Keeping a check on cash transactions under income tax (with illustrations)
We come across a common saying ‘Cash is King,’ however idle cash can never generate any interest income, therefore channelizing the idle money into digital mode shall generate income. The Cashless economy is a system where majority of transactions take place by modes other than cash. These modes may be credit cards, debit cards, wallets or digital modes where flow of cash is non-existent or is bare minimum. Cashless economy can be an effective gimmick to curb grey economy, terror-financing, corruption etc.Government has been taking many steps towards promotion of cashless economy and have been introducing many provisions under Income tax Act 1961 to restrict cash transactions.
The article shall highlight various transactions coming under Income tax Act where assesses need to say No to cash and also the transactions which induce assesses to pay in modes other than cash So, let’s dive into these transactions:
1. Cash Restrictions in Immovable Property: Section 43CA and Section 50C of the Income Tax Act, 1961 deal with immovable property transactions. As per the Section 43CA and Section 50C dealing with case of transfer of stock in trade/capital asset being land or building or both, the value adopted or assessed by the stamp valuation authority for the purpose of payment of stamp duty shall be taken as the full value of consideration(FVOC) for the purposes of computation of capital gains.
As per Section 50C if a capital asset, and in Section 43CA if any asset (other than a capital asset) being land or building or both, is transferred for a consideration below the stamp duty value, then such stamp duty value shall be deemed to be the FVOC for the purpose of computation of capital gains under Section 48 of Income Tax Act,1961. The original consideration paid for the transfer shall not be considered for the purpose of capital gain in the hands of the seller. Further from AY 21-22 the scope of applicability of section 50C and Section 43CA has been restricted to only those transactions where stamp duty value exceeds 110% (105% in AY 20-21) of the consideration so received or accrued for the transfer of capital asset/stock in trade being land or building or both.
|Scenario||Deemed Full value of consideration|
|If stamp duty value exceeds 110% of consideration received or accruing as a result of transfer.||Stamp duty value|
|If stamp duty value is less than or equal to 110% of consideration received or accruing as a result of transfer.||Actual consideration received|
Further In section 50C and Section 43CA; Stamp duty value to be adopted is dependent on the mode of consideration if date of agreement and date of transfer are different.
|Scenario||Deemed Full value of consideration|
|If the whole or part of consideration has not been received by way of account payee cheque/draft, ECS or through prescribed electronic mode* on or before the date of Agreement.||Stamp duty value on date of transfer|
|If the whole or part of consideration has been received by way of account payee cheque/draft, ECS or through prescribed electronic mode* on or before the date of Agreement.||Stamp duty value on date of agreement|
Let’s understand this with the help of example:
There is a transfer of land held as capital asset by Mr. Ram where actual consideration is Rs 1000 lakhs and the stamp duty value as on the date of agreement is 1090 lakhs and the stamp duty as on date of transfer of land is Rs 1120 lakhs. Here date of agreement and date of transfer of land are not same. So, let’s check the scenarios.
|Scenario||Deemed Full value of consideration|
|If Mr. Ram receives Rs 500 lacs by account payee cheque before the date of agreement.||The actual consideration of Rs 1000 lacs would be the full value of consideration since stamp duty on the date of agreement I.e., Rs 1090 lakhs does not exceed 110% of actual consideration I.e., 1000 lakhs.|
|If Mr. Ram has not paid any consideration on or before the date of agreement.||The stamp duty value as on the date of transfer I.e., Rs 1120 lakhs shall be the full value of consideration as it has exceeded 110% of actual consideration of Rs 1000 lakhs.|
Let’s see another example where Ram holds building as stock in trade. Mr. Ram transfers the building on 01/05/2020 where actual consideration is Rs 1000 lakhs and the stamp duty value as on the date of agreement (01/09/2019) is 1200 lakhs and the stamp duty as on date of transfer of land is Rs 2100 lakhs. Here date of agreement and date of transfer of land are not same. So, let’s check the scenarios.
