The Thumb Rule
Book-keeping is the art of recording business transactions in a systematic manner. Book-keeping is the art of correctly recording in books of account all those business transactions that result in the transfer of money or money’s worth.
All the persons whether they are having an individual business or partnership firms or company or LLP or HUF or even they are professionals, are always required to maintain certain books of accounts in order to manage their budget and assess their total and taxable income. Income Tax Act, 1961 and Companies Act, 1956 enforces separate requirements and provisions relating to maintenance of books of accounts. Both the enforceable acts is not clearly indicative of addressing the question – Why do companies and LLPs need to maintain books of accounts. Here lies the answer.
Common Myths and Misconceptions
Since a paragraph would not justify the most important extract of this topic, we have decided to address this headline in the underlined FAQs :
Doubt 1 : Since my business is running in losses currently, I am not supposed to maintain the books of accounts.
Doubt 2 : My company has not generated a single rupee of revenue till date. Why do I need to maintain books of accounts?
Doubt 3 : Is auditing possible without preparing books of accounts?
Doubt 4 : Since my company is new and we are not serious financial crunch, we would only like to file the annual ROC returns without maintaining books of accounts?
Doubt 5 : My LLP is inactive since the date of inception. Should I maintain books of accounts?
Doubt 6 : My company has not prepared books of accounts for the last three years. I wish to prepare the books of accounts from this financial year and file the ROC annual returns and income tax returns. Is is possible?
As per section 44AA of Income Tax Act 1961
In relation to any other persons engaged in any other profession or carrying on any business other than section 44AA(1), the requirement of compulsory maintenance of books of accounts applies
- If the income from business or profession exceeds Rs 120000 or
- The turnover or gross receipts exceed Rs 10 Lakhs in any one of the three years immediately preceding the previous year.
Keep and maintain such books of account and other documents as may enable the Assessing Officer to compute his total income in accordance with the provisions of this Act.
- The Board may, having regard to the nature of the business or profession carried on by any class of persons, prescribe, by rules, the books of account and other documents including inventories, wherever necessary to be kept and maintained under sub-section (1) or sub-section (2), the particulars to be contained therein and the form and the manner in which and the place at which they shall be kept and maintained.
- The Income Tax Appellate Tribunal Delhi in its decision (1998) 97 Taxmann 273(Magzine)/60T.T.J. 278 has held that there is no rule made to the effect that which books of accounts are required to be made by the persons carrying on business covered u/s 44AA(2), therefore if the assessee has kept the details of Incomes and expenditures then no penalty shall be levied u/s 271A.
As per section 209 of the companies Act 1956:
- As per section 209(1) of the companies Act 1956, it has been stated that each and every company shall keep proper books of account at its registered office with respect to:
a) All sums of money whether received or expended therewith the matters in respect of which such receipt and expenditure takes place by the company;
b) All sales and purchases of goods by the company;
c) The assets and liabilities of the company;
d) In the case of a company pertaining to any class of companies engaged in production, processing, manufacturing or mining activities, such particulars relating to utilisation of material or labour or to other items of cost as may be prescribed, if such class of companies is required by the Central Government to include such particulars in the books of Account. Provided that all or any of the books of account aforesaid may be kept at such other place in India as the Board of directors may decide and when the Board of directors so decides, the company shall, within seven days of the decision, file with the Registrar a notice in writing giving the full address of that other place.
As per provisions of section 209(2) where a company has a branch office, in or outside India, then the company shall be deemed to have complied with the provisions of section 209(1), if proper books of account relating to the transactions effected at the branch office are kept at that office and proper summarized returns, made up to dates at intervals of not more than three months, are sent by the branch office to the company at its registered office or the other place referred to in section 209(1).
For the purposes of sections 209(1) and 209(2),books of account shall not be deemed to be kept properly with respect to the matters specified therein,-
a) If books not kept there as are necessary to give a true and fair view of the state of affairs of the company or branch office, as the case may be, and to explain its transactions;
b) If such books are not kept on accrual basis and according to the double entry system of accounting.
Inspection of books of accounts:
As per section 209(4) it is stated that inspection of the books of accounts, papers and other books shall be open by any directors but during the business hours. Section 2(8) defines “books and paper” and “book or paper” includes accounts, deed, vouchers, documents and writings. Routine inspections are carried out by the registrar of companies for checking compliance of various provisions of the companies’ act 1956 to keep a check on the performance or efficiency of the companies. Inspection are also carried out under SEBI/ CRPC to ensure that the company has not falsified its books of accounts or the companies fund have been misappropriated or the management has not misused its fiduciary position for any personal advantage.
Time limit of preservation of books of accounts:
As per section 209(4A) the books of account of every company relating to a period of not less than eight years immediately preceding the current year together with the vouchers relevant to any entry in such books of account shall be preserved properly: Provided that in the case of a company incorporated less than eight years before the current year, the books of account for the entire period preceding the current year together with the vouchers relevant to any entry in such books of account shall be so preserved.
Consequences of Non maintenance of books of accounts:
As per section 209(5), with the requirements of this section if any person referred to in section 209(6) fails to take reasonable steps to secure compliance and where his/her own willful act has been the cause of any default by the company there under then he shall in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to Rs. 10000, or may be with both. Provided that in any proceedings against a person in respect of an offence under this section consisting of a failure to take reasonable steps to secure compliance by the company with the requirements of those requirements were complied with and was in a position to discharge that duty. Further, no person shall be sentenced to imprisonment for any such offence unless it was committed willfully. If the accused person can prove that the act committed was not willful then imprisonment is not applicable. Failure to maintain books of accounts and other documents or to retain them as required u/s 44AA attracts penalty of Rs. 25000 u/s 271A. The penalty can be imposed by the assessing officer or CIT(Appeal).
We hope that we had been able to address the importance and compulsion provisions of maintenance of books of accounts and have simultaneously answered the question : Why do companies and LLPs need to maintain books of accounts.