Section 44AA(2)(i)&(ii) of the Income Tax Act imposes obligations for the maintenance of books in business and professions. Understanding these provisions is crucial for individuals and entities involved in business activities. This article aims to explain the requirements of Section 44AA(2)(i)&(ii), highlighting the differences between existing businesses and newly set up ones, and discussing suggestions for simplification and amendment.
Section 44AA(2)(i) applies to already existing businesses and mandates the maintenance of books if the income exceeds a specified threshold or turnover surpasses a certain limit in any of the three years immediately preceding the previous year. On the other hand, Section 44AA(2)(ii) applies to newly setup businesses or professions and requires the maintenance of books if the income or turnover is likely to exceed the prescribed limit during the current year.
The main point of difference between the two provisions is the basis for determining income or turnover. Section 44AA(2)(i) considers the actual income or turnover of the three preceding years, while Section 44AA(2)(ii) allows for forecasting.
However, these clauses have been deemed illogical by some, as existing businesses may be exempt from maintaining books in the current year, even if their income or turnover does not exceed the threshold in all three preceding years. Conversely, newly set up businesses are required to maintain books in the current year, even if their income or turnover is only likely to exceed the limit.
What is mentioned in 44AA(2)(i)&(ii)?
| 44AA(1) | Every specified profession shall compulsorily maintain books. |
| 44AA(2)
|
Every person carrying on any business or profession other than a specified profession shall maintain books if: (i) Income exceeds Rs 1.20 lakhs or Turnover (TO) exceeds Rs 10 lakhs in any one of the three years immediately preceding the previous year (PY). (ii) If the business/profession is newly set up in any previous year, and income is likely to exceed Rs 1.20 lakhs or TO is likely to exceed Rs 10 lakhs during the PY. For individual/HUF, the above Rs 1.20 lakhs and Rs 10 lakhs are substituted with Rs 2.5 lakhs and Rs 25 lakhs, respectively. |
Point of difference between Section 44AA(2)(i) and (ii):
| POINT | 44AA(2)(i) | 44AA(2)(ii) |
|---|---|---|
| Applicable to whom | ALREADY EXISTING BUSINESS | BUSINESS NEWLY SETUP in the previous year |
| Which year’s income/TO is reckoned? | Three years immediately preceding the previous year | During the previous year |
| Actual/Forecast | Based on last 3-year actual income/TO | Based on forecasting |
On plain reading of Section 44AA(2)(i)&(ii), an ALREADY EXISTING BUSINESS need not maintain books in the current year if income and TO do not exceed the limit in all three PYs immediately preceding the PY. However, if the BUSINESS IS NEWLY SETUP in the PY, it shall maintain books in the current year, even if income/TO is LIKELY to exceed the limit in the CY.
Example
| FY 19-20 | Income and TO below limit |
| FY 20-21 | Income and TO below limit |
| FY 21-22 | Income and TO below limit |
| FY 22-23 | Eg : Turnover Rs 75 lakh |
For the above example, if the business is ALREADY EXISTING BUSINESS, it need not maintain books for FY 22-23, but if the business is NEWLY SETUP during FY22-23, it has to maintain book. The author is of the humble opinion that the clauses are illogical in nature.
Direct tax code
The same illogic exists in the Direct Tax Code Bill, specifically in clause 87(3)(b)(i)(ii) &(iii).
Suggestion
To address these illogicalities, it is recommended that Section 44AA(2)(i)&(ii) be amended and simplified. One suggestion is to consider the income or turnover of the current year instead of the three preceding years. This amendment would streamline the requirements and eliminate inconsistencies.
Conclusion: Understanding the provisions of Section 44AA(2)(i)&(ii) is crucial for individuals and entities involved in business and professions. The differences between existing businesses and newly set up ones should be carefully considered to ensure compliance with the maintenance of books requirement. Suggestions for simplification and amendment, such as basing the assessment on the current year’s income or turnover, can contribute to a more logical and streamlined regulatory framework.
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The author can be reached at sivaraman004@gmail.com
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