Introduction
Section 44 of the Income Tax Act is an important provision that deals with the manner of computation of profits and gains of a business or profession. It lays down the rules for determining the taxable income of a business or profession and specifies the methods of accounting that can be used for this purpose.
Methods of Accounting
Under Section 44 of the Income Tax Act, businesses and professions can use either of the following methods of accounting for computing their taxable income:
Cash Basis: Under the cash basis of accounting, income and expenses are recorded when they are actually received or paid. This method is simple and easy to understand, but it may not give an accurate picture of the true financial position of the business or profession.
Mercantile Basis: Under the mercantile basis of accounting, income and expenses are recorded when they are earned or incurred, irrespective of whether they have been received or paid. This method gives a more accurate picture of the true financial position of the business or profession.
Change in Method of Accounting
Once a business or profession has adopted a particular method of accounting, it cannot change the method without the prior approval of the Income Tax Department. If a change in the method of accounting is made, the business or profession must inform the department and obtain approval before filing its tax return.
Compliance Requirements
Businesses and professions that have a turnover of more than Rs. 2 crore or gross receipts of more than Rs. 50 lakh in a financial year must get their accounts audited by a chartered accountant. The audit report must be submitted along with the tax return.
Sub-sections of Section 44
Section 44 of the Income Tax Act consists of several sub-sections that provide further details on the methods of accounting, compliance requirements, and consequences of non-compliance. These sub-sections are:
- Sub-section (1): This sub-section lays down the general rule that businesses and professions must maintain books of account and adopt a method of accounting to compute their taxable income.
- Sub-section (2): This sub-section specifies the methods of accounting that businesses and professions can adopt for computing their taxable income, i.e., the cash basis or mercantile basis.
- Sub-section (3): This sub-section allows businesses and professions to change their method of accounting, subject to certain conditions and with the prior approval of the Income Tax Department.
- Sub-section (4): This sub-section specifies the compliance requirements for businesses and professions, i.e., maintenance of books of account, audit of accounts, and filing of tax returns.
- Sub-section (5): This sub-section provides the consequences of non-compliance with the provisions of Section 44, i.e., penalty and prosecution.
Important Points to Note
- Maintaining books of account is mandatory for all businesses and professions, irrespective of their turnover or gross receipts.
- Businesses and professions can choose to adopt either the cash basis or mercantile basis of accounting for computing their taxable income.
- A change in the method of accounting can only be made with the prior approval of the Income Tax Department.
- Businesses and professions with a turnover of more than Rs. 2 crore or gross receipts of more than Rs. 50 lakh in a financial year must get their accounts audited by a chartered accountant and file the audit report along with the tax return.
- Non-compliance with the provisions of Section 44 can result in penalties and prosecution.
Applicability of Section 44
Section 44 of the Income Tax Act applies to all types of businesses and professions, including individuals, partnerships, companies, and LLPs. The section is applicable to both residents and non-residents who earn income in India through their business or profession.
For individuals and HUFs (Hindu Undivided Families), Section 44AA of the Income Tax Act specifies the limits for maintenance of books of account and audit requirements based on their turnover or gross receipts.
For companies and LLPs, the Companies Act and LLP Act respectively specify the requirements for maintenance of books of account and audit.
Impact of Section 44 on Tax Liability
The method of accounting adopted by a business or profession can have a significant impact on its tax liability. For example, a business that adopts the cash basis of accounting may show lower profits and pay lower taxes in a particular financial year compared to a business that adopts the mercantile basis of accounting.
The change in the method of accounting can also have an impact on the tax liability of a business or profession. For instance, if a business changes its method of accounting from the cash basis to the mercantile basis, it may show higher profits in the year of change and pay higher taxes.
Therefore, it is important for businesses and professions to carefully consider the method of accounting they adopt and the implications of any change in the method of accounting.
Conclusion
Section 44 of the Income Tax Act lays down the rules for computation of taxable income for businesses and professions. The method of accounting used by a business or profession is an important determinant of its taxable income. Businesses and professions must comply with the requirements of the Income Tax Act and get their accounts audited if necessary.
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Frequently Asked Questions (FAQ’s)
- What is the purpose of Section 44 of the Income Tax Act?
The purpose of Section 44 is to provide guidelines for the computation of taxable income for businesses and professions.
2. Who is required to maintain books of account as per Section 44?
All businesses and professions, irrespective of their turnover or gross receipts, are required to maintain books of account as per Section 44.
3. What are the methods of accounting that businesses and professions can adopt as per Section 44?
Businesses and professions can adopt either the cash basis or mercantile basis of accounting for computing their taxable income.
4. Can a business or profession change its method of accounting as per Section 44?
Yes, a business or profession can change its method of accounting, subject to certain conditions and with the prior approval of the Income Tax Department.
5. What are the compliance requirements for businesses and professions as per Section 44?
The compliance requirements for businesses and professions as per Section 44 include maintenance of books of account, audit of accounts, and filing of tax returns.
6. Is it mandatory for all businesses and professions to get their accounts audited?
No, businesses and professions with a turnover of less than Rs. 2 crore or gross receipts of less than Rs. 50 lakh in a financial year are not required to get their accounts audited.
7. What is the penalty for non-compliance with the provisions of Section 44?
Non-compliance with the provisions of Section 44 can result in penalties and prosecution.
8. Is Section 44 applicable to non-residents earning income in India through their business or profession?
Yes, Section 44 is applicable to both residents and non-residents who earn income in India through their business or profession.
9. What are the limits for maintenance of books of account and audit requirements for individuals and HUFs as per Section 44AA?
The limits for maintenance of books of account and audit requirements for individuals and HUFs as per Section 44AA depend on their turnover or gross receipts.
10. What is the impact of the method of accounting adopted by a business or profession on its tax liability?
The method of accounting adopted by a business or profession can have a significant impact on its tax liability as it can affect the computation of taxable income.
