CA Shruti Singhal
The tax audit season is about to begin. This article aims to refresh the existing limits of cash transactions. The Income Tax Act in India discourages cash transactions to promote transparency and curb tax evasion.
Disallowance of Expenses
Section 40A(3) disallows tax deductions for cash expenses exceeding Rs. 10,000 made in a single day. This applies to businesses and individuals filing income tax returns. For example, if an assessee shows an expense bill of more than Rs. 10,000 for which cash has been paid in various days, it will get covered under this disallowance.
This section is specific to an event. Even by artificially breaking the event into a number of separate invoices, assessee will not escape the provisions of this section. So the amount of expense for less than Rs. 10,000 can only be paid in cash and claimed as an expense under the Income Tax Act, whether the assessee is liable to tax audit or otherwise.
In other words, any expense above Rs. 10,000 that is not paid by approved payment methods i.e. account payee cheques, bank drafts, and electronic transfers will not be allowed as an expenditure under Income Tax Act. This is a huge penal cost of paying expenses in cash.
There's an exception for payments up to Rs. 35,000 to transporters for hiring goods vehicles. It's crucial to maintain proper records of all expenditures with bills and receipts for verification by tax authorities.
Restrictions on Cash Receipts
Section 269ST prohibits receiving cash exceeding Rs. 2 lakhs in a single day or for a single transaction. This applies to both individuals and businesses.
Breaking this rule attracts a penalty equal to the amount received in cash.
Now suppose an assessee makes an expenditure of Rs. 2.5 lakhs for one invoice of commission or salary. The commission agent or employee as the case may be will be liable to a penalty of Rs. 2.5 lakhs.
So the assessee earning income from business or profession needs to take into account both of the following -
- His limit of Cash Expenditure
- Payee's limit of Cash Receipt
Exceptions to Cash Transaction Limits
The Income Tax Act acknowledges certain situations where cash transactions are unavoidable. Here are some exceptions:
- Payments to specified entities: There are exceptions under Rule 6DD for specific situations like payments to the government or banks or in remote areas without access to banking.
- Small purchases: Everyday purchases for minimal amounts (below Rs. 10,000) are not restricted by the Act.
Importance of Digital Transactions
The Income Tax Act incentivises digital transactions by allowing tax deductions for expenses incurred electronically. This encourages a paperless economy and discourages the use of black money.
Conclusion
Understanding cash transaction limits under the Income Tax Act is essential for taxpayers to avoid penalties and ensure smooth tax filing. By adopting digital payment methods, you can not only streamline your transactions but also contribute to a more transparent financial system.
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