Important provisions relating to cash transactions under the Income tax act, 1961

To evade black money and to discourage cash transactions, the Government of India is taking various steps time to time. In this regard, the Income Tax Act, 1961 is amended and provided with disallowances and stringent penal provisions for various types of cash transactions. Let us briefly focus on some of such provisions here.

Section 40A(3): Disallowance of Expenses incurred in Cash:

Sec. 40A(3): Where the assessee incurs any expenditure in respect of which payment or aggregate of payments made in a day in excess of Rs. 10,000/- (w.e.f. A.Y. 2018-19) otherwise than by Account-payee cheque/Bank Draft/use of Electronic Clearing System through a bank account, 100% of such payment shall be disallowed.

Section 40A(3A): Deemed Income of Subsequent year in which payment is made:

Where an allowance has been made in the assessment for any year in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year (hereinafter referred to as subsequent year) the assessee makes payment in respect thereof, otherwise than by Account-payee cheque/Bank Draft/use of Electronic Clearing System through a bank account, the payment so made shall be deemed to be the profits and gains of business or profession and accordingly 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/-.

Exceptions to Section 40A(3) and 40A(3A):

Provided that no disallowance shall be made and no payment shall be deemed to be the profits and gains of business or profession under subsection (3) and this subsection where a payment or aggregate of payments made to a person in a day, otherwise than by Account-payee cheque/Bank Draft/use of Electronic Clearing System through a bank account, exceeds Rs.10,000/-, in such cases and under such circumstances as may be prescribed in Rule 6DD, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors.

Provided further that in the case of payment made for plying, hiring or leasing goods carriages, the provisions of subsection (3) and (3A) shall have effect as if for Rs.10,000/-, the amount substituted for Rs.35,000/-. (Which means if payment is being made for plying, hiring or leasing goods carriages, then Limit is Rs.35000/-, instead of Rs.10000/-)

In respect of Capital Expenditure (Fixed Assets):

Where an assessee incurs any expenditure for acquisition of any asset in respect which a payment or aggregate of payments made to a person in a day, otherwise than by an Account-payee cheque/Bank Draft/use of Electronic Clearing System through a bank account, exceeds Rs.10,000/-, such expenditure shall be ignored for the purposes of determination of actual cost of such asset. (It means no depreciation benefit will be available on such amount)

Amendment by Finance bill 2018:

Provision of Section 40A(3) and 40A(3A) will be applicable to Charitable and Religious trusts for the purpose of determination of the application of fund. (Which means payments made by violating of these provisions is not treated/allowed as an application of fund).

Section 269SS:  Mode of Taking or Accepting Certain Loans, Deposits and Specified Sum:

No person shall take or accept from any other person any loan or deposit or specified sum (Specified sum means any sum of money receivable whether as advance or otherwise, in relation to transfer of an immovable property, whether or not the transfer takes place) of Rs. 20,000 or more otherwise than by way of an account payee cheque or an account payee draft or use of electronic clearing system through a bank account. The limit of Rs. 20,000 will also apply to a case even if on the date of taking or accepting such loan or deposit, any loan or deposit taken or accepted earlier by such person from such depositor is remaining unpaid and such unpaid amount along with the loan or deposit to be accepted, exceeds the aforesaid limit.

Provided that the provisions of this section shall not apply to-

any loan or deposit or specified sum taken or accepted from or any loan or deposit or specified sum taken or accepted by-

(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.

Provided further that the provisions of this section shall not apply to any loan or deposit or specified sum, where the person from whom the loan or deposit or specified sum is taken or accepted and the person by whom the loan or deposit or specified sum is taken or accepted, are both having agricultural income and neither of them has any income chargeable to tax under the Income Tax Act, 1961.

For example: If A has a balance of a loan of Rs.19500/- from B. Now in this case A cannot take loan in excess of Rs.499/- from B except with an account payee cheque or account payee bank Draft or use of electronic clearing system through a bank account.

In case of violation of the above provision, penalty u/s. 271D of Income Tax Act 1961 shall be levied equivalent to the amount of such loan or deposit or specified sum, so taken or accepted.

Section 269T: Mode of Repayment of Certain Loans or Deposits:

Section 269T of the Income Tax Act provides that any branch of a banking company or a cooperative society, firm or other person shall not repay any loan or deposit otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account, who has made the loan or deposit or paid the specified advance (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), if

(a) The amount of the loan or deposit or specified advance together with the interest, if any, is Rs.20,000/- or more, or

(b) 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.

Provided that where the repayment is by a branch of a banking company or co-operative bank, such repayment may also be made by crediting the amount of such loan or deposit to the savings bank account or the current account, if any, with such branch of the person to whom such loan or deposit has to be repaid.

Provided further that the provisions of this section shall not apply to- 

Repayment of any loan or deposit or specified sum is taken or 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.

For example if A is having loan of Rs 30000 outstanding to B, then he cannot repay such loan in cash to B.

In case of violation of above provision, penalty u/s. Section 271E of Income Tax Act 1961 shall be levied equivalent to the amount of such loan or deposit repaid.

Section 269ST: Mode of Undertaking Transactions: (w.e.f. 01.04.2017)

Section 269ST provides - No person shall receive an amount of Two Lakh rupees or more-

(a) in aggregate from a person in a day; or
(b) in respect of a single transaction; or
(c) in respect of transactions relating to one event or occasion from a person,

otherwise than by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account:

Provided that the provisions of this section shall 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 269SS;

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

Example: 1

A made credit sale of Rs.2,50,000 to B for Rs. 1,00,000 and Rs.1,50,000 on two different dates, and if payment received on single day then the Section 269ST is attracted since “aggregate payment received is more than Rs.2,00,000/-”.

Example: 2

A made credit sale of Rs. 2,00,000 to B and two cash payments of RS. 1,00,000 per day are made by B to A on two different dates. Section 269ST is attracted as Rs.2,00,000 cash limit is reached “in respect of a single transaction”.

Example: 3

Suppose a caterer takes order for Convocation Function and received Rs. 10,00,000 in cash from his customer and gives item-wise bill for various services and each bill doesn’t exceed Rs. 2,00,000 and Rs. 10,00,000 cash is received on different dates and cash received on any one day is less than Rs. 2,00,000. This splitting of bills and splitting of payments day-wise will not help as all these payments are “in respect of transactions relating to one event or occasion from a person”.

With regards to repayment of loan received by NBFCs or HFCs, the CBDT has vide circular No.22 of 2017 dated 03/07/2017 clarified that in respect of receipt in the nature of repayment of loan by NBFCs or HFCs, the receipt of one instalment of loan repayment in respect of a loan shall constitute a ‘single transaction’ as specified in clause (b) of section 269ST of the Act and all the instalments paid for a loan shall not be aggregated for the purposes of determining applicability of the provisions section 269ST.

In case of violation of provision of this section penalty u/s. 271DA shall be levied for a sum equal to the amount of such receipt.

No TCS on Cash Sales after insertion of Section 269ST:

TCS (Tax Collected at Source) on Cash Sales of Goods or offering any service for Cash exceeding Rs.2,00,000/- which was introduced in F.Y. 2016-17 was removed from F.Y. 2017-18 due to insertion of Section 269ST.

Also, TCS on cash sales of Bullion and Jewellery removed from the F.Y. 2017-18.