In the Indian economy, cash transactions have always played a major role and been a reason for black money. The Government in recent years has initiated various measures to curb cash transactions and boost digital payments. In this article, I have tried to give a brief overview of w.r.t. cash transaction limits put in by government under the Income Tax Act and GST law along with a penalty for transacting in cash over and above a certain threshold.
The objective of imposing restrictions on cash transactions is to curb the flow of domestic black money which is not only adversely affecting the revenues of the Government but is also affecting the investment for productive purposes because most of the black money is transacted in cash, it remains unaccounted and quite a sizable amount remains unproductive and is stored in the form of cash or remains invested in low priority investments such as gold bullion, jewelry, real estate, etc. The restrictions are intended to move towards a less-cash economy and to reduce generation and circulation of black money.
Cash Payments exceeding the Prescribed Limit - Disallowance of Expenditure [Sec. 40A(3) & Sec. 40A(3A)]
As amended by Finance Act, 2017; with effect from 01-04-2018, section 40A(3) provides that; if any payment or aggregate of payments in a day to a person otherwise than by account payee cheque or bank draft or use of electronic clearing system through a bank account or any other electronic mode as may be prescribed, exceeds Rs10,000/-, no deduction shall be allowed in respect of such expenditure.
Simply put, if payment for any expenditure of over Rs. .10,000 is made in cash, then the expenditure will be disallowed under the Income Tax Act. No deduction is allowable in the computation of income from business or profession 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 an account payee bank draft /use of electronic clearing system through a bank account exceeding Rs. 10,000/-.These results increase in taxable income, in the computation of profits and gains from business or profession.
However, in case of payment is made to the transporter for plying, hiring or leasing of goods carriage; the prescribed limit is Rs. 35,000.
Further, certain exceptions are provided by Rule 6DD of Income Tax Rules, 1962. As per Rule 6DD, no dis-allowance shall be made and no payment shall be treated as profits & gains of business or profession, where payment or aggregate of payments made to a person in a day, otherwise than account payee cheque draft, exceeds Rs. 10,000 in following cases -
1. Where the payment is made to -
- The Reserve Bank of India or The State Bank of India or any other banking company
- Any co-operative bank or land mortgage bank
- Any primary agricultural credit society or any primary credit society
- The Life Insurance Corporation of India
2. Where the payment is made to the Government, such payment is required to be made in legal tender
3. Where the payment is made by -
- Any letter of credit arrangements through a bank;
- A mail or telegraphic transfer through a bank;
- A book adjustment from any account in a bank to any other account in that or any other bank;
- A bill of exchange made payable only to a bank;
- the use of electronic clearing system through a bank account;
- A credit card;
- A debit card.
4. Where the 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 payee
5. Where the payment is made for the purchase of -
- Agricultural or forest produce; or
- The produce of animal husbandry (including livestock, meat, hides, and skins) or dairy or poultry farming; or
- Fish or fish products; or
- The products of horticulture or apiculture,
- To the cultivator, grower or producer of such articles, produce or products
6. Where the payment is made for the purchase of the products manufactured or processed without the aid of power in a cottage industry.
7. Where the payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village or town;
8. Where any payment is made to an employee of the assessee or the heir of any such employee, on or in connection with -
- Discharge or death of such employee,
- On account of gratuity,
- Retrenchment compensation or
- A similar terminal benefit and the aggregate of such sums payable to the employee or his heir does not exceed Rs. 50,000.
9. Where the payment is made by an assessee by way of salary to his employee after deducting the income-tax from salary and when such employee—
- Is temporarily posted for a continuous period of fifteen days or more in a place other than his normal place of duty or on a ship; and
- Does not maintain any account in any bank at such place or ship.
10. Where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike.
11. Where the 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.
12. Where the payment is made by an authorized dealer or a money changer against the purchase of foreign currency or travelers’ cheques in the normal course of his business.
Also, herein the word 'expenditure” is very significant for this section, as it disallows the expenditure. However, the word 'expenditure” has not been defined in the Act or rules; but as per common parlance, it includes the expenditure covered u/s 30 to 37 of the act. Also, misperception exists as to whether the purchases of goods/services made are to be considered expenditure or not, as it is not covered u/s 30 to 37 of the act. For that matter, Purchases are also covered in the expenditure as decided by Hon’ble Supreme Court in the case of Attar Singh Gurmukh Singh Vs ITO (1991) ITR 667.
