Navigating cash transactions in real estate deals requires careful consideration of tax compliance regulations under the Income-tax Act. Understanding permissible modes of payment and the consequences of cash transactions is crucial for stakeholders in the real estate sector.
Permissible modes of payment
The Income-tax Act includes several rules that discourage the use of cash and encourage the use of banks for financial transactions. There are many digital ways to pay and receive money, which help reduce cash transactions. To comply with these rules, you can use the following payment methods:
(a) Account payee cheque
(b) Account payee draft
(c) ECS (Electronic Clearing System)
(d) Credit Card
(e) Debit Card
(f) Net Banking
(g) IMPS (Immediate Payment Service)
(h) UPI (Unified Payment Interface)
(i) RTGS (Real Time Gross Settlement)
(j) NEFT (National Electronic Funds Transfer); and
(k) BHIM (Bharat Interface for Money) Aadhar Pay
It’s important to mention that mobile wallets, while also a digital payment method, are not specifically listed above. However, considering how commonly they’re used and that the government recognizes them as a digital payment method, mobile wallets should be included in this list. The tax department should issue a clarification about this.
For simplicity, payments or receipts made through any method not listed above (including mobile wallets) are treated as cash transactions. This includes payments made with paper currency, coins, bearer cheques, and similar methods.
The following provisions discourage or restrict payments in cash. These amounts will not be allowable as deduction while computing the business income of the assessee.
Disallowance of payment made in cash [Section 40A(3)/(3A)]
No deduction shall be allowed for an expenditure, even if it is deductible under any other provision, if payment (or aggregate of payments) for such expenditure to a person in a day exceeds Rs. 10,000 and it is made by any mode other than account payee cheque or bank draft or electronic clearing system. Where any payment is made for plying, hiring or leasing goods carriages, the ceiling of Rs. 35,000 shall be considered instead of Rs. 10,000.
‘EXPENDITURE’ – MEANING OF
All outgoings, including purchase of stock-in-trade are covered -Section 40A(3) refers to the expenditure incurred by the assessee in respect of which payment is made. It means all outgoings are brought under the word ‘expenditure’ for the purpose of the sub-section. The expenditure for purchasing the stock-in-trade is one of such outgoings. – Attar Singh Gurmukh Singh v. ITO [1991] 191 ITR 667 (SC).
Advance payments are also covered – Even if the payments were made by way of advances and were ultimately treated as discharging the liability to pay the price of the goods purchased, the payments so made must be considered to fall within the expression ‘expenditure’ incurred for payment of the price of the goods – Kejriwal Iron Stores v. CIT [1988] 169 ITR 12 (Raj.).
Interesting point
No deduction shall be allowed for an expenditure under Section 40A(3) of the Income Tax Act, 1961. However, since we’re not claiming any deductions but instead purchasing a capital asset, we’re making the payment in cash. Consequently, Section 40A(3) should not apply. Nonetheless, as per Section 43 (As below), the actual cost of the fixed asset will exclude any payment made in cash which will trigger Section 40A(3).
Actual Cost of Assets used for business or profession [Section 43]
Actual cost of an asset shall mean the cost incurred by the assessee to bring the asset to its present location as reduced by that portion of the cost which is met directly or indirectly by any other person.
Actual cost of an asset shall mean the cost incurred by the assessee to bring the asset to its present location as reduced by that portion of the cost which is met directly or indirectly by any other person.
The expression ‘actual cost’ must be understood in the commercial sense as per normal rules of accountancy prevailing in the commercial/industrial world. As per Accounting Standard 10 (Property, Plant and Equipment), at the time of initial measurement of cost of a fixed asset, it shall include its purchase price and all direct costs incurred to to make the asset ready for use.. For Income-tax Act, it means the actual cost to the assessee as reduced by the proportion of the cost met, directly or indirectly, by any other person or authority.
The actual cost of a fixed asset as per Income-tax Act shall be aggregate of its acquisition cost and all following costs.
Inclusions
1. Attributable incidental expenses
2. Interest on borrowings before commencement of the production
3. Trial-run Expenses etc
Exclusions
1. Payment in cash [Section 40A(3)/(3A)]
2. Interest expenses after asset is put to use etc
Exceptions
The disallowance under this provision does not apply or no payment shall be treated as business income of the assessee, even if payment exceeding Rs. 10,000/Rs. 35,000 is made otherwise than by an account payee cheque or demand draft or electronic clearing system through a bank account or through prescribed electronic modes
1. In the certain circumstances as prescribed in Rule 6DD.
2. Payment to agent : Payment made in non-specified mode shall not be disallowed if it is paid by any person to his agent who is required to make payment in cash for goods or service on behalf of such person. An employee shall not be treated as an agent for this purpose. Dy. CIT v. Vijay Kumar Ramesh Chand & Co. [2007] 108 ITD 626 (Pune – Trib.)
3. Provisions of sec. 40A(3) not applicable if assessee made cash payment for purchase of stock-in-trade: ITAT in Vikrant Happy Homes (P.) Ltd. v. DCIT [2022] 138 taxmann.com 559 (Pune – Trib.) – When an expenditure has been incurred in cash forming part of the closing stock for which no deduction had not been claimed while computing the income under the business head, the question of disallowance under section 40A(3) does not arise.
“3rd exception is not valid looking to the case of Attar Singh Gurmukh Singh v. ITO [1991] 191 ITR 667 (SC) as discussed above”
Provisions governing cash withdrawals
The provisions related to cash withdrawals are as follows:
(a) Section 139A- Reporting of PAN or Aadhar for cash withdrawal
(b) Section 194N- TDS on large cash withdrawals
(c) Section 285BA- Reporting of cash withdrawals in statement of financial transaction
Conclusion
In summary, the Income-tax Act strongly discourages cash transactions in favor of digital or bank-based methods to ensure transparency and traceability in financial dealings. Section 40A(3)/(3A) specifically disallows deductions for expenditures exceeding Rs. 10,000 in cash (or Rs. 35,000 for certain transactions related to goods carriage). The provisions emphasize digital transactions via approved methods such as account payee cheques, bank drafts, and electronic payments.
Furthermore, the Act mandates that the actual cost of assets used for business excludes cash payments, reinforcing the preference for non-cash transactions. Exceptions to the general rules are limited and defined under Rule 6DD, emphasizing situations where cash transactions can be unavoidable.
Author Bio
