Prohibited transaction in cash/limit on cash transactions

Income-tax Act has several provisions that restrict receipt or payment made in cash by a person subject to a certain threshold limit. These restrictions have been introduced to move towards a cashless economy and to reduce the generation and circulation of black money.

Disallowance of cash payments [Section 40A(3)]

Section 40A(3) provides that if the payment or aggregate of payments for an 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 through a bank account or prescribed electronic modes, no deduction shall be allowed for such expenditure.

However, where payment is made for plying, hiring, or leasing goods carriages, the ceiling of Rs. 35,000 shall be considered instead of Rs. 10,000.

The provision of Section 40A(3) does not apply to payments made by commission agents for goods received by them for sale on a commission or consignment basis because such payment is not an expenditure deductible in computing the taxable income of the commission agent.

However, if the commission agent purchases goods on his own account and not on a commission basis, the requirement of payment in a specified mode applies to such purchases.

Further, where the taxpayer had claimed a deduction in respect of expenditure in any of the earlier years and subsequently makes payment thereof, otherwise than by an account payee cheque or bank draft, in excess of Rs. 10,000, in that situation, the payment so made is deemed to be the business income of the previous year in which payment is made.

Exceptions:  

The disallowance does not apply if payment is made in certain circumstances as prescribed in Rule 6DD. These circumstances are prescribed below:

A. Payment to Specified Institutions –

No disallowance shall be made for the payment made in a non-specified mode (i.e., cash, crossed cheque, bearer cheque, etc.) to the following institutions:

(a) RBI or any banking company, (b) State Bank of India or any of its subsidiary banks, (c) Co­op. banks or land mortgage bank, (d) Primary Agricultural Credit Society or Primary Credit Society, (e) LIC

B. Payment in Legal Tender to the Government

No disallowance shall be made for an expenditure whose payment is required to be made to the Government in legal tender, such as payment of freight charges/booking of wagons to railways, sales tax, excise duty, etc.

C. Payment by Specified Modes

No disallowance shall be made where the payment is made by the following modes:

(a) Letter of credit arrangements through a bank, (b) Mail or telegraphic transfer through a bank, (c) Book adjustment from one bank account to another bank account, (d) Bill of exchange payable only to a bank.

Here bank includes a bank established outside India also.

D. Payment by Book Adjustment

No disallowance shall be made for the payment 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 him.

E. Payment for Agriculture or Animal Produce

No disallowance shall be made for payment made to the cultivator, grower, or producer in respect of the following purchases:

(a) Agriculture or forest produce, (b) Produce of animal husbandry (including, livestock, meat, hides, and skins) or dairy or poultry farming, (c) Fish or fish products, (d) Products of horticulture or apiculture (bee-keeping for sale of honey)

The immunity from disallowance under this provision shall be available to the payer if payment for animal husbandry is made to a person who is the producer of these goods. If these goods are purchased from a trader, broker, or any other middleman, this exception shall not available.

F. Payment for Produce of Cottage Industry

No disallowance shall be made where the payment is made to a producer for the purchase of the products manufactured or processed without the aid of power in a cottage industry.

G. Payment in Remote Places

No disallowance shall be made for the cash payment if payment is made in a village or town, to any person who ordinarily resides or carries any business, profession, or vocation, in such village or town which, on the date of such payment, is not served by the bank.

H. Terminal payments to low-paid employees

No disallowance shall be made for any payment made by the employer by way of gratuity, retrenchment compensation, or similar terminal benefits to an employee (or to his heirs) on or in connection with the retirement, retrenchment, resignation, discharge, or death of such employee. Such immunity is allowed if the aggregate of such sum payable to the employee or his heir does not exceed Rs. 50,000.

I. Payment of salary at remote places

If an employee is temporarily posted for 15 days or more in a place other than his normal place of duty or on a ship and he does not maintain any bank account at such place or ship, the salary paid after deducting tax at source under Section 192 by the employer to such employee shall not be disallowed.

J. Payment to the agent

Payments made in a 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 services on his behalf.

K. Payment made by an authorized dealer

Authorized dealers and money changers are normally required to pay cash for purchases of foreign currency or traveler’s cheques in the normal course of their business, and no disallowance shall be made for any cash payments made by them.

Authorized dealer or money changer means a person authorised as such to deal in foreign currency or foreign exchange under any law for the time being in force.

L. Purchase of Animal

Any person who buys animals from farmers to slaughter them and to sell their raw meat or carcasses, to meat processing factories, traders, or retail outlets, may be considered a producer of livestock and meat. This exemption shall be available to the payer subject to the fulfilment of following conditions:

a) The person receiving the payment files a declaration that he is a producer of meat;

b) The producer of meat declares that the payment, otherwise than through account payee cheque or bank draft, was made on his insistence; and

c) A veterinary doctor certifies that the person specified in the certificate is a producer of meat and that slaughtering was done under his supervision.

