BAN on Cash Transactions…!!! Finance Act 2017

1. Background:

Reducing Indian economy’s dependence on cash is desirable for a variety of reasons. India has one of the highest cash to gross domestic product ratio in the word, and lubricating economic activity with paper has costs. Also, a shift away from cash will make it more difficult for tax evaders to hide their income, a substantial benefit in a country that is fiscally constrained. To be sure, the government on its part is working at various levels to reduce the dependence on cash.

In this write up, the author has discussed the steps taken by Government to move our economy towards Less Cash economy.

2. Demonetization

With a view to curb financing of terrorism through the proceeds of Fake Indian Currency Notes (FICN) and use of such funds for subversive activities such as espionage, smuggling of arms, drugs and other contrabands into India, and for eliminating Black Money which casts a long shadow of parallel economy on our real economy, Government cancelled the legal tender character of the High Denomination bank notes of Rs.500 and Rs.1000 denominations on November 8, 2016

3. Digitization and Incentivization

After demonetization to promote the digital payments, Government had taken many measures by way of prize awards, discounts, rebates, lower tax rate on receiving the digital payments etc.

Pay Digital and Win Prizes! As India moves towards a digital and cashless economy, the Government announced on 15th December, 2016 two schemes Lucky Grahak Yojana and Digi-DhanVyapar Yojana to give cash awards to consumers and merchants who utilize digital payment instruments for personal consumption expenditures. The prizes range from Rs 1000 to Rs 1 crore and the transactions permitted were from Rs 50 to Rs 3000 to keep the focus on the common man. The schemes gave boost to cashless transactions particularly brought the poor, lower middle class and small businesses into the digital payment fold, and new way of life.

Government reduced the presumptive profit u/s 44AD of the Income Tax Act, 1961 from 8% to 6% in case of digital payment received by the Assessee.

4. Measures taken under Income Tax Act, 1961 to discourage cash transactions

In order to achieve the mission of the Government to move towards a less cash economy and to reduce the generation and circulation of black money, the Government has taken many measures by amending the below mentioned provisions of Income Tax Act, 1961 through Finance Act, 2017 effective from 1 April 2017.

4.1 Section 13A

♥ To discourage cash transaction and to bring transparency in the source of funding to political parties, the following amendments have been made:

No donation of Rs. 2,000 or more is received otherwise than by an account payee cheque/draft/use of electronic clearing system through a bank account or through electoral bonds (No cash donation exceeding Rs. 2,000/-)

Income tax return to be filed u/s 139(1) – If return is not submitted (or if return is submitted belatedly), exemption u/s 13A will not be available.

4.2 Section 40A(3)/(3A)

♥ Under the existing provisions, expenditure incurred in cash exceeding Rs. 20,000 (in the case of payment to transport contractor, it is Rs. 35,000) is not allowable as deduction as per Section 40A(3) (few exceptions are given by rule 6DD)

In order to disincentivise cash transactions, section 40A(3) has been amended. The monetary limit of cash payment has been reduced to Rs. 10,000 (however there is no change in monetary limit for payment to transport contractor).

Amended in Section 40A(3A) – Section 40A(3A) is applicable if the taxpayer had claimed deduction in respect of an expenditure in any of the earlier years. Payment pertaining to such expenditure is made exceeding Rs. 20,000 during the current year by any other mode other than account payee cheque/bank draft etc.  This monetary limit has also been reduced to Rs. 10,000 from the assessment year 2018-19.

4.3 Disallowance of depreciation, investment allowance and capital expenditure under section 35AD on cash payment and Section 43(1)

Under current provisions, there is no provision to disallow the capital expenditure incurred in cash. To discourage cash payment for purchase of capital assets, section 35AD and section 43(1) have been amended with effect from the assessment year 2018-19 as follows:

4.4 Section 35AD

Any expenditure in respect of which a payment or aggregate payment made to a person in a day, otherwise than by cheque or bank draft or electronic clearing system exceeds Rs. 10,000/-, no deduction shall be allowed in respect of such payment under section 35AD.

