Think twice before making cash transactions

Source: The Hitavada      Date: 29 Aug 2018 09:49:38



By CA Satish Sarda

Though Indian rupee is the legal tender for financial transactions, still many type of transactions made in cash (legal tender) are prohibited by the law. Government has to take various steps to curb the menace of black money. Demonetisation and roll-out of GST were also steps in the same direction.

To curb and stop black money circulations in our country and to disincentivise the cash transactions, Central Government has introduced various provisions in the Income-Tax Act, 1961, with effect from 1 April, 2017. Some of the main provisions are as under :

Cash payment for any expenditure: If payment made to per person per day exceeds Rs 10,000, then total expenditure will be disallowed in Income-Tax Act. For making payments to transporters, Rs 35,000 is the limit instead of Rs 10,000.

Example: If you make payment of Rs 14,000 towards stationery expenses in a day and want to claim it as business expenditure, such expenditure will not be allowable.

Cash payment for any capital expenditure: If payment made to any person per day exceeds Rs 10,000, then such cash payment will not be included in cost of assets for the purpose of calculating depreciation.

Example: If you purchase a machine and pay an advance amount of Rs 30,000 in a cash, then such Rs 30,000 will not be included in cost of assets for the purpose of claiming depreciation.

Payment of medical insurance premium in cash: If you pay medical insurance premium through cash, then no deduction will be allowable u/s 80D.Donation given in cash: If you pay donation exceeding Rs 2,000 in cash, then deduction u/s 80G cannot be claimed in respect of such donation.

Loan taken or repayment: You cannot accept or repay loan exceeding Rs 20,000 in a year. Otherwise you will be levied 100% penalty of such acceptance or repayment.
Transaction of Rs 2,00,000 and above: Penalty equal to amount received will be levied on such transaction.
If any person receives amount exceeding Rs 1,99,999 in cash in following cases: 1) In aggregate from a person in a day. 2) in respect of a single transaction. 3) In respect of transaction related to one event or occasion. Penalty equal to amount received will be levied on such transaction.

Things which should be kept in mind with respect to this provision: i) Transactions with 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. Example: Mr Rajesh buys a gold chain worth Rs 2 lakh and pays the amount by cash to M/s Bharat Jewellers on a single day in 4 equal installments of Rs 50,000 each. As Bharat Jewellers accepted cash worth Rs 2 lakh from a single person and in a single day, section 269ST is applicable in this case. Bharat Jewellers have to pay a penalty of Rs 2 lakh.

ii) Single transaction: Cash receipts of Rs 2 lakh or more which are related to a single transaction are prohibited.
Example: Mr Dinesh goes through a medical surgery and the hospital charges him a bill of Rs 3 lakh. Dinesh clears bill in 3 installments of Rs 1 lakh each on three different dates. Here, cash receipts by hospital on single day are less than Rs 2 lakh but are related to single transaction of Rs 2,00,000 or more amount so penalty will be levied.
iii) Single event/occasion: Cash transactions or cash receipts related to a single event or occasion, cannot be more than Rs 2 lakh. Example: Occasion – marriage, 3 bills of caterer, for 3 days of Rs 80,000, Rs 1,25,000 and Rs 7,5000 (aggregating Rs 2,80,000), though not a single bill is exceeding the Rs 2,00,000 limit still caterer cannot accept cash payment. As marriage is a ‘single occasion’ , all the 3 bills of the caterer will be aggregated and if they exceed Rs 1,99,999 penalty will be levied.

Please note above restriction is not applicable in following cases: 1) When recipient is Central Government, local authorities, bank, financial institutions, post offices, co-operative banks and other person notified by the Government.

2) Withdrawal from bank, post offices, co-operative banks.
Kindly note that penalty u/s 271DA 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 the 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. Above referred restrictions on cash transactions are very much necessary, but before levying any penalty Income-Tax Department should analyse the transaction logically. Some time due to emergency situations cash transactions may have to be done, and if the same are explained properly and reflected in accounts, penalty should not be levied.

In order to encourage transactions through digital/banking channels Government has given relief under Income-Tax.
In presumptive scheme of taxation under section 44AD of Income Tax Act, a person can declare profit @ 6% on the turnover done through digital/banking channels instead of normal rate of 8%. This is an appreciable gesture on the part of Government. Corruption and black money eradication is a joint responsibility of Government and citizens both, so that honest people and nation can progress.

(The author is Past Chairman of Institute of Chartered Accountants of India (ICAI)