Cash Transactions in Agriculture Sector: Income-tax Act 2025 Rules, Exemptions & Penalties

Summary: The article examines the legal framework governing cash transactions in India’s agricultural sector under the Income-tax Act, 2025. It explains the distinction between Kachha Arahtias, who act as commission agents, and Pacca Arahtias, who trade on their own account, including the implications for turnover and tax audit under Section 63. It also discusses CBDT Circular No. 452 of 1986, which clarifies the distinguishing characteristics of these intermediaries. The article analyses restrictions on cash payments exceeding ₹10,000 under Section 36(4), exceptions for purchases directly from agricultural producers, and the ₹2 lakh cash-receipt restriction under Section 186. Particular attention is given to cash sale proceeds collected by commission agents, unpaid balances retained on behalf of farmers, and circumstances in which such balances may acquire the character of deposits. It also covers the exemption from TDS on specified cash withdrawals by eligible APMC commission agents and traders. Further, the article examines the relationship between Sections 185 and 186, cash transactions between agriculturists, and repayment restrictions under Section 188. Practical illustrations address cash payments for agricultural land, cancellation of property transactions, repayment of advances and potential penalties. The concluding discussion covers exceptions for payments to producers of animal husbandry products, livestock and meat, with reference to CBDT Circular Nos. 4/2006 and 8/2006.

1. Cash Transactions in Agricultural Produce: Legal Position under the Income-tax Act, 2025

Agriculture continues to be the backbone of the Indian economy, with a significant portion of the population dependent upon agricultural activities for livelihood. Consequently, large-scale transactions take place every day in relation to the sale and purchase of agricultural produce. The marketing of agricultural commodities is predominantly carried out through regulated markets and mandis, where farmers bring their produce for auction and sale.

The traditional marketing structure of agricultural produce involves multiple participants, including farmers, commission agents (Arhtias), traders, wholesalers, processors, and other intermediaries. Ordinarily, a farmer sells his produce to a Pacca Arahtia (trader) through a Kuchha Arahtia (commission agent). The Kuchha Arahtia acts merely as an intermediary between the farmer and the trader and generally functions in a representative capacity. His role is to facilitate the auction process, safeguard the interests of the farmer, ensure proper realization of sale proceeds, and arrange timely payment. He does not normally acquire ownership of the produce nor does he deal in the goods on his own account.

Historically, a substantial number of transactions in the agricultural sector have been settled in cash, particularly in rural and semi-rural areas where banking facilities may not always be readily accessible and where traditional business practices continue to prevail. However, with the introduction of various restrictions on cash transactions under the Income-tax Act, 2025, considerable uncertainty has arisen among agriculturists, commission agents, traders, and other stakeholders regarding the permissibility of receiving or making payments in cash in connection with agricultural produce.

The provisions regulating cash receipts and cash payments under the Act are comprehensive and operate in different circumstances depending upon the nature of the transaction, the amount involved, the status of the parties, and the capacity in which a person receives or makes the payment. While the law imposes restrictions on certain categories of cash transactions, it also recognises the unique characteristics of agricultural operations and provides specific exceptions and relaxations in appropriate cases.

As a result, the tax consequences of a cash transaction involving agricultural produce cannot be determined merely by reference to the amount involved. It is necessary to examine the precise nature of the transaction, the relationship between the parties, and the statutory provisions governing the receipt or payment in question.

The ensuing discussion examines the legal framework governing cash transactions relating to agricultural produce under the Income-tax Act, 2025. It analyses the applicability of various provisions dealing with cash receipts and payments, the exceptions available to agriculturists and intermediaries, and the circumstances in which adverse tax consequences may arise. The objective is to provide a clear understanding of the law and to dispel the practical difficulties and misconceptions commonly encountered in agricultural trade and marketing transactions.

2. Distinction between a Kuchha Arahtia and a Pacca Arahtia

From an income-tax perspective, particularly in the context of determining turnover for the applicability of tax audit under Section 63 of the Income-tax Act, 2025, the distinction between a Kuchha Arahtia and a Pacca Arahtia assumes considerable significance.

