A number of new provisions have been introduced in the Income Tax Act from time to time to put restrictions on cash transactions as well as to incentivise the non-cash transactions. Cash transactions have always played a major role in the Indian Economy and consistently were responsible for generation and accumulation of Black Money. The purpose of imposing restrictions on cash transaction is to curb the flow of black money which is adversely affecting the revenues of the Government, and will also minimize the investment in unproductive assets like Gold jewellery etc. The motive of various provisions under the Income Tax Act is to boost cashless transactions and digital payments. The various provisions can be classified into following categories.
a) Restrictions on cash transactions resulting in disallowance of expenses and deductions and also penalizing cash transactions above threshold limits.
b) To incentivise payments through banking channels.
c) Collection of information through compliance provisions.
The article gives a brief synopsis of the provisions and is not exhaustive.
a) Restrictions on cash transactions.
i) Section 13A (Exemption to political parties).
No donation exceeding Rs. 2000/- can be received in cash by political parties.
ii) Section 35AD
The Section provides for investment linked tax incentives in case of certain specified businesses. The capital expenditure covered U/S 35AD shall not be allowed as deduction if paid in cash in excess of Rs. 10000/- as per clause (f) of sub-section 8.
iii) Section 36
Clause (ib) of sub section (1) of section 36 puts restrictions on deduction for amount of premium paid by the employer for health insurance of its employees if paid in cash.
iv) Section 40A(3) and 40A(3A)
The deduction in computation of income from Business and Profession is not allowable in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by a crossed account payee cheque or bank draft or use of electronic clearing system through a bank account exceeding Rs. 10000/-. This limit is extended to Rs. 35000/- in the case of payment for transportation charges. Few exceptions are provided in Rule 6DD of Income Tax Rules.
Section 40A (3A) further provides if any amount is claimed as expenditure in any particular year and the cash payment exceeding Rs. 10000/- (35000/- for transportation charges) is made in any subsequent year. The same will be added to the income of that subsequent year.
v) Section 43(1)
Where an assessee incurs any expenditure for acquisition of any assets in excess of Rs. 10000/- otherwise than by way of banking channels, the same shall not be included in the cost of the asset, meaning thereby that the depreciation shall not be allowable on that cost.
vi) Section 80D
No deduction is allowed from gross total income if health insurance premium or medical expenditure on the health of the assessee or his parents or the dependent family members is paid in cash.
vii) Section 80G
No deduction is allowed for donation if paid in cash in excess of Rs. 2000/-
viii) Section 80GGA
The donation as specified in the section are not deductible if paid in cash in excess of Rs. 10000/-
ix) Section 80GGB/C
The contribution made by an Indian Company to any political party is not allowed as deduction if paid in cash.
x) Section 80JJAA
This section provides for a deduction of an amount equal to thirty percent of additional employee cost incurred in the course of such business in the previous year for three assessment years including the assessment year relevant to the previous year in which such employment is provided. The deduction is subject to the conditions specified in the section and that the payment is made by way of any of the modes other than by way of cash.
xi) Section 269SS and Section 271D
This section restricts to accept any loan, deposit and specified sum in cash if the sum (including earlier deposit) is Rs. 20000/- or more. There are certain exceptions as per section. Specified sum have been defined as per explanation clause (iv) as under:-
“Specified sum” means any sum of money receivable, whether as advance or otherwise, in relation to transfer of an immovable property, whether or not the transfer takes place.”
Section 271D provides that if a loan or deposit is accepted in contravention of the provisions of section 269SS then a penalty equivalent to the amount of such loan or deposit so taken or accepted, may be levied by the Joint Commissioner.
xii) Section 269T and Section 271E
Any person including a firm, branch of any banking company or a cooperative society shall not repay any loan or deposit or any specified advance in relation to an immovable property (whether or not such transfer takes place) otherwise than by an account payee cheque or bank draft drawn in the name of the person. The repayment can also be made by the use of electronic clearing system. Provided that the aggregate amount of loans or deposits held by such person together with interest is Rs. 20000/- or more. This section is not applicable on any loan or deposit taken or accepted from Government, any banking company, post office savings bank or co-operative bank as specified in proviso to section 269T.
