There is a paradigm shift in the manner in which the Legislature and Courts are viewing cash transactions.
Prologue
From the time the demonetisation was announced in 2016, it is seen that under direct tax laws, the approach and perspective on cash transactions has spasmodically changed, disincentivising the same. It is noticed that from the time high denomination notes have been called-of, under direct taxes, the transactions done in cash have started to be viewed with parochial mindset.
Cash Transaction Limit under Income Tax
The following are the main income tax sections that pertain to cash transaction limit:
ü Section 40A(3) and Section 43 – Pertains to Cash Payment
ü Section 269SS and Section 269ST – Pertains to Cash Receipts
ü Section 269T – Pertains to Repayment of Certain Loans / Deposits
Provisions under income tax act dealing with cash transactions
First provision which may strike to our mind regarding cash transactions comes under the head “profits and gains of business or profession”, under section 40A (3) wherein proscription is made for cash expenditure during the course of carrying on of business/profession, exceeding prescribed limits now Rs 10,000. There is fairly a long list of exceptions provided in rule 6 DD of income tax rules which gives lengthy items where in it is permissible to carry on cash transactions.
Unaccounted cash found in the course of searches carried out by the IT Department is often explained by taxpayers as representing loans taken from or deposits made by various persons. Unaccounted income is also brought into the books of account in the form of such loans and deposits, and taxpayers are also able to get confirmatory letters from such persons in support of their explanation.
Cash Transaction Limit – Section 269ST
The Finance Act 2017, took various measures to restrain black money and as an outcome of which, a new section 269ST was inserted in the Income Tax Act. Section 269ST imposed restriction on a cash transaction and limited it to Rs.2 Lakhs per day.
Section 269ST states that no person shall receive an amount of Rs 2 Lakh or more:
Ø In aggregate from a person in a day; or
Ø In respect of a single transaction; or
Ø In respect of transactions relating to one event or occasion from a person.
SECTION 269SS of Income Tax
Section 269SS prohibits a taxpayer from taking/accepting loans or deposits or a sum of more than Rs.10, 000 in cash. All loans and deposits of more than Rs.10, 000 must always be taken through a banking channel.
Section 269SS of the Income Tax Act is however not applicable when accepting/taking loan or deposit from a person or entity- Government, Any banking company, post office saving bank or co-operative bank, Any corporation established by a Central, State or Provincial Act, Any Government company as defined in clause (45) of section 2 of the Companies Act, 2013, Institution, association or body or class of institutions, associations or bodies notified by Central Government in its official gazette.
Section 269ST & Rs 2 Lakh Cash Transaction Limit – Examples
Let us understand the above three points with examples;
A. 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.
B. Single Transaction: Cash receipts of Rs 2 Lakh or more which are related to a single transaction are prohibited.
C. Single Event / Occasion: Cash transactions or cash receipts related to a single event or occasion cannot be more than Rs 2 Lakh.
Other Important Points
Ø Based on my interpretation of Section 269ST, payment modes like bearer cheque and self-cheque will also be considered on par with Cash based transactions only.
Ø 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 assessee.
Ø 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.
Ø 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 u/s 271DA.
Ø Donations in cash exceeding Rs 2,000 are not permitted (Donations cannot be claimed u/s 80G if paid in Cash above Rs.2,000/-)
Ø Premiums on Health insurance policies paid in cash cannot be claimed u/s 80D
Ø Loans or Deposits cannot be repaid in cash in excess of Rs 10,000 or more
Ø Payment of above Rs 10,000 per person cannot be made for any business payment towards any expenses (or) purchase of capital asset.
Ø One should not accept a loan or deposit or sale consideration of immovable assets in cash in excess of Rs. 10,000.
Restriction on Capital Expenditure for Business in Cash above Rs. 10,000/- [Section 32 of the Income Tax Act, 1961:
Ø 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. 10000/-, such a payment shall not be eligible for normal/ additional depreciation.
Reduction in the limit of Cash Payment to Rs. 10000/- in a Day [Section 40A (3) & 40A (3A) of the Income Tax Act, 1961:
Ø 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. 10000/-, no deduction shall be allowed in respect of such payment under section 30 to 37 of Income Tax Act, 1961.
Buying Property? Use No Cash At All
In real estate transactions — which are highly capital intensive — amounts of this size are paid as the earnest money to assure the seller of your genuine intentions of being interested in a deal. Now a seller receiving that kind of cash would certainly be in trouble. It would be, therefore, in the best interest of the buyer as well as the seller to use banking channels to pay even the smallest of the amounts. This will not only keep the transaction legal but also help you in keeping a record. In case one party fails to meet the terms and conditions of any agreement it has entered into, the other party can challenge the decision legally, using the money trail as a proof.