Overview of Cash Transaction Provisions Under the Income Tax Act: Allowed vs. Disallowed

Cash transactions are common in everyday life, but under the Income Tax Act ,there are rules to control large cash dealings. These rules help reduce tax evasion and encourage more transparent financial practices. While cash transactions aren’t banned, the law sets limits, especially for things like loans, deposits, and business expenses. The goal is to make sure people follow the right procedures and use proper documentation, pushing for more digital or non-cash payments.

Section 40A(3) of Income Tax Act

Section 40A(3) of the  Act is designed to discourage excessive cash transactions in business operations. Under this provision, if a business pays more than ₹10,000 in cash to a single person on a single day, the payment will not be treated as a deductible expense while calculating taxable income. Instead, it will be added back to the income, potentially increasing the tax liability.

However, Rule 6DD provides certain exceptions to this rule. For example, in the case of transportation businesses, where payments are made for hiring or leasing vehicles such as trucks or lorries, the cash payment limit is relaxed to ₹35,000 per day.

This provision is limited to business-related expenses. Payments exceeding ₹10,000 in cash for other purposes cannot be claimed as deductions. Additionally, purchases of assets such as land or machinery are categorized as capital investments and are governed by provisions related to capital gains, rather than being treated as business expenses.

Section 40A(3) allows payments through cheque, demand drafts, net banking, credit or debit cards, and digital methods like UPI.

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Exceptions to Section 40A(3) as per Rule 6DD

Under Rule 6DD of the Income Tax Act, cash payments exceeding ₹10,000 or payments via bearer cheque are allowed in the following exceptional circumstances:

• Payments exceeding ₹10,000 in cash or bearer cheque are allowed when made to the Reserve Bank of India, State Bank of India, or any banking company. Additionally, such payments are permissible to cooperative banks, primary credit societies, land mortgage banks, primary agricultural credit societies, or the Life Insurance Corporation (LIC).
• Payments made to the Central or State Government in legal tender, such as sales tax, GST, customs duty, excise duty, freight charges, and railway bookings, are not subject to disallowance.
• Payments made through book entries in the payee's account for amounts due for goods or services supplied.
• Payments made to cultivators, growers, or producers of agricultural products, forest products, livestock, meat, hides, dairy products, poultry, fish or seafood, horticultural products, and beekeeping products.
• Payments made for purchasing products manufactured manually in cottage industries, directly to the producers.
• Payments made to individuals residing in villages or towns that do not have access to banking services on the date of payment.
• Any payment made to an employee or their heir due to retirement, retrenchment, resignation, or death, as gratuity, is exempt if it does not exceed ₹50,000.
• Salary payments to an employee (after TDS) when temporarily posted for 15 days or more at a location other than their regular duty station, or on a ship, or when they don't have a bank account at that location.
• Payments made on days when banks are closed due to holidays or strikes.
• Payments made to an agent who is required to make cash payments for goods or services on behalf of someone.
• Payments made by an authorized dealer or money changer for the purchase of foreign currency or traveler's cheques in the normal course of business.

Examples to Implement Section 40A(3)

1. A retail business buys goods worth ₹15,000 from a supplier and pays the amount in cash. Since the payment exceeds ₹10,000, it won’t be considered a deductible expense under Section 40A(3). The ₹15,000 will be added back to the business's taxable income, increasing the tax liability.
2. An employee is temporarily posted in a rural area where there is no access to banking services. The business pays ₹20,000 in cash as salary for the month. Since the employee does not have a bank account at the location, the payment is exempt from the restriction under Section 40A(3) and can be treated as a valid business expense.
3. A business makes a payment of ₹15,000 in cash to a cooperative bank. This payment exceeds ₹10,000, but since it is made to a cooperative bank, it falls under an exception in Rule 6DD. Therefore, it will not be disallowed as a deduction.
4. A business pays ₹12,000 in cash for office supplies on a day when banks are closed due to a holiday. Since the payment is made on a bank holiday, it falls under the exception in Rule 6DD, and the amount can be treated as a valid business expense.