|Scenario||Deemed Full value of consideration|
|If Mr. Ram receives Rs 500 lacs by account payee cheque on 01/09/2019.||Stamp duty value to be adopted as full value of consideration as per section 43CA shall be the stamp duty value as on the date of agreement I.e., Rs 1200 since Rs 500 lacs have been received by A/c payee cheque on the date of agreement and stamp duty value on 01/09/2019 exceeds 110% of consideration I.e., Rs1100 lacs.|
|If Mr. Ram receives Rs 500 lacs by cash on 01/09/2019.||The stamp duty value as on the date of transfer I.e., Rs 2100 lakhs shall be the full value of consideration as it has exceeded 110% of actual consideration of Rs 1000 lakhs and Rs 500 lacs has been received in cash.|
2. Section 269SS of Income tax Act,1961: As per the provisions of section 269SS of Income tax act 1961 no person shall take or accept any loan or deposit or specified sum (herein referred to as advance or otherwise) from any person (herein referred to as depositor) by any mode other than account payee cheque/bank draft or by use of electronic mode where:
I) The amount of loan, deposit or such specified sum is Rs 20,000 or more or
II) The aggregate of total amount of loan, deposit and the specified sum is Rs 20,000 or more or
III) Where a person has received such loan, deposit or specified sum from the depositor at an earlier date but the repayment of such loan, deposit or specified is outstanding, if such outstanding loan or deposit or specified sum or the aggregate outstanding amount is Rs 20000 or more or
IV) The aggregate of all the above loans, deposit or specified sum received in above 3 transactions is Rs 20000 or more.
Non-Applicability to Section 269SS
Any loan or specified sum or deposit “taken or accepted by” or “taken or accepted from” the following entities –
a. The Government
b. Any banking company, post office savings bank or co-operative bank
c. Any corporation established under Central, State or Provincial Act
d. Any Government company as defined in Section 2(45) of the Companies Act, 2013
e. Any institution, association or body or class of institutions, associations or bodies notified in Official Gazette.
Consequences of violation of Section-269SS
According to Section 271D of Income Tax Act 1961 a loan or deposit or specified sum is accepted violating the provisions of section 269SS, then a penalty may be levied which shall be equivalent to the amount of such loan or deposit or specified sum by the Joint commissioner.
3. Section 269T of Income tax Act,1961: Section 269T restricts any person to repay the deposit or specified sum otherwise than by an account payee cheque or account payee bank draft or by use of electronic clearing system as mentioned under Rule 6BBA through a bank account, if –
a. Amount of loan or deposit, along with the interest amount, is Rs. 20,000 or more, or
b. The aggregate amount of loans or deposits, including the interest amount, held by such person in his own name, or jointly with any person, is Rs. 20,000 or more.
Non-Applicability to Section 269T
(b) any banking company, post office savings bank or co-operative bank;
(c) any corporation established by a Central, State or Provincial Act;
(d) any Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956);
(e) such other institution, association or body or class of institutions, associations or bodies which the Central Government may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette.
Consequences of violation of Section-269T
The assessing officer shall levy a penalty equivalent to 100% of the loan or deposit amount under section 271 E of Income Tax Act 1961.
Let’s understand Section 269 SS and 269T with examples:
1) Mr. P takes a cash loan of Rs 17000 on 01/05/2019 from Mr. R and repays it on 20/12/2019 in cash. He again takes a loan in cash from Mr. R of Rs 19000 on 01/08/2020 and repays it in cash on 29/10/2020.
Let’s check whether the provisions of Section-269SS and Section-269T have been violated?
Here in this case the assessment years are different and also the receipts and repayments are within the limits (I.e., below Rs 20,000) as prescribed under Section-269SSand Section 269T.
