Restriction on Cash Transactions under Income Tax Act


Cash Restrictions

Introduction:

The Government of India with an intention to evade black money and to discourage the cash transactions taking various steps. Specially the Income tax Act is amended and provided with dis-allowances and stringent penal provisions for various types of cash transactions. Let us briefly understand some of such provisions here.


SECTION 269ST- Restriction on Cash Receipts

Section 269ST, provides that no person shall receive an amount of 2,00,000/- or more in cash or bearer cheque.

(i) In aggregate from a person in a day (or),

(ii) In respect of a single transaction (or),

(iii) In respect of transactions relating to one event or occasion from a person.


Violation of above section shall be liable to pay, by way of penalty, a sum equal to the amount of such receipt - Section 271DA


Implications:

1. Capital introduction by partner more than Rs.2,00,000/- in an aggregate is a violation under 269ST?

Yes. It violates the clause (iii). Capital introduction is an event.

2. Withdrawal of capital or profits by a partner more than Rs.2,00,000/- in an aggregate is a violation under 269ST?

Yes. It violates the clause (iii). Capital introduction is an event similarly withdrawal is also an event.

3. A raises an invoice value of Rs.2,50,000 (more than 2 lakhs) on B. Can A collect the entire amount in cash on different dates?

No. It violates the clause (ii)

4. Numerous invoices with value lesser than Rs.2,00,000/- have been raised against the same person for an event and on aggregation it exceeds Rs.2,00,000. Payments are received in cash on different dates and are lesser than Rs.2,00,000. Can the person collect the entire amount in cash on different dates?

No. It violates the clause (iii).

5. Credit Sales is made in a FY 17-18 for Rs.2,50,000/- and the amount is recovered in cash over more than one financial year, i.e FY 17-18 and FY 18-19. Can the person do so?

No. he cannot collect like this. The act does not specify any period with response to cessation of time limit for such collection of amount.

6. Can cash be collected excess of 2 Lakhs from more than one person relating to one common event?

As per Clause (iii)- “In respect of transactions relating to one event or occasion from a person”, person can also be interpreted as Persons. Hence, be as a safer side, better to avoid such cases.

7. Can exempt income and cash gifts be collected in cash exceeding the 2 lakhs?

No. It cannot be collected in such manner.

8. Will Debtor directly depositing into the Creditor’s Bank A/c, is a violation under 269ST?

No. It’s not a violation. Audit Trail can be done in this situation through PAN.

9. Can EMI ‘s be received in cash for more than 2 lakhs?

No. It violates Clause (iii).


SECTION 269SS- Restriction on cash receipts

Section 269SS, provides that no person shall take or accept

(i) Any loan (or),

(ii) Deposit (or),

(iii) Any specified Sum.

In cash Rs. 20,000 or more in an aggregate; or such an amount which results in the amount remaining unpaid to the person, exceeds Rs. 20,000 or more.


Violation of above section shall be liable to pay, by way of penalty, a sum equal to the amount of such receipt - Section 271E.


Implications

1. Can A take a loan from B for Rs.5,000/- in cash who already has a loan or deposit made to A of Rs.16,000/- received in cash or bank, which unpaid?

No. Because if Rs.5,000/- is received in cash, the aggregate amount of loan from the specific lender would exceed Rs.20,000/-. It is a violation under 269SS.

2. A borrows loan Rs.18,000/- (lesser than Rs.20,000/-) in cash from B in PY-17-18. In PY-18-19, he again borrows Rs.5,000/-. Is it a violation?

Yes. At any point of time the balance in borrowings from a specific person through cash shall not be equal to or more than Rs.20,000/-.

3. whether receipt of share application money in cash amounts to violation of section 269SS

No, share application money in case is neither a loan nor a deposit

4. A borrows loan Rs.18,000/- (lesser than Rs.20,000/-) in cash from B in PY-18-19. B has already made a deposit of Rs.23,000 (greater than Rs.20,000/-) with A in last year and penalty has been paid by A for the prior violation. Does it attract any violation in the PY-18-19?

Yes. At any point of time the borrowings from a specific person through cash shall not be equal to or more than Rs.20,000/-. However, penalty shall be paid only to the amount received in the current year, since penalty for previous closing balance would have been paid.


SECTION 269T: Restriction on Cash Re-Payments

No person shall repay

(i) Any loan (Incl. interest) or

(ii) Deposit made with it (Incl. interest) or

(iii) Any specified advance received

in cash Rs.20,000 or more; or any amount if the aggregate amount of loans, deposits or specified advances either in his own name or jointly with any other person on the date of such repayment together with the interest if payable is Rs.20,000 or more.


Implications

1. X repays a loan amount of Rs.18,000/- along with Interest of Rs.1,500/- and a loan closing fees of Rs.750/- in cash. Can he do so?

No. On aggregation the amount exceeds Rs.20,000/- (18,000+1,500+750= 20,250). It would become a violation u/s 269 T.

2. A and B jointly repays the loan of Rs.35,000/- along with interest of Rs.3,500/- equally in cash. Each of them pays Rs.19,250/-. Is it a violation?

