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What Income Tax Act Says about Cash Transactions and Consequences of Non-Compliance of related provisions in the act & rules.

After the demonetization Indian economy gradually moving towards the Cashless economy and increase the use of digital money. An increase of electronic transactions creating problems for tax evaders, because mostly black money generated through cash transactions. In a bid to control black money, the government has imposed some restriction on amount & limit of cash transactions through old as well as some new provisions related rules etc in Income Tax Acts.

Today, we would like to remind and share our views on Limitation of Cash transaction along with transaction types & related provisions in income tax act.

What Income Tax Act Says & Consequences of Non-Compliance

Income in the Hands of Political Parties – Section 13A: To curb cash transaction and to bring transparency in the source of funding to political parties, the amendments have been made in Finance Act 2017.

  1. No donation of Rs. 2000/- or more is received otherwise than by an account payee cheque/draft/ use of electronic clearing system through a bank account or through electoral bonds.
  2. Political parties keep and maintain such books of accounts to satisfy the Assessing Officer and such accounts to be audited by an Accountant as prescribed under income tax act.
  3. Income tax return to be filed under section 139(4B) & within the time limit prescribed under section 139(1).

Consequences: Political parties which are registered with the Election Commissioner of India, are exempt from paying income tax. To avail exemption, political parties are required to submit a report to Election Commissioner of India and furnish details of contribution received in excess of Rs. 20,000 from any person.

If the return of income as required u/s 139(4B) is not submitted or if file a belated return that is after the due date, exemption u/s 13A will not be available.

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Capital Expenditures, Depreciation & Investment allowances- Section 35AD/43(1):

Prior to Finance Act 2017, under section 35AD if certain conditions are satisfied, the assessee engaged in the specified business are eligible for deduction @ 100% (few cases weighted deduction @ 150%) of the capital expenditure incurred wholly and exclusively for the purpose of such specified business carried on in the previous year. There was no restriction on deduction of capital expenditure in case acquisition of any capital asset in any mode of payment. But to curb cash payment for capital expenditure, section 35AD and Section 43(1) have been amended in Finance Act 2017 w.e.f. F.Y. 01-Apr-2017:

  1. Section 35AD (Investment Linked Tax Incentive): No deduction shall be allowed in respect of payment or aggregate payment per day made to a person against such expenditure otherwise, then an account payee cheque or draft or use of ECS through bank account exceeds Rs. 10000/-.
  2. Section 43(1): If assess incurs any expenditure for acquisition of any asset in respect of which a payment or aggregate payment made to a person in a day, otherwise than by cheque or bank draft or ECS exceeds Rs. 10000/-, such payment shall be ignored to determine the actual cost of such asset.

Consequences: 1.Deduction under section 35AD will not be allowed and 2. Cash payment will not be a part of “actual Cost” U/s 43(1) and consequently depreciation u/s 32 and Investment allowance u/s 32AD pertaining to such payment cannot be claimed by the assessee.

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Cash payment exceeding a certain amount – Section 40A(3) and 43A(3A):

Prior to the amendment of Finance Act 2017, expenditure incurred(which is otherwise deductible under the other provisions of the act for computation of income from business and profession) and payment made to a person in a day exceeds Rs. 20,000 (Rs.35,000 in the case of payment for plying, hiring or leasing of goods carriage) otherwise than by an account payee cheque or account payee demand draft, such expenses are not allowable as a deduction under Section 40A(3) in the computation of income from business and profession. Except for some provision in Rule 6DD of income tax rules. Which caused to increase in taxable income from the business.

In order to discourage cash transactions, section 40A(3) has been amended and limit of cash payment per day to a person has been reduced from Rs. 20,000 to Rs.10,000 from assessment year 2018-19.However, no changes to the monetary limit of Rs.35,000 has been made in the case of payment for plying, hiring or leasing of goods carriage which was effective from October 2009.The disallowances to be applicable if the payment made in a day to a person otherwise than an account payee cheque/draft/use of electronic clearing system through a bank account.