Kuchha Arahtia (Commission Agent)

A Kuchha Arahtia acts merely as an intermediary or commission agent on behalf of the principals, generally farmers. The sale of agricultural produce is effected on behalf of such principals and not on his own account. Consequently, the gross sale proceeds of the agricultural produce do not constitute his turnover. For the purpose of Section 63, only the gross commission, brokerage or similar remuneration earned by him is regarded as his turnover or gross receipts.

Pacca Arahtia (Trader on Own Account)

A Pacca Arahtia acts as a principal and trades in agricultural commodities on his own account. He purchases the produce and subsequently sells it, assuming the risks and rewards of ownership. Accordingly, the entire sale value of the goods traded by him constitutes his turnover for determining the applicability of tax audit under Section 63.

Thus, where a Kuchha Arahtia merely facilitates the sale of agricultural produce, arranges delivery and secures payment to farmers, the commission received by him from the Pacca Arahtia or other principals alone shall be considered as his turnover or gross receipts. The value of agricultural produce transacted on behalf of the principals is not includible in his turnover for the purposes of Section 63.

The determination of whether a person is a Kuchha Arahtia or a Pacca Arahtia depends upon the real nature of the relationship between the parties and the rights and obligations assumed by the intermediary in the course of the transaction.

Now a question arises what is difference between kachha arahtias and Pacca Arahtias. The difference between kachha & Pacca Arahtias can be understood by the circular by C.B.D.T. in Circular No. 452, dated 17-03-1986.

(i) A kachha arahtia acts only as an agent to his constituent and never act as a principal. A Pacca Arahtia, on the other hand, is entitled to substitute his own goods on his personal accounts and thus he acts as a principal as regards his constituent;

(ii) A kachha arahtia brings a privity of contract between his constituent and the third party so that each becomes liable to the other. The Pacca Arahtia, on the other hand, makes himself liable person upon the contract not only to the third party but also to his constituent;

(iii) Though the kachha arahtia does not communicate the name of his constituent to the third party, he does communicate the name of the third party to the constituent. In other words, he is an agent for an unnamed principal. The Pacca Arahtia, on the other hand, does not inform his constituent as to the third party with whom he had entered into a contract on his behalf.

(iv) The remuneration of Kuchha Arahtia consists solely of commission and he is not interested in the profits and losses made by his constituent as is not the case with the Pacca Arahtia;

(v) The kachha arahtia, unlike the Pacca Arahtia, does not have any dominion over the goods;

(vi) The kachha arahtia has no personal interest of his own when he enters into a transaction and his interest is limited to the commission agency’s charges and certain out of pocket expenses where as a Pacca Arahtia has a personal interest of his own when he enters into a transaction;

(vii) In the event of any loss, the kachha arahtia is entitled to be indemnified by his principal as is not the case with Pacca Arahtia.

3. Whether Cash Payments Exceeding ₹10,000 to Farmers on Account of Agricultural Produce by Kachha Arhtia Can Be Disallowed? (Income-tax Act, 2025)

Section 36(4) of the Income-tax Act, 2025 provides that where an assessee incurs any expenditure and makes payment exceeding ₹10,000 in a day to a person otherwise than through prescribed banking or electronic modes, such expenditure is generally not allowed as a deduction. However, Rule 26 prescribes certain exceptions to this provision. One of the important exceptions relates to payments made for the purchase of agricultural produce directly from the cultivator, grower, or producer of such produce.

Accordingly, where a Kachha Arhtia or trader purchases agricultural produce directly from a farmer and makes payment in cash, the provisions of section 36(4) shall not apply by virtue of the exception provided under Rule 26. Therefore, no disallowance of expenditure can be made merely because the cash payment exceeds ₹10,000.

However, section 186 of the Income-tax Act, 2025 prohibits any person from receiving ₹2 lakh or more in cash from another person in a day, in respect of a single transaction, or in respect of transactions relating to one event or occasion. Hence, while cash payments to cultivators are protected from disallowance under section 36(4), the provisions of section 186 must still be complied with.

