Restrictions on cash transactions under the Income Tax Act, 1961

In order to curb the money laundering and black money practices being increasingly witnessed in our country, there were recent changes in the Income Tax Act regarding cash transactions to prevent such malpractices. Every assessee should declare his/her income in the Income Tax Return in a transparent manner in order to avoid any notices, scrutiny or survey being alleged for not disclosing properly.

Table of Contents

What are the restrictions being imposed on Cash Transactions?

• The Government of India puts certain limitations on the cash transactions which an assessee needs to take into account while undergoing any transaction.
• Such restrictions give a chance to the assessee to abide by them otherwise the amount falling under it shall be disallowed.

Why the restrictions are being imposed on Cash Transactions?

• Without any restriction, the assessee will misuse the loopholes and involve in any kind of unfavourable transaction therefore enabling him to evade tax.
• Such restrictions helps in keeping an eye on the type of transactions being undertaken, the amount involved , the parties involved whether they are related or not , proper invoicing with supporting etc so that proper checks can be placed on significant transactions.

The Kinds of Restrictions under different Sections are quoted below:

Section 40A(3) and Section 40A(3A)

• As per the Section 40A(3) , if any person is carrying business or profession no payment in cash exceeding Rs 10000 can be made to a single person , otherwise if made, such payment shall not be allowed as deduction under the Income Tax Act.
• As per the Section 40A(3A) , any amount is claimed as deduction in any previous year and the payment during the current year is made through modes other than account payee cheque, account payee draft ,electronic clearing system more than Rs 10000/-,deduction shall not be allowed.
• But payment of Rs 10000/- or more through account payee cheque, account payee draft or electronic clearing system is permissible.
• Also if a person carrying business or profession makes the payment to a transporter in cash exceeding Rs 35000/-, such amount shall be disallowed.

Exceptions to Section 40A(3)

There are certain exceptions to this section given under Rule 6DD (That is Payment above Rs 10000 otherwise than by account payee cheque or draft, electronic clearing system is accepted, no disallowance will be attracted) in following cases:

Payment made to:

• Reserve Bank of India or State Bank of India or any other banking company
• Any cooperative bank or land mortgage bank
• Any primary agricultural society or Primary Credit Society
• The Life Insurance Corporation of India
• Where payment is made to governmentPayment made by:

• debit/credit card
• a mail or telegraphic transfer through bank
• Bill of exchange made payable to bank
• Letter of credit arrangements through bank
• A book adjustment from one account to anotherPayment made for purchase of:

• Agriculture or forest produce
• Produce of animal husbandry
• Fish products
• Horticulture products
• To the Producer of such articles, products.

1. Where payment is made for purchase of products produced without the power of use of Cottage Industry.
2. Where payment is made in village or town to a person who carries business or profession in such village/town
3. Where payment is made to an employee or his legal heirs in relevance to retirement, retrenchment, resignation, death of employee, gratuity, a terminal benefit the total of whose sums does not exceed Rs 50000/-
4. Where the payment is to made on a day on which banks were closed due to national holiday or strike
5. Where payment is made by any person to his agent who is required to pay such amount in cash for goods or services on behalf of such person.
6. Where the payment is made by an authorised dealer or money changer for purchase of foreign currency in the normal course of business.
7. Where payment is made by an assessee to his employee after deducting tax from his salary and when such an employee
8. Is temporarily posted for a continuous period of 15 days or more at a place other than his normal place of duty and does not maintain any bank account at such place
9. Where any payment is made for adjusting any amount of liability incurred by a person for goods supplied or services rendered by the assessee.

Section 35AD

• As per Section 35AD, if any amount above Rs 10000 in cash that is (other than cheque, bank draft or electronic clearing system) is paid for purchasing any asset such amount shall not be added to the cost of the asset under Sec 43(1) to claim depreciation.
• The assesse while making such payment shall not be allowed a deduction under section 35AD which provides deductions for capital expenditure incurred for carrying specified business.

Section 80D

• Under Section 80D, any health insurance premium or medical expenditure shall not be deducted if paid in cash except if such amount in cash is paid for preventive health check up.

Section 80G, Section 80GGA,80GGB and 80GGC

• In case of donations made to specified persons, funds or organisation in cash exceeding Rs 2000 under Sec 80G, no such deduction shall be allowed. As per Section 80GGA, donations made for scientific, social or statistical research or rural development programs or for carrying any eligible project,100% of donations shall be allowed as deduction. But the deduction shall not be allowed if contribution in cash exceeds Rs 10000/-. Contributions under Sec 80GGB and Sec 80GGC to any political party or electoral trust  shall not be allowed if made in cash

Section 269ST

As per Section 269ST, no person shall receive an amount of Rs 2 lacs or more-

• In total from a person in a day or
• In context of a single transaction or
• In relevance of a transaction related to an event or personOtherwise such amount shall not be allowed as deduction. Such Section shall not apply to the following if the amount is received by:
  • Government
  • Banking company
  • Post office cooperative bank
  • Such persons, or class of persons which the Central Government by notification specify
  • Receipt by a business correspondent on behalf of banking Company or cooperative bank
  • Receipt from an agent by an issuer of pre-paid payments
  • Receipt by a company or institution issuing credit cards against bills in respect of one or more credit cards
  • Receipt by a white label ATM operator from retail outlet on behalf of banking company or cooperative bank
  • Any reward instituted in public interest by the government100% penalty shall be charged if the provisions of the Section 269ST are not complied with.

Section 269T and 269SS

• As per Section 269T, no person shall make any deposit or repay any loan or return any specified advance received otherwise than by account payee cheque or bank draft or ECS to the person who gave, if the amount of loan/deposit with Interest exceeds Rs 20000 or more.
• As per Section 269SS, no person shall accept any loan/deposit or any specified sum from another person otherwise by account payee cheque/draft or electronic clearing system exceeding Rs 20000 or more.

Section 194N

Under the Union Budget 2020, a new section was launched which implies that if a person withdraws cash exceeding Rs 1 crore in a financial year , TDS at the rate of 2% shall be deducted by the bank , cooperative bank or post office making payment. If the person who receives money has not filled the ITR’s for a period of 3 years, the rate of TDS shall vary that is 2% if payment exceeds Rs 20 lacs but not more than Rs 1 crore, and 5% if payment exceeds Rs 1 crore.

Conclusion

The Indian Government has taken judicious steps to prevent the black money practice or the non-disclosure of income in order to rationalise our taxation system taking efforts to make it unambiguous. But still often the taxpayers misuse by underestimating their incomes for which the Income Tax Department shall have to be extra alert to mitigate such activities and ensure a healthy and transparent tax compliance.