Implication of Cash transactions under Income Tax Act, 1961

Introduction

Cash is considered as a monetary consideration to fulfil a transaction between payer and payee. In India post demonetization and evolution of UPI as a medium of transfer of money changed the transaction settlement drastically. Government encourages cashless transaction rather than cash transaction for transparency, levy of tax, avoidance of black money, corruption etc., Hence through Income tax Act, 1961 cash transaction has been limited, restricted in certain cases. In this article you will get insights about how much you are allowed to transact in cash.

Restriction on Expenditure (Revenue & Capital)

Decoding of section 40A (3) & 40A (3A)

If above conditions are satisfied, then whole of expenditure shall be disallowed under respective section. In case payment is made to the transporter for plying, hiring or leasing goods carriages, then amount of Rs.10,000 shall be increased to Rs.35,000 in the above two conditions.

Key Points to be noted

• If an assessee makes payment of two different bills (none of them exceeds Rs.10,000 /Rs.35,000) at the same time in cash to the same person, provision of section 40A(3) is not attracted.
• Where payment is made over Rs.10,000/Rs.35,000 at a time, partly by account payee cheque & partly in cash but the payment in cash alone at one time doesn’t exceed Rs.10,000/Rs.35,000, the provision of section 40A(3) is not attracted.
• If an assessee makes payment of single bill (exceeding Rs.10,000/Rs.35,000) on different days to the same person in cash, the provision of section 40A(3) is not attracted, provided any of the payment doesn’t exceed Rs.10,000/Rs.35,000.
• The provision of section 40A(3) is attracted only when such expenditure is claimed as deduction under section 30 to 37.
• If part of the expenditure is already disallowed under any provision of this act, then disallowance shall be calculated on the allowed portion of the expenditure. In case of a transaction where both the above section are applicable at the same time, then first disallow the excess under section 40A(2) and if the balance is more than Rs.10,000, then disallow, undersection 40A(3) of the act.

Exception:

Rule 6DD – No disallowance under section 40A(3) shall be made if payment is made to

a. RBI or any banking company or any co-operative bank or any primary agricultural credit society or any primary credit society or LIC;

b. Government under the rules framed by it, such payment is required to be made in legal tender;

c. I. Any letter of credit arrangement or a mail or telegraphic transfer through bank;

II. A book adjustment from any account in a bank to any other account in that or any other bank;

III. A bill of exchange made payable only to a bank;

d. Agricultural or forest produce; or produce of animal husbandry or dairy or poultry farming; or fish or fish products; or products of horticulture or apiculture, To the cultivator, grower or producer of such articles, produce or products;

e. Purchase of the products manufactured or processed without the aid of power in a cottage industry, to the producer of such products;

f. Where payment is made in a village or town, which on the date of such payment is not served by any bank, in such village or town;

g. Where payment is made by way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services rendered by the assessee to such payer;

h. Where payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person;

i. Where the payment is made by an authorized dealer or a money changer against purchase of foreign currency or travelers cheques in the normal course of his business.

Restrictions on Loans, Deposits & Advances:

Analysis of Section 269SS – Mode of taking or accepting certain loans, deposits and specified sum:

No person shall accept, from any other person, loan, deposit or (any specified sum)~ otherwise than by an A/c payee cheque, bank draft or use of ECS through a bank account or through such other electronic mode as may be prescribed*, if

The amount of such loan, deposit, or specified sum or the aggregate amount of such loan, deposit and specified sum is Rs.20,000 or more.

Or

On the date of accepting such loan, deposit or specified advance, amount remaining unpaid or the aggregate amount remaining unpaid is Rs.20,000 or more.

Or

Amount or aggregate of amount referred to in clause (a) together with amount or aggregate of amount in clause (b) is Rs.20,000 or more.

In a nutshell, accepting loans in cash or through bearer cheque or crossed cheque is permitted up to Rs.19,999 only.

Meaning of Specified Sum~: The term ‘specified sum’ was added by Finance Act, 2015 w.e.f. 01.06.2015 by amending provisions of sections 269SS and 269T, which means any sum of money receivable, whether as advance or otherwise in relation to transfer of immovable property irrespective of whether or not the transfer has taken place.

