Cash Transactions Limits:

The Income Tax Department has recently issued an E-Flyer detailing the cash transaction limits and emphasized the significant consequences associated with certain types of cash transactions.

The Income tax Department strongly encourages taxpayers and business professionals to avoid engaging in cash transactions entirely, as failure to do so may result in severe repercussions. Cash Transactions Limits with certain characteristics can have negative effects:

Disallowance of Cash-Paid Expenses

As per Section 40A(3) if a person incurs any expenditure for his business or profession, in respect of which payment or aggregate of payments made in cash in a day exceeds Rs. 10,000 to a person then, 100% of such payment will be disallowed while computing his taxable income from business/ profession. However, some exceptions are provided (See Rule 6DD of the Income Tax Rules).

Exceptions stated under Rule 6DD

Rule 6DD prescribes the following Cases or Circumstances in which payment in excess of Rs. 10,000 may be made otherwise than by an Account Payee Cheque or Demand Draft. So no Disallowance will be made of the Expenditure even if the payment exceeding Rs. 10,000 otherwise than by an Account Payee Cheque or Demand Draft.

Payment is made to Banking and other credit institutions: Where payment is made to the Reserve Bank of India, LIC, Banks, Government, primary agriculture credit society or co-operative bank, or land mortgage bank.

 

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Payment made to Government(both central & state government): Where the payment is made for payment of taxes -direct tax, GST, customs, or any other payment to the Govt. It also covers payments made other than taxes. For e.g., if the scrap is purchased from the Indian railways in cash.

Payment through banking system: Where the payment is made by

• Any letter of credit
• By Telegraphic Transfer/mail
• Bill of exchange payable to bank
• Use of ECS
• Credit/Debit card
• Book adjustment in the same bank or between one bank to another
• Credit card and Debit card
• Payment made by Book Entries:

Payment made by the book adjustment in the account of the payee against the money due to the assessee for the supply of goods or services.

Payment to cultivators, growers, or producers of agriculture products, forest products, animal husbandry products (including livestock, meat, hides, and skin), dairy products, poultry farming, fish or fisheries product, products of horticulture, apiculture, etc.

Where the payment is made for the purchase of products manufactured without the aid of power in a cottage industry to the producer of such product.

Where the payment to a person who ordinarily resides in a village or town which on the date of such payment is not served by any bank.

Payment of terminal benefits:

Where any payment is made to an employee or heir of such employee in connection with the retirement, retrenchment, resignation, or death of such employee, on account of gratuity, provided such payment is up to Rs. 50,000/-.

Payment made to an employee of his salary (after deducting TDS from salary): when such an employee is temporarily posted for a continuous period of 15 days or more in a place other than his normal place of duty or on a ship, or he does not maintain any account in any bank at such place or ship.

Payment required to be made on a day when banks were closed either on account of a holiday or strike.

Payment made by any person to his agent who is required to make payments in cash for goods or services on behalf of such person.

Payment made by an authorized dealer or a money changer against the purchase of foreign currency or traveler’s cheque in the normal course of his business.

Certain Loans or Deposits Must Be Repaid

Any branch of a banking company or a cooperative society, firm or other person is not allowed to repay any loan or deposit in cash if:

The amount of the loan or deposit or specified advance* together with the interest, if any, is Rs.20,000 or more, or

The aggregate amount of loans or deposits or specified advance held by such person, either in his own name or jointly with other person on the date of such repayment together with the interest, if any, is Rs.20,000 or more to any person who has made the loan or deposit or paid the specified advance*.

This clause is not applicable to:

Repayment of any loan, deposit, or defined amount* received from or made payable to:

(a) Government;

(b) any banking company, post office savings bank or co-operative bank;

(c) any corporation established by a central, state or provincial Act;

(d) any Government company as defined in clause (45) of section 2 of the Companies Act, 2013;

(e) such other institution, association or body or class of institutions, associations or bodies which the Central Government may, by notification in the Official Gazette, specify. (Refer Sec.269T)

*Specified advance means any sum of money in the nature of advance, by whatever name called in relation to transfer of an immovable property, whether or not transfer takes place.

Acceptance of Certain Loans and Deposits

• No one is allowed to take monetary payments of 20,000 rupees or more in the case of any loan or deposit, any sum related to the transfer of any immovable property (even if the transfer is not completed).
• If any cash received from a person for any such purpose is still outstanding to be repaid, then the overall limit of Rs. 20,000/- will apply to the outstanding amount plus any subsequent receipt in cash.

The following items are exempt from this rule:

This kind of money is accepted from –

(a) Government;

(b) any banking company, post office savings bank or co-operative bank;

(c) any corporation established by a central, state or provincial Act;

(d) any Government company as defined in clause (45) of section 2 of the Companies Act, 2013;

(e) such other institution, association or body or class of institutions, associations or bodies which the Central Government may, by notification in the Official Gazette, specify.

(f) from a person having agriculture income, and the recipient is also having agriculture income and neither of them is chargeable to income tax.

Consequences of violation: A fine in the amount of the cash seized will be imposed.

 

Read Also : Income Tax Notices for High Value Cash Transactions

 

Additional Cash Transaction

No person is allowed to receive in cash an amount 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,

This provision does not apply to-

(i) any receipt by-

(a) Government;

(b) any banking company, post office savings bank or co-operative bank;

(ii) transactions of the nature referred to in section 2695S;

(iii) such other persons or class of persons or receipts, which the Central Government may, by notification in the Official Gazette, specify. ( Refer Section 2695T)

(d) w.e.f 2019-20, Digital payments (Mode of electronic payments) are permissible in addition to account payee cheque, account payee bank draft or electronic clearing system through a bank account. Persons having business income and turnover/ receipt exceeding 50 crores in a financial year are mandatorily required to accept payment through prescribed electronic mode or other electronic mode only. In case of failure to do so, it would attract a penalty of Rs. 5000/- for every day during which such failure continues.

Consequences of violation of this provision: penalty u/s. 271 DA is levied for a sum equal to the amount of such receipt.

Deemed Income of the Year Following the Year of Payment

In case an allowance has been made in respect of any liability incurred by a person for any expenditure, and then during any subsequent year the person makes payment in respect thereof in cash, the payment is chargeable to income-tax as income of the subsequent year if the payment or aggregate of payments made to a person in a day exceeds Rs.10,000.

In case payment is being made for plying, hiring or leasing goods carriages, then the limit is Rs.35000, instead of Rs. 1,00,00/-.

Disallowance for Capital Expenditures, or Fixed Assets,

In case a person incurs any expenditure for acquisition of any asset in respect which a payment or aggregate of payments made to a person in cash in a day exceeds Rs.10,000/-, such expenditure is not included for the purposes of determination of actual cost of such asset.

This means that no depreciation benefit will be available on such capital expenditure incurred in cash

Donations in cash

Donation made in cash to a registered trust or political party, if exceeds Rs. 2000, are not allowable as deduction u/s 80G.

Health Insurance Premiums

Any payment made in cash on account of premium on health insurance facilities is not allowable as deduction u/s 80D of IT Act.