Acceptance of loans, deposits, and specified sum [Section 269SS]

Section 269SS restricts a person (recipient) from taking or accepting any loan or deposit or any specified sum from any other person (depositor), otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account or other prescribed electronic mode (impermissible mode). However, restriction isn’t imposed if the recipient and depositor, both are having agriculture income and neither of them has any income chargeable to tax.

The following transactions are covered under section 269SS:

• Any loan or deposit of money; or
• Any sum of money receivable by way of advance or otherwise in relation to the transfer of immovable property, whether or not the transfer takes place.

The provision shall be attracted if:-

a) The amount (or aggregate) of such loan or deposit or specified sum from a depositor is Rs. 20,000 or more; or

b) On the date of taking or accepting such loan or deposit or specified sum, the amount (or the aggregate) of any loan or deposit or specified sum taken or accepted earlier from the depositor remaining unpaid is Rs. 20,000 or more; or

c) The aggregate of the sum referred to in points (a) and (b) above is Rs. 20,000 or more.

However, if a deposit is accepted by a Primary Agricultural Credit Society (PACS) or a Primary Co-Operative Agricultural and Rural Development Bank (PCARD) from its member or a loan is taken from a PACS or a PCARD by its member, the threshold of Rs. 20,000 shall be enhanced to Rs. 2 lakhs¹.

Exceptions – There is no restriction to take or accept any loan or deposit or specified sum from or by any of the following:

• Government;
• Any banking company, post office saving bank, or co-operative bank;
• Any corporation established by a Central, State, or Provincial Act;
• Any government company defined under section 2(45) of the Companies Act, 2013; or
• Any other notified institutions, associations, or body, or class of institutions, associations, or bodies.

Penalty for contravention of the provisions – Where a person takes or accepts any loan or deposit (or specified sum) in cash or in a mode which is in contravention of Section 269SS, he shall be liable for a penalty under Section 271D of a sum equal to the amount of the loan or deposit (or specified sum) so taken or accepted.

Mode of undertaking transactions [Section 269ST]

Section 269ST restricts a person (recipient) from receiving an amount of Rs. 2 lakhs or more otherwise than by an account payee cheque or account payee bank draft or use of an electronic clearing system through a bank account or other prescribed electronic modes.

This provision imposes restrictions in respect of the receipts of Rs. 2 lakhs or more:

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

b) In respect of a single transaction; or

For Example, Mr. A has sold goods worth Rs. 2.5 lakhs to Mr. B who has paid in cash as follows:

• • 1.5 lakhs on April 1;
  • 25,000 on May 1; and
  • 75,000 on June 1.

Mr. A would be considered to have not complied with the provisions of Section 269ST the moment he receives the last payment of Rs. 75,000 which eventually makes the total receipt in respect of a transaction exceeding Rs. 200,000.

c) In respect of a transaction relating to one event or occasion from a person – if there are multiple transactions, relating to one event or occasion from a person they would be covered under the restriction.

Where a transaction is covered within the scope of Section 269SS (accepting loan or deposit in impermissible mode) provisions of this section shall not apply.

Exceptions – This provision shall not apply to the receipt by the following persons:

• Government;
• Any banking company, post office saving bank, or co-operative bank; or
• Any other notified persons, class of persons, or receipts.

Further, the provision of this section shall not apply to receipt by any person from any banking company, post office savings bank, or co-operative bank.

Penalty for contravention of the provisions – Where a person receives the amount in contravention of this provision, he shall be liable for a penalty under Section 271DA of a sum equal to the amount of such receipts.

Acceptance of payment through prescribed electronic modes [Section 269SU]

Section 269SU provides that where a person is carrying on a business and his total sales, turnover, or gross receipts during the immediately preceding previous year exceeds Rs. 50 crores, it shall be mandatory for him to provide a facility to accept the payment through the following electronic modes:

a) Debit card powered by RuPay;

b) Unified Payments Interface (UPI) (BHIM-UPI); and

c) Unified Payments Interface Quick Response Code (UPI QR Code) (BHIM-UPI QR Code).

These facilities to accept the payment shall be in addition to the facility for other electronic modes of payment being provided by such person.

The provision of this section shall not apply to a person having only B2B transactions (i.e., no transaction with retail customer/consumer) subject to the condition that at least 95% of the aggregate of all amounts received during the previous year, including the amount received for sales, turnover or gross receipts, is by any mode other than cash.

Penalty for contravention of the provisions – Where a person fails to provide the facility for accepting payment through prescribed electronic modes as required under this provision, he shall be liable for a penalty under Section 271DB of Rs. 5,000 for every day during which such failure continues.

Mode of repayment of certain loans or deposits [Section 269T]

Section 269T restricts a person from repayment of any loan, deposit, or any specified advance received by it otherwise than by an account payee cheque or account payee bank draft (drawn in the name of the person who made the loan, deposit or specified advance) or by use of electronic clearing system through a bank account or other prescribed electronic modes.

Repayment in respect of the following transactions are covered under this provision:

• Any loan or deposit of money which is repayable after notice or repayable after a period and in case of a person other than company it includes loan or deposit of any nature; or
• Any sum of money in the nature of advance in relation to the transfer of immovable property, whether or not the transfer takes place.