Further, Sec 40A (3A) provides that in case allowance is made in any assessment year on the basis of incurred liability for such expenditure, but payment has been made in subsequent year, in cash exceeding the prescribed limit, then payment so made shall be deemed to be income of the year in which payment is made.
Disallowance of Capital Expenditures, Depreciation and investment allowances on cash payments [ Sec 35AD & Sec 43(1) ]
Section 35AD provides for investment-linked tax incentives, wherein if certain conditions are satisfied, assessee engaged in specified businesses is eligible for deduction @ 100% (150% weighted deduction in certain cases) of the capital expenditure incurred wholly and exclusively for the purpose of such specified business carried on.
Section 43(1) provides for a detailed methodology for determination of actual cost of the asset, for which depreciation is to be allowed.
To discourage cash payment for the purchase of capital assets, section 35AD and section 43(1) have been amended with effect from the assessment year 2018-19. Wherein, any capital expenditure is incurred in cash exceeding Rs. 10,000, no deduction u/s 35AD shall be allowed for such capital expenditure; also, such payment shall be ignored for the purpose of determination of actual cost as per sec 43(1). In other words, where an assessee incurs any expenditure for acquisition of a depreciable asset in respect of which a payment has been made in cash in excess of Rs. 10,000, such a payment or capital asset acquired through it shall not be eligible for normal/additional depreciation or investment allowance.
Deduction in respect of Health Insurance Premium not to be allowed [Sec 80D]
Section 80D of the act provides for deduction from Gross Total Income of an individual for the amount paid as health insurance premium and medical expenditure for self and family. No such deduction shall be allowed health insurance premium or medical expenditure has been paid in cash, except for amount paid for preventive health-care check-up.
Deduction in respect of Donations not to be allowed [ Sec 80G ]
Section 80G provides for deduction in respect of donations made to specified funds or organizations or any person registered under the section. In order to promote cashless economy and transparency, no deduction is to be allowed u/s 80G if the donation has been made in cash exceeding Rs. 2,000.
Deduction for donation for scientific research or rural development [ Sec 80GGA ]
Section 80GGA provides for deduction in respect of donations made for scientific, social or statistical research or rural development programs or for carrying out any eligible project or for National Urban Poverty Eradication Fund. 100% of such donations are allowed as a deduction; however, no deduction shall be allowed if the contribution has been made in cash exceeding Rs. 10,000.
Deduction for donation to Political parties or Electoral Trust [ Sec 80GGB & 80GGC ]
Section 80GGB & 80GGC provides for deduction in respect of contributions made to any political party or electoral trust. However, no deduction shall be available if such a contribution has been made in cash.
Prohibition on Acceptance of Cash loans, deposits, etc [ Sec 269 SS ]
As per Section 269 SS, a person shall not take or accept loan/deposit or specified sum# from another person otherwise than by A/c payee cheque or account payee bank draft or by use of electronic clearing system so that the aggregate from such person is Rs. 20,000 or more.
The limit of Rs. 20,000 will also apply to a case even if on the date of taking or accepting such loan or deposit, any loan or deposit taken or accepted earlier by such person from such depositor is remaining unpaid and such unpaid amount along with the loan or deposit to be accepted, exceeds the aforesaid limit.
In layman terms, cash loan or deposit from the same person of Rs. 20,000/- or more is not allowable for the purpose of Section 269SS.
Section 271D provides that if a loan or deposit is accepted in contravention of Sec 269 SS, then a penalty equivalent to the amount of such loan or deposit so taken may be levied.
# Specified sum means any amount receivable whether as advance or otherwise, in relation to transfer of immovable property, whether or not the transfer takes place.
Prohibition on Repayment of Loans, deposits, etc in Cash [ Sec 269 T ]
As per Sec 269 T, any person shall not repay any loan or deposit made with it or any specified advance# received by it otherwise than by A/c payee cheque or bank draft or use of ECS, to the person made the loan or deposit if the amount of loan or deposit together with interest is Rs. 20,000 or more, whether in held by a person in his own name or jointly with another person.
Section 271 E provides that if a loan or deposit or specified advance is repaid in contravention of provisions of Sec 269 T, then a penalty equivalent to the amount of loan or deposit or specified sum repaid may be levied.
# Specified Advance means any sum in nature of advance, in relation to the transfer of immovable property, whether or not such transfer takes place.
Restriction on Cash Transactions [ Sec 269 ST ]
Section 269 ST was introduced in Finance Act, 2017 and came into effect from 01.04.2017. This was implemented in order to make provisions to restrict cash transactions as the effectiveness to control black money could not be achieved by the previous sections to their full potential.
