In order to restrict cash transactions, the government has come out with several provisions and related rules to prohibit various types of cash payments in the Finance Acts. The effects of restrictions under provisions of income tax act are as follows:

  • Restrict cash transactions by disallowances of expenses or deduction under chapter VIA of income tax act in computation of taxable income.
  • Penalizing cash transactions above threshold limits to create effective

Some of the provisions under income tax act and relevant income tax rules are given

S. No. Section Provisions at a glance Consequences in violation of Provisions (Penalty)
1 Section 13A

Exemption of Income in the hands of political Parties

Political parties which is registered with the Election Commissioner of India, are exempt from paying income tax. To avail exemption political parties are required to submit a report with Election Commissioner of India and furnish details of contribution received in excess of Rs. 20,000/- from any person.

  • No donation of Rs. 2,000/- or more is received otherwise than by an account payee cheque/draft/use of electronic clearing system through a bank account or through electoral bonds.
  • Income tax return to be filed under section 139(4B) & within time limit prescribed under section 139(1).
The income to the extent will not be exempted.

If return of income as required u/s 139(4B) is not submitted or if return is submitted belatedly that is after the due date, exemption u/s 13A will not be available.

2 Section 35AD

Disallowances of Capital Expenditures in case of Specified business.

Under the provisions if certain conditions are satisfied, the business assesse engaged in the specified business are eligible for deduction @ 100% (few cases weighted deduction @ 150%) of the capital expenditure incurred wholly and exclusively for the purpose of such specified business carried on in the previous year.

  • No deduction under section 35AD shall be allowed in respect of payment or aggregate payment per day made to a person against such expenditure otherwise, than an account payee cheque/draft/use of electronic clearing system through a bank account exceeds Rs. 10,000/-.
Deduction u/s 35AD shall not be available.
3 Section 43(1)

Disallowances of depreciation and investment allowances on cash payments

To discourage cash payment for purchase of capital assets, section 43(1) have been amended with effect from the assessment year 2018-19 as follows:

  • Section 43(1) is amended to provide that where an assessee incurs any expenditure for acquisition of any asset in respect of which a payment or aggregate payment made to a person in a day, otherwise than by cheque or bank draft or electronic clearing system exceeds Rs. 10,000/-, such payment shall be ignored to determine the actual cost of such asset
Cash payment will  not form part of “actual cost” u/s 43(1) and consequently depreciation u/s 32 and investment allowance u/s 32AD pertaining to such payment cannot be claimed.
4 Section 40A(3)

Payments exceeding certain sum made otherwise than by account payee cheques or bank drafts etc

 

To discourage cash payments for expenditure, section 40A(3) have been amended with effect from the assessment year 2018-19 as follows:

  • Expenditure incurred (which is otherwise deductible under the other provisions of the act for computation of income from business and profession) and payment made to a person in a day exceeds Rs. 10,000/- (Rs. 35,000/- in the case of payment for plying, hiring or leasing of goods carriage) otherwise than by an account payee cheque/draft/use of electronic clearing system through a bank account, such expenses are not allowable as deduction under Section 40A(3) in computation of income from business and profession. However few exceptions are provided by Rule 6DD of income tax rules. This resulted increase in taxable income from business or profession.
No deduction is allowable in computation of income from business or profession in respect of such cash payment.

This results increase in taxable income, in computation of profits and gains from business or profession.

5 Section 40A(3A)

Payments exceeding certain sum made otherwise than by account payee cheques or bank drafts etc

 

As per section 40A(3A), the restriction is also Applicable

  • If the tax payer had claimed a deduction in respect of any expenditure relation to any previous year.
  • Payment to such expenditure is made during the current year.

If during the current year payment made in a day otherwise than by an account payee cheque or account payee demand draft/use of electronic clearing system through a bank account exceeds Rs. 10,000/-.

No deduction is allowable in computation of income from business or profession in respect of such cash payment.

This results increase in taxable income, in computation of profits and gains from business or profession.

6 Section 80D

Deduction in respect of Health Insurance Premium

Deduction is allowable from Gross Total Income of a tax payer who is an Individual (may be resident/non-resident)/Indian citizen or foreign citizen) or a HUF (may be resident/non-resident) if

  • Payment made out of income chargeable to tax
  • Payment should be made any mode other than cash (exception is payment for preventive health check-up)

Regarding maximum limit of deduction please refer to the provision.

No deduction shall be allowed from gross total income u/s 80D
7 Section 80G – Donation Under the existing provisions of section 80G, deduction under Chapter VIA of income tax act is not allowed in respect of donation made of any sum exceeding Rs. 2,000/-, if the same is not paid by any mode other than cash. Section 80G contains details of Donee, maximum limit and deduction as a % of net qualifying amount for deduction from Gross Total Income (GTI) to arrive at Taxable Income. No deduction is allowed under Chapter VIA of income tax act from Gross Total Income if Donation paid in cash exceeding Rs. 2,000/-.
8 Section 80GGA

Donations for scientific research or rural development

An Assessee (other than an asessee whose Gross Total Income includes income chargeable under the head “profits and gains of business or profession”) is entitles to deduction in respect of certain donations for scientific, social or statistical research or rural development programme or for carrying out an eligible project or National Urban Poverty Eradication Fund shall be allowed (Subject to certain conditions). Such donation can be given in cash, or by cheque or draft. However no deduction is allowed in respect of cash transaction/contribution exceeding Rs.10,000/- 100% of donations or contributions made other than cash only is allowable as deduction. No deduction shall be allowed if contribution is paid in cash in excess of Rs.10,000.
9 Section 80GGB

Donations by Indian company to political parties / electoral trust

Any sum contributed by an Indian company to any political party or an electoral trust is not allowed as deduction while computing taxable income in respect of any sum contributed by way of cash. No cash payment allowed as deduction in computation of taxable income.

