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Cash Transaction under Income Tax Law

13 Sep,2018

Description

Introduction:

Many people have question about maximum cash they can give or accept without facing any problem under Income Tax Act.

People have lot of doubts on one can accept cash and give cash whether in form of loan, advance, deposit or against a business transaction.

  1. How much cash sales one can do in a day?
  2. How much cash sales one can do with a single person in a day and in a year?
  3. How much cash loan, deposit or advance one can give to different person or a single person?
  4. What are the penalties if cash given or taken in a day from a single person or different person?
  5. How much cash one can receive against a single invoice or different invoice in a day or in a year from a single or different person?

Under Income Tax Different sections of IT ACT which prohibits dealing in cash transactions or limits the value of cash transactions.

  • Section 269ST
  • Section 40A(3)
  • Section 269SS
  • Section 269T

These sections define the value of cash transactions that are allowed as per income tax Act. Remember there is no constitutional ban on dealing in cash, only thing is that the income tax department assesses cash transactions in different manner putting penalties on cash transaction done.

As per Section 269ST, any person who enters into a transaction of Rs.2 Lakh or above in cash, will be liable to a penalty of an amount equivalent to the amount of transaction.

For example

If you buy an expensive watch for cash worth Rs.5 Lakh, it is the shopkeeper who receives payment in contravention of section 269ST will have to pay the tax (penalty) of Rs.5 Lakh. So here the tax rate is 100%.

Though this new section on cash Transaction limit sounds simple, we need to go through it in details, as I believe that this may have quite an impact on our daily financial lives.

2. What does section 269ST say ?

With effect from 1st April, 2017, no person shall receive an amount of Rs.2 Lakh or more;

  1. In aggregate from a person in a day (or)
  2. In respect of a single transaction (or)
  3. In respect of transactions relating to one event or occasion from a person.

The new Cash transaction limit is not applicable, if a person receives the amount through an Account Payee Cheque (or) an Account Payee Bank Draft (or) through use of electronic clearing system through a bank account. (Look like, any receipts done through e-Wallets like Paytm, credit cards etc, may also be hit by this new amendment, need more clarity though)

Kindly note that Penalty under section 271D will be imposed on a person who receives a sum of Rs.2 Lakh and above in cash. The extent of penalty will be a sum equal to amount of such receipt. The said penalty shall however not be levied if the person proves that there were good and sufficient reasons for such contravention.

 

3. Section 269ST & Rs.2 Lakh cash Transaction Limit: Examples

Let us understand the above three points with examples;

Single Person

Cash receipt of Rs.2 Lakh or more, from a single person in a day is not allowed even if the amount has been paid through multiple transactions during the day which are below Rs.2 lakh.

For example

Mr.X buys a gold chain worth Rs.2 Lakh and pays the amount by cash to Mr.Y on a single day in 4 equal installments of Rs.50,000 each. As Mr.Y accepted cash worth Rs.2 lakh from a single person and in a single day, section 269ST is applicable in this case. Mr.Y has to pay a penalty of Rs.2 Lakh.

Single Transaction

Cash receipt of Rs.2 Lakh or more which are related to a single transaction are prohibited.

For example

Mr.A goes through a medical surgery and the hospital charges him a bill of Rs.4 Lakh. Mr.A clears the bill in 4 installments if Rs.1 lakh each on four different dates. Here, the cash receipt got by hospital are less than Rs.2 Lakh and have been received on different dates.

Whether this transaction violates section 269ST? – yes. Hospital has to pay the penalty. Because, they received the payments with respect to single bill/transaction. So, spitting of payments over several days is prohibited.

Single Event/Occasion

Cash transaction or cash receipts related to a single event or occasion, cannot be more than Rs.2 Lakh.

For Example

X gets married to Y. On their wedding occasion, their relatives gifted Cash amount worth Rs.10 Lakh on different dates. Even if we assume that each person has gifted cash worth less than Rs.2 lakh, are these receipts come under the purview of Section 269ST? Is penalty applicable?

Yes, penalty can be levied. Here, marriage is a ‘single occasion’ and cash gift worth Rs.2 Lakh or more can not be received from relatives and other person.

4. Other Important Points

* Based on interpretation of section 269 ST, payment modes like bearer cheque and self-cheque will also be considered on par with Cash based transactions only.

* It has been clearly stated that penalty (if any) is chargeable to an individual who violates section 269ST, even if you do not have PAN and/or is not a tax assesse.

* The restriction of receipt of money in cash of Rs.2 Lakh or above in cash is applicable irrespective of whether it is for personal/business purpose, capital or revenue in nature, tax-free or taxable income.

* Kindly note that the payer of money is not liable to pay any penalty. It is the receiver of cash who has to bear the penalty under section 271DA.

* Donations in cash exceeding Rs.2,000 are not permitted (Donations can be claimed under section 80G)

* Premiums on Health insurance policies paid in cash cannot be claimed as deduction under section 80D.

* Loans or Deposits cannot be repaid in cash in excess of Rs.20,000 or more.

*Payment of above Rs.10,000 per person, cannot be made for any business payment towards any expenses (or) purchase of capital asset.

* One should not accept a loan or deposit or sale consideration of immovable assets in cash in excess of Rs.20,000.

5. Restriction on capital Expenditure for business in cash above Rs.10,000 (Section 32 of the income Tax Act, 1961)

Where an assessee incurs any expenditure for acquisition of a depreciable asset in respect of which a payment ( or aggregate of payment made to a person in a day ), otherwise than by an account payees cheque/draft or use of electronic clearing system through a bank account, exceeds Rs.10,000. Such a payment shall not be eligible for normal/additional depreciation.

 

6.Reduction in the limit of Cash Payment to Rs.10,000 in a Day (Section 40A (3) & 40A(3A) of the Income Tax Act, 1961)

The monetary limit on revenue expenditure in cash has been reduced from Rs.20,000 to Rs.10,000 (there is no change in the monetary limit pertaining to cash payment upto Rs.35000 to transport Contractors). Few exceptions are also provided in Rule 6DD of the Income Tax Rules. Consequently, any expenditure in respect of which payment (or aggregate of payment made to a person in a day), otherwise than by an account payee cheque/ draft/use of electronic clearing system through a bank account, exceeds Rs.10,000, no deduction shall be allowed in respect of such payment under sections 30 to 37 of Income Tax Act, 1961.

 

7.Conclusion

As a business owner or as an economic soldier we should try to avoid cash transactions. Cash is the main source for bribes at lower level of bureaucracy. The best we can do is to minimize cash transactions.

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