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Section 269ST of Income Tax Act

Section 269ST of the Act prohibits  receiving cash payments of Rs. 2 lakh or more in a single day or transaction, including both capital and revenue receipts. If this rule is violated, a penalty equal to the cash amount received can be imposed.

Exceptions to Section 269ST

There are several exceptions to the provisions of Section 269ST. These include:

1. Entities Exempt from the Provisions: The restrictions on cash transactions do not apply to government bodies, banking companies, post offices, and co-operative banks.
2. Specific Transactions: Cash receipts related to certain transactions are also exempt. This includes receipts from agricultural produce, foreign exchange transactions through authorized dealers, and payments made by insurers or the government.
3. Non-Residents: The section does not apply to non-residents who do not have a permanent establishment in India.

Penalty of Violation of Section 269ST

A violation of the provisions of Section 269ST regarding the receipt of ₹2 lakh or more in cash can lead to a penalty under Section 271DA of the Income Tax Act.

The penalty imposed under Section 271DA is 100% of the amount of cash received in violation of Section 269ST.

For example, if a person receives ₹3 lakh in cash in a single transaction, they will be liable to pay a penalty of ₹3 lakh under Section 271DA.

Examples to Section 269ST

• If a non-resident receives ₹3 lakh in cash for a business transaction in India and does not have a permanent establishment in the country, the rules of Section 269ST do not apply. This means there is no penalty for the cash transaction.
• If a farmer sells agricultural produce for ₹3 lakh in cash, it’s exempt from Section 269ST since cash transactions related to agriculture are not subject to the ₹2 lakh limit, so no penalty applies.

Section 269SS of Income Tax Act

Section 269SS of the Act applies when a loan, deposit, or specified sum of ₹20,000 or more is involved. It also comes into effect if the loan or deposit remains unpaid on the date the individual receives the specified sum, provided the outstanding amount is ₹20,000 or more.

Exceptions to Section 269SS

• Section 269SS does not apply if a loan, deposit, or specified sum is taken or accepted from the government, banks, post offices, cooperative banks, certain corporations, government companies, or any entity listed in the Official Gazette. In these cases, the rules do not apply, whether the loan or deposit is received or given.
• It also does not apply when two people, both earning only agricultural income and having no taxable income, accept a loan or deposit from each other.
• Exceptions also include receiving cash from relatives in emergencies (not intended to evade taxes), partners adding cash to a partnership, and cases where there is only a book entry without any actual money being exchanged.

Penalty of Violation Of Section 269SS

Violating the provision of Section 269SS  will lead to a penalty under section 271D, equal to 100% of the loan, deposit, or specified sum taken or accepted.

For example, if someone takes a loan of ₹50,000 in cash, they will be penalized ₹50,000, which is equal to the loan amount, under Section 271D.

Examples to Section 269SS

1. If you borrow ₹25,000 in cash from a friend, Section 269SS applies, and the loan should have been given through a bank, not in cash.
2. If two farmers, both with no taxable income, exchange ₹18,000 in cash, Section 269SS does not apply because they earn only from farming.
3. If a partner puts ₹30,000 in cash into a partnership, Section 269SS does not apply because it's a contribution, not a loan.

Section 269T of Income Tax Act

Section 269T of the Act prohibits repaying loans, deposits, or specified advances of ₹20,000 or more in cash. Such repayments must be made through an account payee cheque, bank draft, or electronic clearing system.A "specified advance" refers to any advance payment made for transferring immovable property, regardless of whether the transfer happens or not.

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Exceptions to Section 269T

Section 269T does not apply to repayments of ₹20,000 or more if the payment is made to:

• The government,
• A banking company, post office savings bank, or cooperative bank,
• A corporation set up under a Central, State, or Provincial Act,
• A government company as per Section 617 of the Companies Act, 1956,
• Other notified institutions.

Penalty of Violation of Section 269T

A violation of the provision of Section 269T attracts a penalty under Section 271E, equal to 100% of the amount of the loan, deposit, or specified advance repaid.

For example,if a person repays a loan of ₹50,000 in cash instead of through an account payee cheque, bank draft, or electronic clearing system, it will be a violation of Section 269T. As a result, a penalty of ₹50,000 (equal to the repaid amount) may be imposed under Section 271E.