Non deduction results increase in tax payable.

10 Section 80GGC

Donations any person (other than Indian Company) to political parties / electoral trust

Any sum contributed by any person (other than Indian company) to any political party or an electoral trust is not allowed as deduction while computing taxable income in respect of any sum contributed by way of cash. No cash payment allowed as deduction in computation of taxable income.

Non deduction results increase in tax payable

11 Section 269SS

Prohibition on acceptance of cash loans, deposits or advance

As per provisions section 269SS, a person shall not accept any loan or deposit or “specified sum” from any other person otherwise than by an account payee cheque or account payee bank draft (or use of electronic clearing system through a bank account) if,

a) the amount of such loan or deposit or the aggregate amount of such loan and deposit; or

b) on the date of taking or accepting such loan or deposit, any loan or deposit taken or accepted earlier by such person from the depositor is remaining unpaid and the amount or the aggregate amount remaining unpaid; or

c) the amount or the aggregate amount referred to in clause (a) together with the amount or the aggregate amount referred to in clause (b), is Rs. 20,000/- or more:

“Specified Sum” means any sum of money receivable whether as advance or otherwise, in relation to transfer of an immovable property, whether or not 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.

However by virtue of section 273, the above penalty is not leviable if the assessee proves that there was a reasonable cause for the failure in compliance of the provisions

12 Section 269T

Prohibition on repayment of cash loans, deposits or advance

It provides that any branch of a banking company or a cooperative society, firm or other person shall not repay any loan or deposit made with it or any specified advance (any sum in nature of advance , by whatever name called in relation to transfer of an immovable property, whether or not such transfer takes place) received by it otherwise than by an account payee cheque or account payee bank draft drawn in the name of the person (or use of electronic clearing system through a bank account), who has made the loan or deposit, if

a) The amount of the loan or deposit together with interest is Rs. 20,000/- or more, or

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

Section 271E provides that if a loan or deposit is repaid in contravention of the provisions of section 269T then a penalty equivalent to the amount of such loan or deposit repaid may be levied by the Joint commissioner.

However by virtue of section 273, the above penalty is not leviable if the assessee proves that there was a reasonable cause for the failure in compliance of the provisions

As per proviso of section 269SS and section 269T, section is not applicable on any loan or deposit taken or accepted from:-

a) Government

b) any banking company, post office savings bank or co-operative bank

c) any corporation established by a Central, State or Provincial Act.

d) any Government company

e) such other institution, association or body or class of institutions, associations or bodies which the Central Government may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette.

13 Section 269ST –

Restriction on Cash Transactions

The section prohibits receipt of an amount of Rs. 2,00,000/- or more except by way of an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account by a person,

a) In aggregate from a person in a day
(For example: If a person receives Rs. 2.50 lakhs in cash against two different invoices raised for the service provided/goods supplied amounting to Rs. 1 lakhs and Rs. 1.50 lakhs). Or

b) In respect of a single transaction.
(For Example: If there is a single invoice for service provided/goods supplied amounting to Rs. 2.70 lakhs against which cash has been received on different days for Rs. 1.60 lakhs and Rs. 1.10 lakhs) or

c) In respect of transactions relating to one event or occasion from a person.
(For Example: If marriage is one occasion and a person receives amount of Rs. 2.30 lakhs)

Section 27DA provides that if any person receives any amount contravention of the provision of section 269ST, shall be liable to pay penalty of a sum equal to the amount of such receipt.

However, penalty is not leviable by the Joint Commissioner if it is proved by such person that there is a good and sufficient reason for such contravention.

Provisions of section 269ST shall not apply to any receipt by

(i) Government/any banking company, post office savings bank or co-operative bank;

(ii) Transactions of the nature referred to in section 269SS – i.e. acceptance of Loan, deposits etc,

(iii) Such other persons or class of persons or receipts etc. that may be notified by the Central Government.

(iv) Persons from whom the loan or deposit is taken or accepted and if the person by whom the loan or deposit is taken or accepted are both having Agricultural Income and neither of them has any Income chargeable to Tax.

(v) Any corporation established by a Central, State or Provincial Act

It is further clarified that the receipt of one installment of loan repayment in respect of a loan shall constitute a ‘SINGLE TRANSACTION’ as specified in clause (b) of section 269ST of the Act and all the installments paid for a loan shall not be aggregated for the purposes of determining applicability of the provisions section 269ST.

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