Such loan, deposit, or specified sum should be taken or accepted in accordance with provisions of Section 269ST. In case of cash repayment of loan or deposit, the borrower could be penalized under Section 269T and the recipient could be penalized under Section 269ST.

This provision shall be attracted if the value of the covered transaction exceeds the following limit:

a) The amount of such loan or deposit or specified advance together with the interest payable thereon is Rs. 20,000 or more;

b) The aggregate amount of the loans or deposits held either in own name or jointly with any other person on the date of such repayment together with the interest payable on such loans or deposits is Rs. 20,000 or more; or

c) The aggregate amount of the specified advances received by such person either in his own name or jointly with any other person on the date of such repayment together with the interest payable on such specified advances is Rs. 20,000 or more.

However, if a deposit is paid by a Primary Agricultural Credit Society (PACS) or a Primary Co-Operative Agricultural and Rural Development Bank (PCARD) to its member or a loan is repaid to a PACS or a PCARD by its member, the threshold of Rs. 20,000 shall be enhanced to Rs. 2 lakhs².

Exceptions  – There is no restriction on repayment of any loan or deposit or specified advance taken or accepted from any of the following:

• Government;
• Any banking company, post office saving bank, or co-operative bank;
• Any corporation established by a Central, State, or Provincial Act;
• Any government company defined under section 2(45) of the Companies Act, 2013; or
• Any other notified institutions, associations, or body, or class of institutions, associations, or bodies.

Penalty for contravention of the provisions – Where a person repays any loan or deposit (including interest) or specified advance in cash or an impermissible mode in contravention of provisions of Section 269T, he shall be liable for a penalty under 271E of a sum equal to loan or deposit or specified advance so repaid.

Overview of Section 269SS, 269ST, 269SU and 269T:

Here for the above sections including section 40A(3) prescribed electronic modes include-

(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.

Important Points on the prohibited transaction in cash/limit on cash transactions

1. If the payment (or aggregate of payments) for an 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 through a bank account or prescribed electronic modes, no deduction shall be allowed for such expenditure under section 40A(3).

2. Where payment is made for plying, hiring, or leasing goods carriages, the ceiling of Rs. 35,000 shall be considered instead of Rs. 10,000.

3. No disallowance shall be made under section 40A(3) for the payment made in a non-specified mode (i.e., cash, crossed cheque, bearer cheque, etc.) to (a) RBI or any banking company, (b) State Bank of India or any of its subsidiary banks, (c) Co­op. banks or land mortgage bank, (d) Primary Agricultural Credit Society or Primary Credit Society, (e) LIC

4. The following transactions are covered under the provision of section 269SS – (a) Any loan or deposit of money; or (b) Any sum of money receivable by way of advance or otherwise in relation to the transfer of immovable property, whether or not the transfer takes place.

5. Where a person takes or accepts any loan or deposit (or specified sum) in cash or in a mode which is in contravention of Section 269SS, he shall be liable for a penalty under Section 271D of a sum equal to the amount of the loan or deposit (or specified sum) so taken or accepted.

6. There is no restriction under section 269SS to take or accept any loan or deposit or specified sum from or by – (a) Government; (b) Any banking company, post office saving bank, or co-operative bank; (c) Any corporation established by a Central, State, or Provincial Act; (d) Any government company defined under section 2(45) of the Companies Act, 2013; or (e) Any other notified institutions, associations, or body, or class of institutions, associations, or bodies.

7. Provision of section 269ST imposes restrictions in respect of the receipts of Rs. 2 lakhs or more:

• In aggregate from a person in a day; or
• In respect of a single transaction; or
• In respect of a transaction relating to one event or occasion from a person.

8. Where a person receives the amount in contravention of provision of section 269ST, he shall be liable for a penalty under Section 271DA of a sum equal to the amount of such receipts.

9. Section 269SU provides that where a person is carrying on a business and his total sales, turnover, or gross receipts during the immediately preceding previous year exceeds Rs. 50 crores, it shall be mandatory for him to provide a facility to accept the payment through the following electronic modes:

• Debit card powered by RuPay;
• Unified Payments Interface (UPI) (BHIM-UPI); and
• Unified Payments Interface Quick Response Code (UPI QR Code) (BHIM-UPI QR Code).

10. Where a person fails to provide the facility for accepting payment through prescribed electronic modes as required under this section 269SU, he shall be liable for a penalty under Section 271DB of Rs. 5,000 for every day during which such failure continues.

11. Where a person repays any loan or deposit (including interest) or specified advance in cash or an impermissible mode in contravention of provisions of Section 269T, he shall be liable for a penalty under 271E of a sum equal to loan or deposit or specified advance so repaid.

12. Prescribed electronic modes include – (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.

Notes: 

¹ Inserted by the Finance Act, 2023 with effect from 01.04.2023.

² Inserted by the Finance Act, 2023 with effect from 01.04.2023.