Thus, cash purchases of agricultural produce from cultivators for an amount below ₹2 lakh will not result in any disallowance under section 36(4) in the hands of the trader or Kachha Arhtia and will not attract the provisions of section 186 in the hands of the cultivator. Therefore, cash payments exceeding ₹10,000 made directly to farmers for the purchase of agricultural produce are allowable as a deduction, subject to compliance with the other provisions of the Act.

4. Treatment of Cash Sale Consideration Collected by a Kachha Arahtia Under Section 186

The applicability of section 186 in transactions involving a Kachha Arahtia is governed by the principles of agency. A Kachha Arahtia acts merely as a commission agent and does not deal in goods on his own account. He acts on behalf of his principal, who may be the farmer or any other seller. Consequently, any amount received by the Kachha Arahtia in the course of such agency is regarded in law as an amount received by the principal himself.

For instance, where a farmer sells agricultural produce worth ₹3,50,000 through a Kachha Arahtia and the purchaser pays the entire sale consideration in cash to the Kachha Arahtia, the receipt by the Kachha Arahtia is not considered an independent receipt in his own hands. Since he acts only as an agent of the farmer, the law treats the amount as having been received by the farmer through his agent. In other words, the receipt by the agent is deemed to be the receipt of the principal.

Accordingly, while examining the applicability of section 186, the transaction must be viewed as a cash receipt of ₹3,50,000 by the farmer from the purchaser. The fact that the money physically passes through the hands of the Kachha Arahtia does not alter the legal character of the transaction. What is relevant is the real recipient of the money, namely, the farmer on whose behalf the agent acts.

After receiving the amount from the purchaser, the Kachha Arahtia may deduct his commission and remit the balance to the farmer. Such remittance does not constitute a fresh receipt in the hands of the farmer. The reason is that the farmer is deemed to have already received the amount at the moment it was collected by the Kachha Arahtia on his behalf. The subsequent payment by the Kachha Arahtia merely represents the transfer of the farmer’s own money which was being held by the agent in a fiduciary capacity.

Therefore, for the purposes of section 186, there is only one relevant receipt, namely, the receipt of the sale consideration from the purchaser through the agency of the Kachha Arahtia. The later remittance by the agent to the farmer is merely a settlement between the principal and the agent and cannot be regarded as a separate or independent receipt. Consequently, the provisions of section 186 are required to be examined with reference to the receipt by the farmer from the purchaser and not with reference to the subsequent transfer of funds by the Kachha Arahtia to the farmer.

Thus, in the case of a Kachha Arahtia, the decisive factor is that he functions merely as an agent and not as an independent trader. As a result, the receipt by the Kachha Arahtia is treated as the receipt of the principal, and the applicability of section 186 is determined accordingly.

5. Whether Unpaid Payment by Kachha Arhtia to Farmers Can Be Considered as Deposit?

A Kachha Arhtia acts as an agent of the agriculturist for the sale of agricultural produce. When the Kachha Arhtia sells the goods belonging to the farmer, the sale proceeds received by him belong to the agriculturist. If the sale proceeds remain with the Kachha Arhtia for some time and have not yet been remitted to the farmer, such amount cannot be regarded as a deposit made by the agriculturist with the Kachha Arhtia.

Further, where the Kachha Arhtia remits only a part of the sale proceeds to the agriculturist and retains the balance amount, the unremitted portion also does not assume the character of a deposit merely because it remains unpaid. Consequently, repayment of such sale proceeds by the Kachha Arhtia to the agriculturist does not fall within the scope of section 188 of the Income-tax Act, 2025 (corresponding to the erstwhile section 269T), which governs the repayment of loans, deposits, and specified advances.

However, a different position arises when the agriculturist specifically instructs the Kachha Arhtia to retain the sale proceeds for future payment. In such a case, the retained amount assumes the character of a deposit, irrespective of whether it is kept in the same account or transferred to another account and irrespective of the nomenclature given to the amount. Once the retained amount becomes a deposit, its repayment by the Kachha Arhtia will be governed by section 188 of the Income-tax Act, 2025.

