The step of demonetization that was taken in November, 2016 was a move by the government to curb the black money circulating in the economy. Post demonetization, a large push can be felt towards the cashless economy in order to promote the transparency. Various provisions have been introduced under Income Tax Act, 1961 to ensure minimal use of cash while carrying business transactions. Let us have a look on all those transaction and try to understand what would happen if you don’t obey the act.
1. Prohibition of taking and repaying loan in Cash
Provision: Section 269SS of the Income Tax Act prohibits any person from taking or accepting from any other person any loan or deposit or any specified sum (advance for transfer of immovable property) of Rs.20,000 or more in cash.
Similarly as per Section 269T of the Income Tax Act, no person shall repay any loan or deposit or specified sum of Rs.20,000 or more in cash.
However these provisions are subject to some exceptions.
Consequences: If any person disobeys these provisions then he shall be liable to penalty of 100% of such amount. (Section 271D and 271E)
2. Transaction in cash
Provision: As per Section 269ST, a person cannot receive an amount of Rs.2 lakh or more in cash in a day/in respect of a single transaction or even in multiple transactions relating to one event.
Consequences: If a person receives any sum in contravention of the provisions of section 269ST, he shall be liable to pay, by way of penalty, a sum equal to the amount of such receipt.
3. Payment of revenue expenses in cash
Provision: This is a well-known provision. As per Section 40A(3) any expenditure in respect of which a payment or aggregate of payments made to a person in a day exceeds Rs.10,000, no deduction shall be allowed in respect of such expenditure. However the limit is Rs.35,000 in case payment is made for plying, hiring or leasing goods carriages.
However this provision have numerous exceptions specified under 6DD.
Consequences: No penal consequences arises but the expenditure made shall be disallowed while calculating PGBP Income. However no such disallowance is made in case income is disclosed as per section 44AD or 44ADA.
The same provisions is made applicable to Charitable Institutions by insertion of Explanation 3 to section 11(1).
4. Payment made in Cash for purchasing Fixed Assets
Provision: Section 43(1) speaks about “actual cost” of a fixed asset. It specifies that any payment made in excess of Rs.10,000 in cash for acquisition of any asset or part thereof, then such expenditure shall be ignored for the purposes of determination of actual cost.
Consequences: As specified above, any such purchases made in cash shall not be included in block value for computing depreciation. Simply speaking you will lose depreciation.
5. Disallowance of deductions
Section 80D: Any payment for medical insurance of an individual shall not be made in cash. However payment for preventive health checkup can be made in cash.
Section 80G: Any donation made to avail deduction u/s 80G shall not be paid in cash if amount is more than Rs.2000. That means only up to Rs.2000 can be paid in cash.
Section 80GGB & 80GGC: Any donation made to any political party shall be made in mode other than cash. That means any donation made in cash would not be allowed as deduction.
6. TDS Provisions for Cash transactions
Provision: In order to demotivate the payment in cash, Section 194N was introduced in Finance Act, 2019. The provision states that if any person withdraw cash of more than Rs. 1 crore from any bank account during the year, then TDS shall be deducted at the rate of 2%. Also the section was amended to provide that for non-fillers of ITR (not filled ITR during last 3 assessment years), the limit shall be Rs.20 lakh.
In case of non-fillers, if amount is more than Rs. 1 crore, then rate of TDS shall be 5%.
Consequences: There is no penal provision but deduction of tax results in higher working capital requirement.
7. Reporting under ‘Special Financial Transaction’
Provision: Section 285BA casts responsibility on Banking Company and co-operative banks to report following transaction related to cash-
In case of Current Account: – Cash deposits or cash withdrawals (including through bearer’s cheque) aggregating to fifty lakh rupees or more in a financial year.
In case of Saving Account: – Cash deposits aggregating to ten lakh rupees or more in a financial year.
These transactions are then reflected in Annual Information System. Non fillers of return may receive notice from income tax department to justify these transactions.
Q.1 Is there any limit for cash holding?
Ans. No, there is no limit for cash holding. You can hold as much as you want. Only you have to justify the source. Otherwise Section 69A will apply and all the money found in your possession shall be treated as your income.
Q.2 Can we receive trade advance in cash?
Ans. Yes you can receive advance in cash. There is no such provision that bars such receipt except such receipt is for transfer of immovable property as it is denied under Section 269SS. Also bear in mind provisions of Section 269ST.
Q.3 Can trade advance returned in cash?
Ans. Yes, trade advance can be refunded in cash as held in various judgments. (Gujarat High Court in the case of CIT vs. Madhav Enterprise Pd Ltd.)
Q.4 Is travelling with high amount of cash banned?
Ans. No, you can travel with as much cash as you want but again you have justify the source.
Transactions made in cash have a lots of disadvantages when compared to transactions carried through banking mode. A number of such disadvantages have been already discussed above. Apart from these, it is easy to prove transaction carried electronically in case of any business dispute and it helps in avoiding error of omission.