Under Section 44AD of the Income Tax Act, taxpayers who opt for the presumptive taxation scheme are not required to maintain detailed books of accounts as per the provisions of Section 44AA. This is one of the major advantages of the presumptive taxation scheme, aimed at reducing the compliance burden for small businesses and professionals. Here’s a detailed explanation of the requirements and exceptions:

1. No Requirement to Maintain Books of Accounts

Taxpayers opting for Section 44AD, which applies to small businesses with gross turnover or receipts of up to ₹2 crore, are exempt from the requirement to maintain the detailed books of accounts that are typically required under Section 44AA. This means that eligible taxpayers are not required to keep records like:

• Cashbooks
• Ledgers
• Journals
• Invoices for sales and purchases
• Profit and loss statements
• Balance sheets

Instead, they can declare their income as a fixed percentage (6% or 8%) of their gross turnover or receipts, without needing to track their actual income or expenses for tax purposes.

2. Exception: Audit Requirement in Specific Cases

While Section 44AD generally frees taxpayers from maintaining detailed books of accounts, there are certain conditions where the taxpayer would still need to maintain accounts and undergo an audit.

(a) Lower Income Declaration:

If the taxpayer declares income less than the presumptive rates specified in Section 44AD (i.e., less than 6% or 8% of turnover), and their total income exceeds the basic exemption limit (₹2.5 lakh for individuals below 60 years of age, ₹3 lakh for senior citizens, or ₹5 lakh for super senior citizens), they must:

• Maintain books of accounts as per the provisions of Section 44AA.
• Get their accounts audited under Section 44AB.

Example:

• If a taxpayer with a turnover of ₹1 crore declares income of ₹4 lakh (which is less than 8% of ₹1 crore = ₹8 lakh) and their total income exceeds ₹2.5 lakh (basic exemption limit), they will be required to maintain detailed books of accounts and get their accounts audited.

(b) Opting Out of Section 44AD:

If a taxpayer opts out of the Section 44AD presumptive scheme after using it, they are required to maintain books of accounts and get their accounts audited for the next five years. This is to ensure consistency in tax reporting.

3. Records to Keep for Verification Purposes

Even though taxpayers opting for Section 44AD are not required to maintain formal books of accounts, it is advisable to maintain basic records for verification and compliance purposes. Some of these records include:

• Sales Invoices: Records of all sales transactions, including invoices and receipts.
• Purchase Invoices: Details of purchases made for the business, especially if these are significant or large.
• Bank Statements: A record of transactions that show inflows and outflows for the business, as this is often a good measure to cross-check turnover.
• Proof of Digital Receipts: If claiming income at the lower presumptive rate of 6%, maintain records of digital transactions (such as bank transfers, card payments, etc.) to substantiate the claim.

Maintaining these basic records can help in case the tax authorities seek clarification or conduct an inquiry into your financials, even though formal accounting records are not mandatory.

4. Books of Accounts under Section 44AD vs Regular Businesses

For businesses not opting for Section 44AD, the Income Tax Act mandates maintaining the following under Section 44AA:

• Cash Book: A record of daily cash receipts and payments.
• Ledger: A book of accounts that records each financial transaction in various categories (e.g., sales, expenses).
• Journal: A chronological record of all financial transactions.
• Inventory Records: For businesses dealing in goods, an inventory register to track stock in hand.
• Vouchers: Supporting documents for each transaction.

However, under Section 44AD, there is no such requirement, making it much easier for small taxpayers.

5. Implications of Not Maintaining Books of Accounts Under Section 44AD

• No Audit Requirement: Taxpayers opting for Section 44AD are exempt from the need to get their accounts audited unless they declare income below the presumptive rate or opt out of the scheme.
• Simple Tax Filing: Filing income tax under Section 44AD is straightforward, as taxpayers only need to report a percentage of their turnover or receipts and are exempt from the complexities of accounting and audits.

Conclusion

For small businesses with a turnover of up to ₹2 crore, Section 44AD provides a hassle-free way to compute income without maintaining detailed books of accounts. As long as the taxpayer declares income at or above the presumptive rates (6% for digital transactions and 8% for cash transactions), they are not required to maintain formal accounting records. However, it is always a good idea to keep basic transactional records for compliance purposes and to address any queries from the Income Tax Department.