Conclusion: Mere non-payment or retention of sale proceeds by a Kachha Arhtia does not constitute a deposit. However, if the amount is retained pursuant to the farmer’s direction for future payment, it becomes a deposit, and its repayment is subject to the provisions of section 188.

6. Applicability of TDS on Cash Withdrawals by APMC Commission Agents and Traders [Section 393(3), Table Sl. No. 5]

Section 393 of the Income-tax Act, 2025 provides for deduction of tax at source on cash withdrawals exceeding the prescribed threshold from a banking company, co-operative bank, or post office. However, considering the unique nature of agricultural trade and the necessity of making prompt cash payments to farmers, the Central Government has exempted certain categories of persons from the applicability of these provisions. One such category comprises commission agents and traders operating under an Agriculture Produce Market Committee (APMC).

Commission agents and traders functioning in agricultural markets frequently purchase agricultural produce from farmers and, particularly in rural areas, payments are often required to be made in cash. Recognizing that such cash withdrawals are generally made for genuine business purposes and not for facilitating tax evasion or circulation of unaccounted money, the Government has provided an exemption from TDS on cash withdrawals exceeding the prescribed limit, subject to fulfillment of specified conditions.

For availing this exemption, the commission agent or trader must be operating under an APMC and must be duly registered under the law relating to Agricultural Produce Markets of the concerned State. Further, he is required to intimate to the banking company, co-operative bank, or post office the account number from which cash withdrawals exceeding the prescribed threshold are proposed to be made and furnish his Permanent Account Number (PAN). In addition, he must provide a certificate declaring that the cash withdrawn in excess of the prescribed limit is intended to be utilized for making payments to farmers on account of purchase of agricultural produce.

The banking company, co-operative bank, or post office has an important responsibility in this regard. It must verify the correctness of the PAN furnished by the commission agent or trader, ensure that he is duly registered with the concerned APMC, and collect as well as maintain the necessary documentary evidence supporting the claim for exemption. Only after satisfying itself regarding compliance with these conditions can the benefit of exemption be granted.

The rationale behind granting this exemption is to avoid liquidity constraints for commission agents and traders, ensure timely payments to farmers, prevent disruption in agricultural marketing operations, and reduce unnecessary compliance burdens on genuine agricultural transactions. At the same time, safeguards have been incorporated through verification requirements and record maintenance obligations to prevent misuse of the exemption.

A commission agent or trader claiming the benefit must ensure that the cash withdrawn is actually utilized for making payments to farmers, the declarations furnished to the bank are accurate, the PAN and registration details are correct, and adequate records are maintained to substantiate the utilization of the withdrawn amount. Any misuse of the exemption or furnishing of incorrect information may result in denial of the benefit and attract penal consequences under the provisions of the Income-tax Act, 2025.

7. Understanding the Boundary Between Sections 185 and 186 in the Context of Agriculturists

The interplay between Sections 185 and 186 becomes particularly significant where the transaction is between agriculturists. At first glance, it may appear that once a transaction enjoys the agriculturist exemption under Section 185, it would automatically remain outside the scope of Section 186 as well. However, a closer examination of the statutory scheme reveals that such an assumption is not always correct.

Section 185 contains a specific exemption in respect of transactions where both parties are agriculturists and neither has any income chargeable to tax under the Income-tax Act. Consequently, where a loan, deposit, or specified sum is accepted in cash between such persons, the provisions of Section 185 do not apply. The transaction is effectively taken outside the scope of that section by virtue of the statutory exemption.

A question then arises whether such an exempt transaction can also claim protection from Section 186 on the ground that it relates to a loan, deposit, or specified sum. The answer depends upon the distinction between a transaction covered by Section 185 and a transaction excluded from Section 185.