Other electronic mode prescribed in Rule 6ABBA*

a. Credit card;

b. Debit card;

c. Net banking;

d. IMPS (Immediate payment service);

e. UPI (Unified payment interface);

f. RTGS (Real Time Gross Settlement);

g. NEFT (National Electronic Funds Transfer); and

h. BHIM (Bharat Interface for Money) Aadhaar Pay

Exemption from Section 269SS

This section applies to all the person i.e., Individual, HUF, Company, Partnership firm, AOP/BOI, Local authority, co-operative society, trust and AJP

The provisions of this section are not applicable in cases:

A. Where the following persons are either payer or recipient:

1. Government;

2. Any banking company, post office savings bank or co-operative bank;

3. Any corporation established by central, state or provisional act;

4. Any government company

B. Where the payer of loan or deposit and the recipient are both having agricultural income and neither of them has ANY income chargeable to tax under the Act.

Amendment by Finance Act, 2023: Primary Agricultural Credit Society (PACS) and Primary Co-Operative Agricultural and Rural Development Bank (PCARDB) can accept deposits up to Rs.1,99,999 (earlier Rs.19,999) in cash from its members and vice versa.

Penalty for non-compliance of section 269SS

Section 271D:

If a person takes or accepts any loan or deposit or specified sum in contravention of the provisions of section 269SS, he shall be liable to pay, by way of penalty, a sum equal to the amount of the loan or deposit or specified sum so taken or accepted.

Analysis of Section 269T – Mode of repayment of certain loans or deposits

No person shall repay any loan or deposit or (any specified advance) ^ otherwise than by an A/c payee cheque or draft or ECS or through such other electronic mode as may be prescribed in the name of the person who has made the loan or deposit if

The amount of such loan or deposit together with the interest is Rs.20,000 or more

Or

Aggregate of deposit with the above, either in his own name or jointly with any other person, together with the interest is Rs.20,000 or more

Is Rs.20,000 or more.

‘Specified advance’^ means any sum of money in the nature of advance, by whatever name called, in relation to transfer of an immovable property, whether or not the transfer takes place.

Exemptions applicable to section 269SS shall same apply for this section 269T also.

Penalty for non-compliance of section 269T

Section 271E:

If a person repays any loan or deposit or specified sum in contravention of the provisions of section 269T, he shall be liable to pay, by way of penalty, a sum equal to the amount of the loan or deposit or specified advance so repaid.

Amendment by Finance Act, 2023: Primary Agricultural Credit Society (PACS) and Primary Co-Operative Agricultural and Rural Development Bank (PCARDB) can repay deposits up to Rs.1,99,999 (earlier Rs.19,999) in cash to its members and vice versa.

Restriction on Cash transaction of Rs.2 Lakhs or more

Analysis of Section 269ST – Mode of undertaking transactions

No person shall receive an amount of Rs.2,00,000 or more-

a. In aggregate from a person in a day; or

b. In respect of a single transaction; or

c. In respect of transactions relating to one event or occasion from a person,

Otherwise than by A/c payee cheque or an bank draft or ECS or through such other electronic mode as may be prescribed:

Provided that the provisions of this section shall not apply to

(i) Any receipt by government or any banking company, post office savings bank or co-operative bank;

(ii) Transactions of the nature referred to in section 269SS

Key Points in Section 269T

1. Restriction is only on the person receiving money and not on the person paying money therefore penalty under section 271DA shall be leviable only on person receiving money.

2. Restriction is applicable to all the persons (except those which have been exempted specifically as per the proviso)

3. Applicable to receipts whether for business purpose, personal purpose or any other purpose.

4. Applicable to receipts whether with or without consideration:

a. The restriction is applicable irrespective of the fact that whether receipt is with or without consideration. In case of receipt of money without consideration in contravention of section 269ST, there will be dual impact, one charge of tax under section 56 (in specific cases) as well as penalty under section 271DA

b. Gift in cash from relative, even though is exempted as per section 56(2)(vii) but if amount of gift received in cash of Rs.2Lakhs or more assessee has to bear penalty under section 271DA also.

5. Character of receipt is irrelevant i.e. exempt income or taxable income.

Penalty for non-compliance of section 269ST

Section 271DA: if a person receives any sum in contravention of this section, he shall be liable to pay, by way of penalty, a sum equal to the amount of such receipt.

Conclusion

Provisions mentioned above are inserted to restrict cash transaction, On the flip side ITD encourages cashless transactions by giving relief to tax payers through increase in tax audit limit, low profit margin declaration in presumptive taxation, mandatory acceptance of payment through prescribes electronic modes etc., which are expected to make significant impact in coming future.

For any further information or clarifications, writer can be reached at [email protected]