Arjuna: Krishna, with Diwali approaching, I see many individuals busy cleaning their homes and businesses, preparing for the festivities. As people engage in organizing and renewing their spaces, can you guide us on the proper handling of old financial records under various laws? This will help businesses organize and streamline their records efficiently.
Krishna: Of course, Arjuna! Diwali symbolizes renewal, letting go of the past, and welcoming the new. Goddess Laxmi, who values cleanliness and order, blesses those who keep their surroundings in good shape. In the world of business, several tax laws have specific requirements for record-keeping. It's crucial to be aware of these provisions before deciding what to discard when clearing out old books and records.
Arjuna: Krishna, can you explain the requirements under the Income Tax Act concerning maintaining financial records?
Krishna: Arjuna, as per the Income Tax Act, records must be maintained for six financial years, beginning from the end of the relevant Assessment Year, under the following conditions:
a) If the income from business or profession exceeds Rs. 1,20,000 (or Rs. 2,50,000 for Individuals and HUFs) in any of the three preceding financial years, or
b) If the total sales/turnover/gross receipts exceed Rs. 10,00,000 (or Rs. 25,00,000 for Individuals and HUFs) in any of the three preceding financial years, or
c) For certain specified professions, if the gross receipts exceed Rs. 1,50,000 in any of the three previous financial years. Required records include a cash book, journal, ledgers, carbon copies of receipts, and original copies of payment vouchers as per Rule 6F.
Further, books of accounts are not required to be kept, if the person has declared income on presumptive basis u/s 44 AD i.e. @ 8/6% of turnover or u/s 44AE having transportation business if claimed his income to be more than the profits or gains so deemed to be the profits and gains of his business.
For example, XYZ Enterprise Pvt Ltd. in the current financial year 2023-2024, which corresponds to the Assessment Year 2024-2025, are required to keep records dating back six years, from FY 2018-2019 to FY 2023-2024.
Arjuna: Krishna, what about the GST law-how long should businesses retain their books of accounts under that regime?
Krishna: Arjuna, under the GST Act, every registered person must maintain accurate records of their stock of goods, input tax credit (ITC) claimed, output tax payable, inward and outward supplies, production of goods, etc. under Section 35. These records must be kept for at least six years, starting from the last date of filing the annual return for that year. In the case of a Composition Dealer, there's no need to keep ITC records.
However, if the person is involved in any appeal, revision, tribunal case, court case, or is under investigation, they must retain the books and records for one year after the case is finally resolved, or for the six-year period, whichever is longer.
Let's say XYZ Enterprises Pvt. Ltd., a registered company under GST, will file its annual return (GSTR-9) for the financial year 2023-2024 on December 31, 2024. As per the GST law, such company need to keep these records for the years 2018-2019 to 2023-2024 to comply with the GST Act.
If XYZ Enterprises Pvt. Ltd. is involved in a tax dispute for FY 2021-2022, with the annual return filed on 31st December 2022. The dispute is resolved on 31st December 2028. The company is required to retain its records for one year after the case is resolved, means the company must maintain its books of accounts until 31st December 2029. This extended retention period applies even though the standard 6-year record-keeping period would have ended on 31st December 2028, due to the ongoing litigation.
Arjuna: Krishna, what is the requirement under the Companies Act for retaining books of accounts?
Krishna: Arjuna, every company is required to maintain its financial records for eight years from the end of the relevant financial year under the Companies Act.
For instance, if "XYZ Enterprises Ltd." closed its financial year on March 31, 2024, the company must retain its records for eight years, i.e., from FY 2015-2016 to FY 2023-2024.
Arjuna: Krishna, what are the consequences of not maintaining the books of accounts as required by the respective laws?
Krishna: Arjuna, if a person fails to maintain the required books under the Income Tax Act, the tax department can impose a penalty of Rs. 25,000. Additionally, if records are not properly maintained, the department may estimate income on an arbitrary basis.
Under the GST Act, non-compliance with record-keeping requirements could result in a penalty of Rs. 10,000 or the amount equivalent to the tax evaded, whichever is higher. Beneficiaries of such an offense may face penalties of up to Rs. 25,000.
For companies under the Companies Act, if books are not maintained as per Section 128, the Managing Director, whole-time director, or other responsible persons can be fined between Rs. 50,000 to Rs. 5,00,000 or face imprisonment for up to one year, or both.
Arjuna: Krishna, how does the practice of keeping books of accounts align with the spirit of Diwali?
Krishna: Arjuna, Diwali symbolizes the victory of light over darkness and knowledge over ignorance. When businesses worship money on "Dhanteras" and their books of accounts on "Laxmi Pujan," it reflects the significance of maintaining transparent and accurate financial records. While the fiscal year runs from April 1 to March 31, our traditions celebrate a new beginning with Padva during Diwali, marking the start of "Vikram Samvat 2081" this year. This signifies that financial discipline is not just a legal requirement but should be rooted in ethical principles. Goddess Laxmi represents wealth, and her blessings come to those who uphold integrity and righteousness in their financial dealings. Therefore, as we celebrate Diwali, we should also embrace these deeper values, ensuring that our financial practices are guided by honesty and wisdom.
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