The exclusion contained in Section 186 applies only to transactions which are governed by Section 185. Where a transaction is specifically exempted from the operation of Section 185, it cannot be said to be a transaction regulated by that provision. In other words, a transaction which never enters the field of operation of Section 185 because of a statutory exemption cannot seek the benefit of the exclusion available under Section 186.

For example, suppose Mr. A and Mr. B are agriculturists and neither has any income chargeable to tax. Mr. A advances a loan of ₹5,00,000 in cash to Mr. B. Owing to the agriculturist exemption, Section 185 does not apply. Since the transaction is excluded from the operation of Section 185 itself, it is arguable that it is not a transaction “covered by” Section 185 for the purposes of the exclusion under Section 186. Consequently, if the receipt satisfies the conditions prescribed under Section 186, the provisions of that section may still become relevant.

Similarly, where Mr. A purchases agricultural land from Mr. B and pays ₹5,00,000 in cash, the transaction does not involve a loan, deposit, or specified sum and therefore falls completely outside Section 185. In such a case, the receipt must be examined directly under Section 186. Since Mr. B receives more than ₹2,00,000 in cash in respect of a single transaction, the provisions of Section 186 may be attracted notwithstanding the fact that both parties are agriculturists.

Thus, in the context of agriculturists, it is important to appreciate that the exemption under Section 185 is not a blanket exemption from all cash transaction provisions. The exemption merely prevents the application of Section 185. Unless a specific exemption is available under Section 186 itself, the receipt may still be examined independently under that section.

Accordingly, while Section 185 and Section 186 are structured to avoid overlapping consequences, the agriculturist exemption under Section 185 does not necessarily confer immunity from Section 186. The protection available under Section 185 is confined to that provision alone, and the applicability of Section 186 must be determined independently on the facts of each case. This distinction is crucial in understanding the legislative scheme governing high-value cash transactions involving agriculturists.

Example

Mr. Lal Singh purchased land from Mr. Nijjar Singh for ₹1,80,000 and paid the entire consideration in cash. Both parties are agriculturists and neither has any income chargeable to tax under the Income-tax Act.

In this case, although Mr. Nijjar Singh has received a specified sum in cash, section 185 will not apply because both parties satisfy the conditions of the exemption. Consequently, no penalty under section 450 (corresponding to the erstwhile section 271D) can be levied.

The answer will remain the same even if the property transferred is not agricultural land. This is because the exemption depends upon the status of the parties as agriculturists having no income chargeable to tax and not upon the nature of the property transferred.

Case Where Consideration is ₹5,00,000

If the consideration for the land is ₹5,00,000 and the entire amount is paid in cash, section 185 will still not apply because of the agriculturist exemption.

However, section 186 becomes relevant. Section 186 prohibits receipt of ₹2 lakh or more in cash from a person in a day, in respect of a single transaction, or in respect of transactions relating to one event or occasion.

The exemption under section 186 is available only for transactions that are covered by section 185. Since the transaction between the two agriculturists is excluded from the operation of section 185 itself, it is not regarded as a transaction covered by section 185 for the purpose of section 186.

Therefore, receipt of ₹5,00,000 in cash by Mr. Nijjar Singh violates section 186. As a result, penalty under section 451 (corresponding to the erstwhile section 271DA) equal to the amount received in cash, i.e., ₹5,00,000, shall be leviable.

8. Cash Repayment of Advance Received Towards Immovable Property — Violation of Section 188 Even if the Property Transaction is Cancelled

Section 188 of the Income-tax Act, 2025 restricts the repayment of loans, deposits, and specified sums of ₹20,000 or more otherwise than through an account payee cheque, account payee bank draft, or prescribed electronic modes.

Unlike section 185, which grants an exemption to agriculturists having no income chargeable to tax, section 188 does not provide any such exemption. Therefore, agriculturists are also required to comply with the provisions relating to repayment of loans, deposits, and specified sums.

Accordingly, where the aggregate outstanding balance of a loan, deposit, or specified sum together with interest is ₹20,000 or more, repayment must be made only through prescribed banking channels. Repayment in cash in such cases constitutes a violation of section 188 and attracts penalty under section 453 (corresponding to the erstwhile section 271E).