4.5 Section 43

The following amendments have been made to Section 43(1)

♥  Actual cost – Actual cost not to include cash payment exceeding Rs. 10,000. Section 43(1) is amended to provide that where an assessee incurs any expenditure for acquisition of any asset in respect of which a payment or aggregate payment made to a person in a day, otherwise than by cheque or bank draft or electronic clearing system exceeds Rs. 10,000/-, such payment shall be ignored to determine the actual cost of such asset. It means no depreciation will be allowed on such payment.

4.6 Section 80G

Under the existing provisions of section 80G, deduction is not allowed in respect of donation made of any sum exceedingRs.10,000/-, if the same is not paid by any mode other than cash.

In order to provide cash less economy and transparency, section 80G has been amended so as to provide that nodeduction shall be allowed under the section 80G in respect of donation of any sum exceeding Rs. 2,000/- unless suchsum is paid by any mode other than cash.

4.7 Section 269ST and 271DA

♥ A new section 269ST has been introduced, no person (except banking company, Government, post office co-operative & other as may notify by Government) shall receive an amount of Rs. 2 lakh or more  –

(a) In aggregate from a person in a day;

(b) In respect of single transaction; or

(c) In respect of transactions relating to one event or occasion from a person

Contravention of above mentioned provision shall attract a penalty equivalent to the amount of such receipt under section 271DA unless such person proves that there were good and sufficient reasons for the contravention. Penalty under this section shall be imposed by the Joint Commissioner.

♥ This section impacts the payee and not the payer. It is the payee or recipient who is made liable for violation of section 269ST in the form of penalty u/s 271D

Examples in respect of applicability of Section 269ST

1) A sold goods to Mr. B vide invoice no 1/2017-18 of Rs. 10,00,000 dated 01-04-2017. Mr. B made the payment as follows:

a)_ 2,00,000 vide RTGS on 03-04-2017

b) 1,50,000 cash payment on 05-04-2017

c) 1,90,000 vide bearer cheque on 07-04-2017

d) 4,60,000 by account payee cheque on 11-04-2017

Implications for Mr. A

Mr. A has received the payment of Rs. 3,40,000 (1,50,000 [cash]+1,90,000[bearer cheque])  otherwise than by account payee cheque/draft/use of electronic clearing system through a bank. It is covered by section 269ST even if cash payment/bearer cheque payment in a single day is less than Rs. 2,00,000. The AO can impose the 100% penalty ofRs. 3,40,000 under section 271DA.

Mr. A received the payment exceeding Rs. 2,00,000 related to invoice no 1/2017-18, he is required to report this transaction in Form 61A ( Section 285BA), provided Mr. A is subject to tax audit.

2) A sold his Car to Mr. B for Rs. 2,50,000/- i.e. Rs. 50,000 token money vide Cheque and Rs. 2,00,000 in Cash on different dates.

Implications for Mr. A

Mr. A has received Rs. 2,00,000/- in cash for a particular transactions and hence section 269ST shall be applicable. The AO can impose the penalty u/s 271DA of 100% of the transaction involved.

Reporting under Form 61A shall be applicable provided Mr. A is subject to tax audit u/s 44AB of Income tax act, 1961 since amount received is Rs. 2,00,000 in relation to one sale.

Conclusion:

It is suggested to incur the expenditure through digital way to contribute towards fulfillment of the mission of the Government of a less cash economy. Digital payments help in proper maintenance of books of accounts and help in timely compliances. If cash payment is compulsory then above mentioned provisions should be carefully considered to avoid any tax consequence. 

Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. The observations of the authors are personal view and this cannot be quoted before any authority without the written permission of the authors. This article is meant for general guidance and no responsibility for loss arising to any person acting or refraining from acting as a result of any material contained in this article will be accepted by authors. It is recommended that professional advice be sought based on the specific facts and circumstances.

(Authors – CA Neeraj Kumar and CA Deepak Arya, RAPG & Co. Chartered Accountants from Delhi and can be reached at info@rapg.in, 9999836182/9818449179)