As per section 40A(3A), the restriction is also applicable If the taxpayer had claimed a deduction in respect of any expenditure relating to any previous year.
Payment to such expenditure is made during the current year.

If during the current year payment made in a day otherwise than by an account payee cheque or account payee demand draft/use of electronic clearing system through a bank account exceeds Rs.10,000. This monetary limit has also been reduced from Rs.20,000 to Rs.10,000 from the assessment year 2018-19.

Consequences: This results increase in taxable income, in computation of profits and gains from business or profession.No deduction is allowable in computation of income from business or profession in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by a crossed account payee cheque or an account payee bank draft /use of electronic clearing system through a bank account exceeding Rs. 10000/-.

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Payment of Health Insurance Premium-Section 80D:

The deduction is allowable from Gross Total Income of a taxpayer who is an Individual or a HUF if (i) Payment made out of income chargeable to tax (ii) Payment should be made any mode other than cash.

  • Payment on account of preventive health check-up may be made in cash.
  • Deduction for preventive health check-up shall not exceed in aggregate Rs.5000.

Consequences: If health insurance premium made by the taxpayer in a mode of cash, in that case, No deduction shall be allowed from gross total income.

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Donation – Section 80G:

Under Chapter VIA of income tax act as per provision of Section 80G deduction is not allowed in respect of donation made of any sum exceeding Rs.10,000/-, if the same is not paid by any mode other than cash. Section 80G contains details of Donee, the maximum limit, and deduction as a % of net qualifying amount for deduction from Gross Total Income to arrive at Taxable Income.
In order to provide cashless economy and transparency, section 80G has been amended by Finance Act 2017, so as to provide that no deduction shall be allowed under the section 80G in respect of donation of any sum exceeding Rs. 2000/- unless such sum is paid by any mode other than cash.

Consequences: No deduction will be allowed under Chapter VIA of income tax act from Gross Total Income if Donation paid in cash exceeding Rs. 2000/-

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Donation to Scientific Research or Rural Development – Section 80GGA:

An Assessee (other than an assessee whose Gross Total Income includes income chargeable under the head “profits and gains of business or profession”) is entitled to deduction in respect of certain donations for scientific, social or statistical research or rural development program or for carrying out an eligible project or National Urban Poverty Eradication Fund shall be allowed (Subject to certain conditions). Such donation can be given in cash, or by cheque or draft. However, no deduction is allowed in respect of cash transaction/contribution exceeding Rs. 10,000 from the assessment year 2013-14.

Consequences: 100% of donations or contributions made other than cash only is allowable as deduction.No deduction shall be allowed if contribution is paid in cash in excess of Rs.10000/-

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Donations to political parties. – Section 80GGB / Section 80GGC:

Any sum contributed by an Indian company to any political party or an electoral trust is deductible while computing taxable income.From the assessment year 2014-15, no deduction shall be allowed in respect of any sum contributed by way of cash.

Consequences: No cash payment allowed as a deduction in the computation of taxable income. Non deduction results increase in tax payable.

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Incentives to an eligible assesse covered in section 44AD who made digital payment:

The amendment is made in section 44AD in Finance 2017 (effective from assessment year 2017-18) in order to promote digital transactions and to encourage small unorganized business to accept digital payments by reducing the existing rate of deemed total income of 8% to 6% in respect of the amount of such total turnover or gross receipts received by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account during the previous year or before the due date specified in sub-section (1) of section 139 in respect of that previous year. However, the existing rate of deemed profit of 8% referred to in section 44AD of the Act, shall continue to apply in respect of total turnover or gross receipts received in any other mode. Assesses availing presumptive scheme under section 44AD must keep in view the provisions of section 269ST (as stated above) as also provisions of section 206C(TCS) while accepting cash payments/advances from customers.

Note: We will discuss about section 269SS ans 269ST soon….

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One thought on “Forbid Cash Transaction and related Income Tax Provisions

  1. S Vishawanathan says:

    I notice that so many people paying a donation to their connected Charitable Trust and take the benefit of it by getting deduction u/s 80G. After that doner gets the refund the donation by so call trust. Govt should control this type of tax evading techniques.

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