Examples to Section 269T

1.  A company took ₹40,000 from X as a deposit. When returning the deposit, the company gives it back in cash.The company will be fined ₹40,000 for violating Section 269T and if the company repays using a cheque or bank transfer, there is no penalty.
2. X borrowed ₹30,000 from his friend Y. He repays it in cash. Since the payment is in cash, X faces a penalty of ₹30,000 under Section 269T and if X repays using a cheque or online transfer, there is no penalty.

Section 80D of Income Tax Act

Section 80D of the Act provides deductions for premiums paid on health insurance policies for oneself, family (spouse and children), and parents, including senior citizens. The deduction is allowed up to ₹25,000 for individuals below 60 years of age, and ₹50,000 for senior citizens (aged 60 or more). To qualify, the payment must be made through cheque, demand draft, or electronic transfer.

For example, if an individual pays ₹20,000 for their own health insurance and ₹30,000 for their senior citizen parents' insurance, the total deduction would be ₹50,000 (since the limit for senior citizens is higher).

However, deductions are not allowed if the premium is paid in cash or exceeds the prescribed limit. For example, a payment of ₹12,000 in cash for health insurance would make the individual ineligible for the deduction.

Section 80G of Income Tax Act

Section 80G of the Act allows deductions for donations made to government-approved charities, as long as they meet certain conditions. The donation must be made to a registered institution, and the payment should be through methods like cheque, bank draft, or electronic transfer. A receipt is required to claim the deduction.

However, cash donations over ₹2,000 are not eligible. For example, a ₹5,000 donation to a registered charity by cheque qualifies for a deduction, but a ₹3,000 cash donation to an unregistered charity or a ₹2,500 cash donation to a registered charity would not qualify because they exceed the ₹2,000 limit for cash donations.

Section 80GGB of Income Tax Act

Section 80GGB of the Act allows Indian companies (except foreign companies) to claim deductions for donations made to political parties or electoral trusts. However, the donation must be made through a cheque, bank draft, or electronic transfer while cash donations are not allowed. For example, if a company donates ₹50,000 to a political party using a cheque, it can claim a deduction. But if the donation is made in cash, it will not be eligible for a deduction. It’s important for companies to ensure the payment method is valid to qualify for this benefit.

Section 80GGC of Income Tax Act

Section 80GGC allows individuals, Hindu Undivided Families (HUFs), Associations of Persons (AOP), Bodies of Individuals (BOI), firms, and artificial juridical persons (not wholly or partly funded by the government) to claim a deduction for donations made to political parties (registered under Section 29A of the Representation of the People Act, 1951) or electoral trusts, provided the donations are made through prescribed modes like cheque, bank draft, or electronic transfer.

Cash donations are specifically excluded and do not qualify for the deduction. For example, if an individual contributes ₹10,000 to a registered political party via cheque, they can claim a deduction under Section 80GGC. However, donations made in cash are not eligible for this benefit. It is also important to note that donations from entities such as companies, firms, or associations are not eligible; only individual taxpayers or HUFs can avail of this deduction.

Section 43(1) of Income Tax Act

Section 43(1) of the Income Tax Act defines the "actual cost" of an asset for depreciation purposes. Even if an asset is purchased with cash, the payment can still be considered part of the asset's cost, provided the payment is within the prescribed limits. However, if the cash payment exceeds ₹10,000, it may not be eligible for deductions under Section 40A(3). Proper documentation is required to substantiate the cost when cash payments are involved, which is important for businesses claiming depreciation.

Conclusion

Understanding the rules governing cash transactions under the Income Tax Act is important for both individuals and businesses. Complying with the prescribed limits helps avoid penalties and promotes a transparent financial system. Taxpayers choosing the new tax regime should be aware that they cannot claim deductions under sections like 80G, 80D, 80GGB, and 80GGC, as the lower tax rates come with the loss of these deductions.By opting for digital transactions wherever possible, we can ensure compliance and contribute to the growth of a cashless economy.

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