain books of ac­c­ounts, the latter spells out the consequences of not doing so.  

Ajit Shah, partner, N. A. Shah Associates, says, “Failure to maintain these records or retain them for six years from the end of the relevant assessment year can result in a penalty of Rs 25,000.”

Sameer Jain, managing partner, PSL Advocates & Solicitors, says, “If assessment under Section 147 is launched, then books of accounts and other documents must be retained for six years or until the assessment is completed, whichever is later.”

Who needs to maintain

The law requires persons engaged in the following professions to maintain accounts if their gross receipts exceed certain limits in any of the three years immediately preceding the relevant financial year: medicine, engineering, accountancy, legal, architecture, technical consultancy, interior decoration, film artists, authorised representative, and board-notified persons, such as doctors, engineers, chartered accountants, company secretaries, lawyers, actors, etc.

Amay Jain, associate, Victoriam Legalis Advocates & Solicitors, says, “The purpose is to enable the assessing officer to compute an assessee’s total income in accordance with the I-T Act, 1961.”

Records you must maintain

A few key documents must be maintained. “Cash book, journal, ledger, and copies of invoices raised on clients, invoices for expenditures claimed, etc should be maintained,” says Shah.

Medical professionals like doctors, surgeons, and physicians must in addition maintain a daily case register and details of inventory of drugs, medicines, consumables, and accessories. These records must be kept at the place of business or profession.

Exceptions to Rule 6F

Rule 6F states that books of accounts and other documents need to be retained for six years from the end of the relevant assessment year. In some cases, an exception can be made to Rule 6F of the I-T Rules.

Inderpal Singh Pasricha, partner, I. P. Pasricha & Co, says, “In case of a new business or profession, if the income, turnover or receipt for the current year, as the case may be, is not likely to exceed the threshold limit, the assessee shall not be required to maintain books of accounts.”

What experts suggest

Experts say it has now become a standard practice to pay a fine instead of maintaining books of accounts and other documents. “This is because the penalty levied is paltry. In the pharmaceutical industry, for instance, it is around Rs 25,000 — much lower than the profits earned from criminal behaviour,” says Jain.

Many physicians either don’t maintain a daily case register or inventory record (especially in private clinics) or maintain them in an unorganised manner. Experts say these records must be maintained in an organised way to mitigate the risk of penalty.

Those who opt for presumptive taxation also get exempted.

“Medical professionals having gross receipts up to Rs 50 lakh and opting for presumptive taxation at 50 per cent or more of gross receipts are not required to maintain such accounts,” says Shah.

Professionals and businesses should monitor their income, gross receipts, or turnover during a financial year. If they fall within the purview of Section 44AA, they must maintain books of accounts.

“There can be tax implications as well. In tax assessment proceedings, if books of accounts are not available, authorities could assess income at a higher level,” adds Surana.