Restriction on cash transactions under Income tax act, 1961
After the demonetization, Government has earned an important lesson. Keeping the rhetoric aside, it’s enlightened to the wisdom of colours in money. Notes of two-thousand turned pink, five hundred went green but none could become black. Still, it’s a firm belief, perhaps the only way to stop money from turning black.
It’s no longer secrete, cash transaction is mere the starting point in the webs of money launderers. A web that has no definite end. Once, cash turns black, it keeps exchanging hands. For few, the cycle ends on real estate, but it’s an illusion. It becomes part of an ever expanding parallel economy. An economy that shrinks the other one.
The very nature of cash as an exchange value with no trails, makes it most lucrative for all exchangers. Be it tycoons like Sahara Shree or saffron Baba, mystery in changing colours of cash has always given sufficient veil for shady deals. Businessman use it to suppress profit and save themselves from the burden of tax. Politician use it to earn incentives for their public works. Officials use it to hide the bribes. Public use it for convenience. Yet none are behind in naming and shaming.
Even the Income Tax Authorities are aware of it. It is very much for this the Income-Tax Act places several restrictions on cash transactions. These restrictions are placed by two methods –
Disallowing expenses and deductions to incentivise better compliances
Penalising cash transaction above threshold limits to create effective deterrence
Disallowance for expenses and deductions
Cash transaction is often the main source of generating black money. As seen from the country’s top corporate frauds including the Satyam, bogus cash transactions are used to cook the books of account. It’s by default the most preferred mode for turning the black into white and vice-versa. So, to create an effective check over it, Income-tax Act places deterrence through below mentioned provisions:
Section 13A – This section creates deterrence for Political Parties from accepting cash donations. As per this section, no political party shall take contribution of more than ₹20,000 in cash. This limit is further reduced to ₹2,000 by Finance Act, 2017, w.e.f. 1-04-2018. Non-compliance of this section disallows the tax exemptions provided to the Political Party. However, what the income-tax act fails to explain is the deterrence for political parties from splitting cash of ₹20,000 into ₹2,000 notes. What they receive at present in cash will probably still be in cash. What may change could be the only bogus number of donors. After all, what Sahara Shree could do can surely be done by parties too.
Section 40A – This section creates deterrence on entities from making cash payment of and over ₹20,000. This section disallows all such expenses under income-tax in a way creating deterrence from making cash payments. The limit of ₹20,000 is extended to ₹35,000 for transport contractor.
Disallowance of depreciation, investment allowance and capital expenditure under section 35AD – This section disallows depreciation and deductions in cash for the assets that are purchased in cash for and above ₹10,000. If, however, any such payment is made, such amount paid in cash above the limit shall not be recognized as the cost of such asset. The effect is clear – no depreciation means taxing the cash.
Section 80G – At a time when Government presented itself as if it were limiting cash donations for Political parties, there was no reason for letting other donations, out of such restrictions. It has reduced the existing limit of ₹10,000 to ₹2,000 w.e.f. 1-04-2018, for any cash donations to be allowed as deduction.
Penalising cash transactions
Other than discouraging cash transaction through disallowances, there are certain provisions that even penalises such transactions. Section 269 restricts payment or repayment of loan through cash transaction above ₹20,000. The only exception is for persons who have agricultural income and none of them have any taxable income (i.e. whose income are above basic exemption limit). The financial institutions or in common as we refer them as banking entities, are out of the ambit of this section.
Further Section 269ST is introduced to deter cash transaction for other than loans. To limit the most preferred mode of generating black money or as often used to turning black into white and vice versa, restriction is placed for transacting in cash for above ₹2,00,000. Again, Financial institutions are not covered under this section. So, other than while dealing with financial institution, no transaction in cash for and above ₹2,00,000 is permitted. This restriction is for
- A single transaction on
- A single day with
- A single person for
- Single occasion
In short, one can deal in cash, but any transaction in a day from a party should not exceed ₹2,00,000 for a transaction related to any one event or occasion.
To effectively enforce this restriction, penal provision under section 271D is introduced. As per this section, the liability lies with the recipient. If anyone receive in cash in violation of this section, he/she shall have to pay penalty of equivalent amount unless he proves-
- Such violation has sufficient good reasons for any contravention.
The Penalty under this section is imposed by Joint Commissioner.
Some Practical examples, to Illustrate the cash restrictions
- Suppose you donate ₹15,000 in cash to a trust registered under Income-tax. Now you want to claim it as deduction under 80G from your total income.
Here you’ve violated the provision of Income-tax that disallows cash donations for above ₹10,000. (This limit is further reduced to ₹2,000 after 1.4.2018) Therefore, you cannot take deductions under 80G.
- You have paid ₹50,000 in cash as repayment of loan to Mr. Shyam.
Here you will be disallowed to include ₹50,000 as you expense unless Mr. Shyam and you are persons with no taxable income.
- You sold a set of Chipsets to Mr. Y whose invoice value is ₹4,50,000. You received payment for the same in cash.
Here, your assessing officer is allowed to penalise you for the same amount as you have violated the provisions of 269ST. For any amount above ₹2,00,000 received in cash in a single day for a single transaction, your Assessing Officer can penalise the same amount. It is also needleless to mention that details of cash payments in violation of this section will have to be reported even in your tax audit report, if you are subject to tax audit.
Incentive to transact through banking Channels
Besides the disincentives and penalising provisions, Income-tax Act has also been amended to incentivise non-cash transaction. For small traders, who do not maintain proper books of accounts and pay tax based on presumptive basis, an incentive has been given. Unlike, in the past, traders going cashless can declare their income at 6% of profit rather than 8%, if their annual gross turnover is below ₹2 crores.
For example, when a trader declares his gross income to be ₹199 lakhs, his presumptive profit u/s 44AD will be –
- 15.92 lakhs @ 8%, if he were to deal in cash
- 11.94 lakhs @6%, if he were to go cashless
The difference in taxable income would amount to 4 lakhs, almost 25% income being exempt. If we see at the other way, it would amount to great saving in taxes. In the same example, if we were to suppose that the trader has no other income and is eligible for no other deductions, his tax liability will be –
- ₹ (1,20,000 + 30% of 5,92,000) + 3% of cess = ₹3,06,530 when his deals in cash; and
- ₹ (1,20,000 + 30% of 1,94,000) + 3% cess = ₹1,83,550 when he goes cashless.
The result is saving of ₹1,22,980 is taxes i.e., 40% saving in taxes. It is a great incentive for small traders to go cashless.
The above information is mere representation in an article. It cannot be constituted as a legal advice and readers are requested to seek legal advices for their specific circumstances. Though, significant efforts have been made to keep the information accurate and relevant, readers are requested to use their own circumspection as new notifications and circulars affecting the legal standings are issued regularly by the income-tax department.