Section 271E provides for a penalty equivalent to the amount of such loan or deposit repaid in contravention to the provisions of section 269T to be imposed by the Joint Commissioner.
xii) Section 269ST-Restricition on cash transactions
The section was introduced vide Finance Act, 2017 which prohibits the receipt of an amount of Rs. 2 Lakh or more by a person.
1) In aggregate from a person in a day
2) In respect of a single transaction
3) In respect of transactions relating to one event or occasion from a person.
Otherwise than by an account payee cheque/draft or use of electronic clearing system through a bank account.
Certain exceptions have also been specified in the section.
Penalty for contravention of the provisions of this section is provided U/S 271DA which will be equivalent to the amount of such receipt. The Joint Commissioner shall be authorized to impose penalty after giving a show cause notice.
xiv) Section 269SU (w.e.f. 01-11-2019)
“Every person, carrying on business, shall provide facility for accepting payment through prescribed electronic modes, in addition to the facility for other electronic modes, of payment, if any, being provided by such person, if his total sales, turnover or gross receipt, as the case may be, in business exceeds fifty crore rupees during the immediately preceding previous year.”
Penalty for contravention of the provisions of section 269SU can be imposed by Joint Commissioner which shall be five thousand rupees for everyday during which such failure continues after giving a show cause notice.
a) Section 44AB
One major incentive has been provided through important amendment made in section 44AB regarding applicability of Audit provision in case of person carrying on business which after amendment reads as under:-
i) Carrying on business shall, if his total sales, turnover or gross receipts, as the case may be, in business exceeds or exceeds one crore rupees in any previous year.”
The following proviso shall be inserted through Finance Act 2020 w.e.f. A/Y 2021-22 :-
“Provided that in the case of person whose-
a) Aggregate of all amounts received including amount received for sales, turnover or gross receipts during the previous year, in cash, does not exceed five per cent, of the said amount, and
b) Aggregate of all payments made including amount incurred for expenditure, in cash, during the previous year does not exceed five percent of the said payment,
This clause shall have effect as if for the words “one crore”, the words “five crore rupees” had been substituted”
The effect of this amendment in my opinion is that if limit of cash receipts and payments does not exceed five percent of aggregate of all receipts or aggregate of all payments, the liability for audit as per section 44AB is not applicable upto Rs. 5 crores. The provision of section 44AD will also not be applicable irrespective of the quantum of net profit or loss. The beneficiaries of this provision are the persons who are trading in equity shares or any other businesses in which the transactions in cash are minimal (below five percent).
Section 44AD (presumptive Taxation)
Normally an eligible assessee carrying on the eligible business on which provisions of section 44AD are applicable has to declare net profit @ 8% of turnover/gross receipts (upto turnover of two crore rupees). However a proviso was inserted w.e.f. 01/04/2017 to provide for a lower presumptive tax @ of ‘six percent’ shall be substituted for 8% in respect of the amount of turnover or gross receipts which is received through account payee cheque or any other mode provided therein.
Sections 43CA, 50C and 56:- Transactions relating to Real Estate.
The above said provisions provide that the consideration in respect of transfer of any immovable property shall not be less than stamp value fixed by the stamp valuation authority. However a relaxation has been provided that where the transaction is the result of an agreement executed earlier the value as per agreement may be adopted if any advance payment was made through account payee cheque or any other specified mode.
Compliances in respect of cash Transactions
Obligation to furnish statement of Financial Transactions made in cash.
a) Section 285BA
The section makes it obligatory on certain persons to furnish details of cash receipts/deposits in excess of Rs. 200000/- as provided in section 285BA read with Rule 114E.
b) Section 194N (w.e.f. 01-09-2019)
“Every person, being,-
1) A banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act)
2) A co-operative society engaged in carrying on the business of banking
3) A post office,
who is responsible for paying any sum, or, as the case may be, aggregate of sums, in cash, in excess of one crore during the previous year, to any person (herein referred to as the recipient) from one or more accounts maintained by the recipient with it shall, at the time of payment of such sum, deduct an amount equal to two percent of sum exceeding one crore rupees, as income tax”
Certain exceptions have been given in the proviso to this section.
The motive behind all these provisions is to route the transactions through banking channels, which can be helpful in restricting the generation of black money but these measures are not sufficient to eliminate black money. The Government should lower the rate of personal Income Tax to develop a culture of tax compliance and generate more and more revenue.