Arjuna (Fictional Character): Krishna, today we observed that every where in our country Government is trying hard to reduced cash transaction to curb the black money. So I am wondering as is there any restrictions under Income Tax as well to restrict cash transaction in the country?
Krishna (Fictional Character): Arjuna, Government is taking lots of effort to avoid cash transaction. Income Tax Act is one of the major sources for this implementation process. There are restrictions on cash transactions under Income Tax act.
Arjuna: Krishna, According to Income Tax Act, what are the restrictions for taxpayers who are involved in business or profession for cash transaction?
Krishna: Arjuna, while incurring expenditure for business i.e. for purchasing goods or incurring expenditure and availing deductions cash payment of more than Rs. 10,000/- per day should not be made otherwise deduction will be disallowed as per section 40 (A) (3) of the Income Tax Act and tax will have to be paid on such expenditure. If Businessman has made purchases of Rs. 1 lakh from “A” then he can make cash payment of Rs. 10,000/- in a single day. For making payment to transporter of goods the limit is Rs. 35,000/-. There are certain exceptions for making payment beyond limit i.e. businessman can make payments exceeding Rs. 10,000/- as given in Rule 6DD of the Income Tax Act.
Important Note: If businessman incurred cash expense more than 10,000 for purchase of fixed asset then such payment is not allowed to be added to the cost of the asset for the purpose of claiming depreciation.
Arjuna: Krishna, This was regarding cash expenses but if loans and advances are accepted or repaid in cash then what is the provision under Income Tax?
Krishna: According to section 269 SS and 269 T of the Income Tax Act the taxpayer cannot accept or repay the loan in cash exceeding Rs. 20,000/-. If the taxpayer has accepted or repaid loan in cash exceeding 20,000/- then the auditor has to report the same in tax audit report. If it comes to the notice of Income Tax officer then he may levy penalty. If loan acceptor or donor both are farmers and their receipts are not taxable according to Income tax Act then above provision is not applicable to them. If the loan accepted is more than Rs. 20,000/- then repayment cannot be made in cash.
Important Note: The restrictions in respect of loan are not applicable for transactions with bank, government, Government Company or corporation and other entities if specified by the government. Your home loan will not get covered under these restrictions and you can repay your home loan in cash beyond twenty thousand rupees.
Arjuna: Krishna, Is there any provision for taxpayer in respect of certain deductions available from your income?
Krishna: Arjuna, regarding income tax deductions also there are restrictions with respect of cash payment. As per Section 80D, the deduction of mediclaim is not allowed if it is paid in cash, However kindly note that the preventive health check-up of Rs 5,000 can be allowed even if it is paid in cash.
Also as per section 80G, deduction is not allowed if it is paid in cash for the amount exceeding Rs 2,000. This restriction is applicable for every single deduction and not for aggregate amount.
Arjuna: Krishna, Is there any other restriction on acceptance of money in cash?
Krishna: Arjuna, as per the recent amendment, Section 269ST was introduced by the Government as a blanket restriction on receipt of money by any person for an amount of two lakhs and above. This restriction is applicable to the recipient and not the payer. The restriction is applicable in respect of receipt of money for each occasion or for each transaction and not necessarily for payment in a single day. This provision has been brought in to curb use of black money on various occasions like marriage, travel etc. and for which no deduction is claimed by the payer under the tax laws. In case you receive payment in contravention of the above provision, the income tax officer can levy a penalty equal to the amount of money received. Please note that there are no penal consequences for the person who is paying such money.
Arjuna: Krishna, Is there any provision for taxpayer to deposit cash in bank accounts?
Krishna: Arjuna, there is no restriction for depositing cash in bank accounts but if amount exceeding Rs. 10 lakh is deposited in saving bank account then bank has to inform the same to income Tax department through SFT Compliance in Form 61A as per Rule 114E of the Income Tax Rules. Due to this the department may raise enquiry or issue scrutiny notice.
Arjuna: What one should learn from this cash transaction?
Krishna: Arjuna , cash is fluctuating. From where cash came and gone that no one knows. But if transaction took place though bank the details of the same remains for long time. Many taxpayer for evading taxes incur transactions in cash and later on get involved in tax laws. Due to which more taxes and penalty have to be paid. Therefore maximum transactions should be made through bank and should avoid transactions in cash. Businessman says “Aaj Nagad Kal Udhar” but if more transactions are incurred in cash then problems will have to be faced.
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(Republished with Amendments by Team Taxguru)