Transactions involving cash have long been a focus area for tax authorities due to the potential for tax evasion and lack of transparency. To curb such practices, the government has introduced various provisions and restrictions, the non-compliance of which can result in hefty penalties, sometimes up to 100% of the transaction amount. In this detailed article, we delve into the specific provisions governing cash transactions under the Income Tax Act, providing insights into their implications and penalties for non-compliance.
A) Cash Payments Under Business/Profession (Refer Section 40A(3))
When a person incurs expenses for their business or profession and the payment exceeds Rs.10,000 in cash for a single transaction in a day, or Rs.35,000 in the case of goods carriages. In These cases the entire payment is disallowed while computing taxable income.
| Transaction Type | Payment Limit |
|---|---|
| Business/Profession Expenditure | Rs.10,000 per day |
| Expenditure for Asset Acquisition | Rs.10,000 per day |
Additionally, expenditures made in cash for asset acquisition are not considered for depreciation benefits.
That means in case a person incurs any expenditure for acquisition of any assets in respect of 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 purpose of determination of actual cost of such asset. This means that no depreciation benefit will be available on such capital expenditure incurred in cash.
However, Rule 6DD prescribes certain cases and circumstances where the expenditures will be allowed as deduction even if payment is made in Cash.
B) Cash Receipts Under Business/Profession (Refer 269SS)
No person shall receive an amount of 2 lakh rupees or more in aggregate from a person in a day or in respect of a single transaction or in respect of transactions related to one event or occasion from a person, otherwise than by an account payee cheque/draft or through other electronic modes. Non consequence can attract penalty equivalent to the amount received.
This is not applicable to:
- any receipt by Government, any banking company, post office or co-operative bank,
- transactions in nature referred to in section 269SS
Further reporting under SFT would be applicable for where a person is liable to audit under section 44AB of Income Tax Act.
C) Taking or Accepting Certain Loans or Deposits
Except for the certain specified transactions, No person is permitted to accept Rs.20,000/- or more in cash for
- any loan or deposit or
- any amount in relation to transfer of any immovable property.
- 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. Violation can attract penalty of an amount equal to the amount taken in cash.
D) Repayment of Certain Loans or Deposits
Except for the certain specified transactions, no person is allowed to repay any loan or deposit on cash if the amount of the loan or deposit or specified advance together with the interest, if any, is Rs.20,000/- or more.
Violation of the provision can attract penalty for an amount equal to the amount of such loan or deposit repaid.
E) TDS on Cash Withdrawals
To discourage cash transactions, provision for TDS has been introduced on Cash withdrawals.
Accordingly, the banking company or a cooperative bank or a post office shall be responsible to deduct TDS @ 2% on cash withdrawals in excess of Rs. 1 Cr.
- However, If the recipient has not furnished the returns of income for all the three assessment years relevant to the three previous years, for which the time limit of file return of income under section 139(1) has expired, where the sums is aggregate of amounts, as the case may be, in cash exceeds 20 lakhs during the previous year – the tax shall be deducted at the rate of 2% of the sum, where the amount or aggregate of amounts, as the case may be, being paid in cash exceeding 20 lakhs but up to 1 crore.
- 5% of the sum, where the amount or aggregate of amounts, as the case may be, being paid in cash exceeding 1 crore.
F) Tax Audit Applicability on Account of Cash Transactions
Whether the turnover of the assesses carrying on business is between 1Cr to 10Cr, tax audit would be applicable where cash receipts or cash payments are in excess of 5% of the total receipts/ payments.
Formula to calculate cash receipt/payment
| CASH RECEIPTS | Amount |
| Total of all the cash receipts in cash account | XX |
| Less: Contra entries | XX |
| Less: Capital Contribution | XX |
| Less: Amount received from partners | XX |
| Less: Bank deposit received | XX |
| Net Cash Receipts | XXX |
| CASH PAYMENTS | |
| Total of all the cash receipts in cash account | XX |
| Less: Contra entries | XX |
| Less: Capital Contribution paid | XX |
| Less: Amount paid to partners | XX |
| Less: Bank withdrawals | XX |
| Net Cash Payment | XXX |
G) Other Cash transactions
- Deductions under Income Tax are not allowed for donation in cash to a registered trust or political party, in excess of Rs.2,000/-
- Deduction under 80D is not allowed for payments made in cash for premium on health insurance.
The above provisions are as a guideline that every taxpayer is required to comply with all the provisions of the Income Tax Act for better and clean books of accounts.
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Very good information.