Yes. It’s a violation. Though each of them pays an amount which is lesser than Rs.20,000/-, jointly it exceeds the limitation and thus causes a violation u/s 269 T.

3. Whether advance received for sale of goods paid in cash amounts to violation of section 269T

Yes. It’s a violation. Deposits include Trade deposits.

4. Whether receipt and payment of Partners Capital by partnership firm amounts to violation of section 269SS and 269T?

No. Partners’ capital is neither a loan nor a deposit. But it will cover in 269ST.


SECTION 40A(3) – Restriction on Cash Payments

Where the assesse incurs any expenditure in respect of which payment or aggregate payments made to a single person in a day, in cash exceeds Rs.10,000, then it will be disallowed as expenditure in income tax act.

Note: For transporters the above limit is Rs.35,000/-


Implications

1. Payment has been made to Rama in excess of Rs.10,000/- on the same day in cash for many invoices raised on same (or) different days. Is this a violation?

Yes. No payment is excess of Rs.10,000/- shall be made to any person in cash for incurring any expenses.

2. Payment of Rs.9,000 has been made in cash as partial payment on 25/04/2018 and balance is settled in cash on 28/01/2019 against an invoice with a value of Rs.15,000/-. Is this a violation?

No, not a violation, since the payment on any day with the same person does not exceed Rs.10,000/-.

3. Loan is repaid in cash for an amount of Rs.18,000/- and Expenditure is met for amount Rs.8,000/- to the same person X, in cash on the same day. Is it a violation?

No. Even though the total amount of cash outflow to the same person on the same day is greater than Rs.20,000/-, one is for settlement of loan and the other is to meet with the expenses. Hence it is not a violation.

4. For a Goods Transportation Agency, payment of Rs.31,500/- has been made on a single day for single bill. Is this a violation ?

No. For GTA alone, the limit is upto Rs.35,000/- and not Rs.10,000/-. Hence it is not a violation.

5. Payment of advance salary in cash Rs.35,000/- is a violation?

Yes. It’s a violation; the amount will be disallowed in the year in which the expenses entry is passed.

Similarly payment of advance to vendor will be disallowed in the year of expenses incurred.


SECTION 43(1) - Restriction on Cash Purchase of assets

Where the assesse incurs any expenditure for purchase of asset in respect of which payment or aggregate payments made to a single person in a day, in cash exceeds Rs.10,000, then such expenditure shall be ignored for the purposes of determination of actual cost of asset.


Implications

1. Payment has been made B ltd for purchase of a capital asset, in excess of Rs.10,000/- on the same day in cash for many invoices raised on same (or) different days. Is this a violation?

Yes. No payment in excess of Rs.10,000/- shall be made to any person in cash for incurring any capital expenditure relating to acquisition of an asset.

2. A pays Rs.8,000/- for an expense made and Rs.7,000/- as a part payment for acquiring a capital asset, in cash. Is this a violation?

No. Since specifically both are covered under different sections in the act.


SECTION 44AD: Presumptive Taxation – Discouraging cash receipts

Assesse’s having total turnover or gross receipts lesser than Rs.2 crores are eligible for this scheme. As per this section a sum equal to eight per cent of the total turnover or gross receipts of the eligible assesse in the previous year shall be deemed to be the profits and gains of his business chargeable to tax under the head "Profits and gains of business or profession"

But as per the amendment if the amount of total turnover or gross receipts received through banking channels, then only six percent of such receipts will be deemed to be profits and gains business or profession, thereby govt discouraging cash receipts.


Implications

1. Total Turnover of the business in a FY is Rs.25,00,000/-. Turnover made through account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account is Rs.22,00,000/-. What is the presumptive income?

The deemed profit in this case is 6% on Rs.22,00,000/- and 8% on Rs.3,00,000/-.

2. Can an assesse having turnover greater than Rs.2 crores opt this scheme of taxation?

No. Only assessee having Total TO lesser than Rs.2 crores can opt this scheme of taxation.


Other Miscellaneous Provisions:

1. No exemption shall be allowed for research income when contributions are received in cash. Section 10(21)

2. Contributions received in cash by charitable institutions, trust, university and other educational institutions are not exempt from taxation. Section 10(23C)

3. Premium of Health insurance of employees shall be paid only in a mode, other than cash for claiming deduction. Section 36

4. Unexplained credit of cash in the books of accounts would be taxed at the discretion of AO. Section 68

5. Medical insurance premium other than preventive health checkup shall be paid in mode other than cash. Section 80D

6. When interest on debentures are paid in cash (even though the interest amount is lesser than Rs.5,000/-), TDS shall be deducted. Section 193

7. TCS shall be collected from the buyer of the goods specified under the section, at the prescribed rate, upon making the payment. Section 206C

8. Cash donations made to specified relief funds and notified charitable institutions can be claimed as deductions only to the extent of Rs.2,000/- Section 80G

9. No deduction will be allowed on cash donations made to a political party. Section 80GGB

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