Illustration

Mr. Lal Singh pays an advance of ₹1,70,000 to Mr. Nijjar Singh in connection with the proposed purchase of an immovable property. Such advance constitutes a specified sum because it is money received in relation to the transfer of an immovable property. The character of the amount as a specified sum arises from the purpose for which it is received and is not dependent upon the eventual completion of the transfer.

Subsequently, the parties decide not to proceed with the transaction and the agreement for transfer of the property is cancelled. As a consequence, Mr. Nijjar Singh becomes liable to refund the advance received from Mr. Lal Singh. Instead of making the repayment through banking channels, he refunds the entire amount of ₹1,70,000 in cash.

Section 188 governs the repayment of loans, deposits and specified sums. The provision mandates that no person shall repay any loan, deposit or specified sum otherwise than by an account payee cheque, account payee bank draft or a prescribed electronic mode where:

the amount of the loan, deposit or specified sum together with interest, if any, remaining unpaid on the date of repayment is ₹20,000 or more; or

the aggregate of such amounts exceeds the prescribed threshold.

In the present case, the amount of the specified sum remaining unpaid on the date of repayment is ₹1,70,000, which is substantially higher than the statutory limit of ₹20,000. Therefore, the repayment was required to be made through one of the prescribed modes. Since the refund was made in cash, the repayment is in contravention of Section 188.

The subsequent cancellation of the proposed transfer does not alter the legal character of the amount originally received. Once the money was received as an advance in relation to the transfer of an immovable property, it became a specified sum within the meaning of the Act. Consequently, when the amount is returned, the repayment continues to retain the character of repayment of a specified sum and remains subject to the restrictions prescribed under Section 188.

Accordingly, the fact that the contemplated transfer never materialised is wholly irrelevant for determining compliance with Section 188. The cash refund of ₹1,70,000 constitutes a violation of the provision because the repayment of the specified sum was not made through the prescribed banking or electronic modes.

A question may arise as to whether the exemption granted to agriculturists under section 185 can also be extended to transactions covered by section 188. The answer is in the negative. The exemption in favour of agriculturists has been specifically incorporated in section 185 and is restricted to the acceptance of loans, deposits, or specified sums. No similar exemption has been provided under section 188 in respect of the repayment of such amounts.

Consequently, the benefit available under section 185 cannot be imported into or read into section 188. Therefore, even if both the payer and the payee are agriculturists and neither of them has any income chargeable to tax under the Income-tax Act, the repayment of a loan, deposit, or specified sum otherwise than through the prescribed modes and in excess of the prescribed monetary limit would amount to a violation of section 188. The absence of taxable income or the agricultural status of the parties does not provide any immunity from the operation of section 188.

9. Whether Disallowance Will be Made if Any Cash Payment Made Excess of 10000 to Producers of Animal Husbandry, Livestock & Meat?

>Product of animal husbandry – If payment exceeding ₹10,000 is made to a producer of the products of animal husbandry (including livestock, meat, hides and skins) otherwise than by an account payee cheque or draft for the purchase of such produce, no disallowance should be attracted under section 36(4) (erstwhile Section 40A(3)). This exception is, however, not be available on the payment for the purchase of livestock, meat, hides and skins from a person who is not proved to be the producer of these goods and is only a trader, broker or any other middleman by whatever name called-Circular No. 4/2006 dated March 29, 2006.

> Purchase of animals – Any person, by whatever name called, who buys animals from the farmers, slaughters them and then sells the raw meat carcasses to the meat processing factories or to the traders/retail outlets would be considered as producer of livestock and meat. The exemption is subject to the following conditions:

(1) A declaration from the person receiving the payment that he is a producer of meat:

(2) A confirmation that the payment, otherwise than by an account payee cheque or account payee bank draft, was made on his insistence; and

(3) A further confirmation from a veterinary doctor certifying that the person specified in the certificate is a producer of meat and that slaughtering was done under his supervision-Circular No. 8/2006, dated October 6, 2006