2) Mr. P receives a loan of Rs 18000 on 01/10/2020 and by account payee cheque on 04/10/2020 of Rs 22000. Mr. P repays the entire amount on 20/11/2020 by Rs 15000 in cash and Rs 25000 by account payee cheque.
In this case the aggregate receipts of loan of Mr. P have exceeded the limit of Rs 20,000. Mr. P received the second loan by way of account payee cheque. Hence there is no violation of section-269SS. The aggregate amount outstanding is Rs 40,000 as on 04/10/2020. Mr. P has repaid the outstanding loan in cash amounting to Rs15000 on 20/11/2020 and has violated the provisions of section-269T as aggregate amount outstanding was more than Rs 20000.
4. Section-269ST of Income tax Act,1961: Section 269ST will be triggered in any of the following 3 circumstances where amount is received in cash and exceeds the specified limit of Rs 2 lacs.
Let’s understand the circumstances:
Receipts from ‘a person’ in ‘a day: It means that a person can receive cash up to Rs 2 lacs in a day from a single person. So, the next question that comes into our mind is if a person receives cash in different days then can the provisions of this section be escaped?
Single transaction: This means that a single transaction in cash shall be up to Rs 2 lacs. Therefore, if a person splits invoices pertaining to a single transaction then also the payee cannot receive the amount in cash amounting to Rs 2 lacs or more than Rs 2 lacs.
Transactions relating to a single event or occasion: It means that even if a person receives cash for different transactions but the transactions relate to one occasion or an event then also the payee cannot receive cash amounting to Rs 2 lacs or more.
Non-Applicability to Section 269ST:
a) Government/ any banking company, post office savings bank or co-operative bank;
b) Transactions of the nature referred to in section 269SS – i.e., acceptance of Loan, deposits etc.;
c) Such other persons or class of persons or receipts etc. that may be notified by the Central Government;
d)Any corporation established by a Central, State or Provincial Act;
Consequences of violation of Section-269ST
Failure to comply with section 269ST would attract the penalty under section 271DA of the Act, equivalent to the amount receipt in cash.
Let’s understand the section with the help of examples:
1) Mr. A receives Rs 2,35,000 in cash for 2 different bills of Rs 1,00,000 and Rs 1,35,000 then since aggregate receipts in day received exceeds Rs 2lacs Section-269ST has been violated.
2) Mr. A made a sale of Rs 3,50,000 on 02/05/2020 and cash is received on 10/10/2020 and 12/12/2020 amounting to Rs 1,90,000 and Rs 1,60,000. Since cash is received in respect of single bill(transaction) Section-269ST has been violated
3) Mr. A receives a catering and decoration contract for marriage and receives Rs 3,00,000 in full. Section 269ST has been violated since he has received for a single event.
It is important to note here that Section 269ST is applicable on payee and not payer for any receipt whether capital or revenue. Further Section 269ST shall not be applicable to transactions in nature of Section 269SS I.e., receiving loan/deposit or specified sum. This indicates that a borrower remains out of the purview of Section-269ST.
Further the provisions of Section 269T and Sec269ST are inharmonious. Where Section 269T is applicable on borrower and its scope is restricted to transactions for loans, deposits or specified sum, Section 269ST is imposable on recipient for all types of transactions including loans, specified sum or deposits.
|Mr. Ram repays Rs 60,000 in cash||269T||Mr. Ram is a borrower. Hence Section-269ST shall not be applicable. He has repaid in cash more than the limit prescribed under Section 269ST. Hence shall be liable for penalty under section 271E.|
|Mr. Ram repays Rs 2,60,000 to Mr. Sham in cash||269ST & 269T||Mr. Ram has repaid in cash more than the limit prescribed under Section 269ST. Hence shall be liable for penalty U/s 271E whereas Mr. Sham has received more than Rs 2,00,000 hence has violated Section 269ST and penalty U/s 271DA shall be levied.|
5. Section 40A(3) and 40A(3A) of Income tax Act,1961 read with Rule 6DD: As per this section an expenditure is if the assessee incurs any expense in relation to which payment or aggregate of payments made to a person in a day otherwise than by an account payee cheque/draft or use of Electronic clearing system exceeds Rs10,000.