As per Sec 269 ST, No person should receive cash of Rs. 2,00,000 or more:
- in aggregate from a person in a day; or
- in respect of a single transaction; or
- in respect of transactions relating to one event or occasion from a person.
Provision of Section 269ST shall not apply any of the following if receipt by-
- Banking Company
- Post office Co-operative Bank
- Transactions of nature referred to in section 269SS
- such other persons or class of persons or receipts, which the Central Government may, by notification in the Official Gazette, specify
Ministry of Finance has specified following additional exceptions to Sec 269 ST
- Receipt by a business correspondent on behalf of banking company or co-operative bank
- Receipt by white label ATM operator from retail outlet on behalf of a banking company or co-operative bank
- Receipt from an agent by an issuer of pre-paid payment instruments
- Receipt by a company or institution issuing credit cards against bills in respect of one or more credit cards
- Receipts not included in total income u/s Sec 10 (17A), i.e., any award or reward instituted in public interest by Government
According to Section 271 DA, if an individual receives an amount in contravention to any of the provisions or rules of Section 269ST, they would be held accountable to pay a penalty of the total sum equal to the amount that was received in cash.
Thus, in layman terms, the penalty amount would be 100% of the amount that was acquired in contravention of this section.
Keeping in context, many of the small businesses and households taking loan from NBFCs and HFCs, government has clarified that the receipt of one installment of loan repayment in respect of a loan shall constitute a ‘single transaction’ and all the installments paid for a loan shall not be aggregated for the purposes of determining applicability of the provisions section 269ST.
In other words, if an individual is repaying the loan to HFCs or NBFCs, then the one installment of the loan repayment shall constitute a single transaction. Therefore, if a single loan installment amount is less than Rs. 2 Lakhs, it could be paid in cash. All the installments paid for a loan would not be aggregated for the purpose of determining the applicability of the Rs. 2 Lakhs limit.
The restriction u/s 269ST is only on receipt of money and not on payment of money. Therefore, penalty u/s 271DA on violation of these provisions shall be leviable only on the person receiving money and not on the person paying the money. However, it is to be highlighted here there are already above-mentioned restrictions applicable on payment in cash and there exists appropriate penalties and disallowances for same.
Further, Sec 269 ST is applicable to all persons, whether it is individuals, HUFs, companies, firms, AOPs, BOIs, local authorities, and other artificial judicial persons.
The restriction is applicable irrespective of the purpose of accepting amount i.e., whether the business purpose or personal purpose; capital or revenue nature, tax-free or taxable income. Thus, now even an individual cannot accept cash, even in gift, of Rs. 2,00,000 or more.
Also, it has been made clear that penalty u/s 271 DA is leviable even if the receiver does not have PAN and/or is not a tax assessee.
CBDT specifically clarified through its Circular No: 27/2017 that restrictions-imposed u/s 269ST are also applicable on the sale of agricultural produce also; thereby specifying government’s intent to cover all the major transactions in cash and curb the creation of black money.
If Mr. A sells goods worth Rs. 4,50,000 through three different bills of Rs. 1,50,000 each to Mr. B and accepts cash in 1 single day at different times then section 269ST(a) will get violated. As Cash Receipt of Rs. 2 lakh or more, from a single person in a day is not allowed even if the amount has been paid through multiple transactions during the day which are below Rs. 2 lakh.
If Mr. A sells goods worth Rs. 500,000 through a single bill to another person and receives cash of Rs. 1,00,000 in 5 equal instalments then section 269ST(b) will get violated. As Cash receipts of Rs. 2 Lakh or more which are related to a single transaction are prohibited.
Mr. A accepts order of designing, manufacturing and installing machinery in the factory of Mr. B. He accepts cash in the following manner:
In this case, Sec 269 ST(c) will get violated even if cash is accepted on different dates, as all the transactions relate to the same event, i.e., purchase of machinery by Mr. B.
Before the introduction of this section, there was no restriction on the receiver to accept cash however a restriction on the payer U/s 40A(3) that a person shall not pay more than Rs. 10,000. So earlier it was easy to manipulate books to some extent. But after this introduction, it would not be possible to do so and thus this step of government is to be appreciated to curb cash transactions.
Further, currently, there is no prescribed limit for sale in cash under GST Law.
All the above stated provisions of law are applicable on the date of publishing this article but are subject to amendments in law. Thus, you are requested to correlate the same with provisions prevailing for the time being in force before applying the same to any practical situation.
The author is a student of CA-Final and may be contacted at firstname.lastname@example.org