However, in cases payment is made for plying, hiring or leasing of goods carriage the limit id Rs35,000 instead of Rs10,000.
Section 40A(3A): As per section 40A(3A) if an assessee had claimed a deduction in respect of any expenditure incurred in a previous year and payment to such expenditure is made during the current year otherwise than by an account payee cheque/draft or use of Electronic clearing system exceeds Rs10,000.
Let’s understand the above section with the help of examples:
1) Payments of 5 invoices of Rs 6000 each made in cash to Mr. Ram who is engaged in leasing of goods and carriages as on 4/08/2020.
Disallowance of expenditure Section 40A (3) shall not be attracted since the aggregate payments made are Rs30,000 and do not exceed Rs35,000.
2) Payments of 2 Invoices of Rs 19000 each made to Mr. Ram engaged in leasing of goods and carriages on 27/10/2020 and 28/10/2020.
Disallowance of expenditure Section 40A (3) shall not be attracted since the aggregate of payments has not exceeded Rs 35,000 in a day.
3) Payments of Rs 38000 made in cash to Mr. Ram who is engaged in leasing of goods and carriage against an invoice booked in 2017-18.
Disallowance under section 40A(3A) shall be attracted as expense has been booked in 2017-18 and had been allowed in previous year 2017-18.
6. Tax exemptions to Political Parties: Section 13A of Income tax act,1961 allows tax exemption to political parties which are recognized (Registered with election commission of India) if they comply with the following requirements with respect to cash:
Violation consequences: Consequences of violating the above cash related provisions will be taxability of income to the extent of income from house property, income by way of voluntary contributions, income from capital gains and income from other sources which is otherwise exempt in hands of political parties.
7. Donation under Section-80G: Section 80G covers Contributions made to charitable institutions and certain relief funds. The deduction under Section 80G is available to all persons whether a company, Individual, firm or any other person. The donations under this section in excess of Rs 2,000 should be made in any mode other than cash to qualify as a deduction under section 80G.
8. Deduction under Section-80D: Deduction under this section can be availed for two types of expenditure Medical insurance premium (which includes preventive health check-up) and Medical expenditure. The deduction under this section is allowable if mode of payment for the expenditure incurred (other than preventive health check-up) is other than by cash.
9. Disallowance under section 35AD R/w section 43(1): Second proviso to Section 43(1) states that no expenditure shall form part of actual cost of capital assets, if the payment for acquiring such assets has been made to a person in a day, otherwise than by account payee cheque/ bank draft/ using Electronic Clearing System exceeds Rs. 10,000.
10. Deduction U/s 80GGA: Section 80GGA provides deduction to an assessee other than an Assessee whose Gross Total Income includes income chargeable under PGBP in respect of certain donations for scientific, social or statistical research or rural development program or for carrying out an eligible project or National Urban Poverty Eradication Fund Subject to certain conditions.
In order to discourage the cash transactions, section 80GGA provides that no deduction shall be available if payment made by cash exceeds Rs. 10,000.
11. Deduction under section 80JJAA of Income tax act,1961: Section 80JJAA provides deduction of 30% of additional employee cost incurred by the Assessee shall be allowed as deduction for 3 assessment years. The Assessee who have income under head PGBP and liable to tax audit under section 44AB are entitles for deduction under Section 80JJAA.
In order to discourage cash transaction, no deduction shall be allowed u/s 80JJA, if Assessee made the payment of emoluments otherwise than by prescribed banking channel i.e., account payee cheque/ bank draft/ using Electronic Clearing System, subject to certain conditions.
12.Section 36(1)(ib) of Income tax act,1961:Section-36 disallows deduction for expenses in respect of premium paid by the employer for health insurance of its employees if paid in cash.
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