Keeping a Check on Cash Transactions Under Income Tax
CA. Supriya Dewan
The author is a member of the Institute. She can be reached at casupriyadewan@gmail.com and eboard@icai.in
“We come across a common saying ‘Cash is King’. However, idle cash can alone not generate any interest income. Therefore, channelizing idle money into digital mode creates the potential to generate income. A cashless economy is a system where majority of transactions take place by other modes than cash. These modes may be credit cards, debit cards, wallets or digital modes where flow of cash is non-existent or is bare minimum. Read on…”
Introduction: The Drive Towards a Cashless Economy
A cashless economy serves as an indispensable and highly effective policy instrument to suppress the parallel grey economy, sever terror-financing networks, and curb systemic corruption. In pursuit of these national economic goals, the Government of India has been proactively incentivizing digital financial ecosystems while simultaneously enacting rigorous, deterrent statutory provisions under the Income-tax Act, 1961 to restrict, penalize, and disallow cash transactions.
This comprehensive analytical guide highlights the specific transactions under the Income-tax Act where assessees must unequivocally say “No” to cash, as well as the provisions that systematically induce taxpayers to adopt non-cash, verified banking channels.
1. Cash Restrictions in Immovable Property: Sections 43CA & 50C
Section 43CA (applicable to transfer of immovable property held as stock-in-trade) and Section 50C (applicable to transfer of capital assets being land, building, or both) govern the determination of the full value of consideration in real estate transactions.
Where the date of the Agreement fixing the quantum of consideration and the date of Registration (transfer) are different, the statutory Stamp Duty Value (SDV) on the date of agreement may be adopted as the deemed full value of consideration—provided that the consideration, or at least a part thereof, has been received through banking channels (account payee cheque/draft, ECS, or prescribed electronic modes under Rule 6ABBA) on or before the date of the agreement.
“In Section 50C and Section 43CA, Stamp duty value to be adopted is dependent on the mode of consideration if date of agreement and date of transfer are different.”
Case Illustration: Section 50C (Capital Asset)
Mr. Ram transfers land held as a capital asset where the actual declared consideration is Rs. 1,000 lakhs. The stamp duty value as on the date of agreement is Rs. 1,090 lakhs, and the stamp duty value as on the date of transfer of land is Rs. 1,120 lakhs. The date of agreement and the date of transfer are different.
Deemed Full Value of Consideration: The actual declared consideration of Rs. 1,000 lakhs is adopted as the full value of consideration because the stamp duty value on the date of agreement (Rs. 1,090 lakhs) does not exceed 110% of the actual consideration (Rs. 1,000 lakhs × 110% = Rs. 1,100 lakhs safe-harbor ceiling).
Case Illustration: Section 43CA (Stock in Trade)
Mr. Ram holds a building as stock-in-trade and transfers it on 01/05/2020 for an actual consideration of Rs. 1,000 lakhs. The stamp duty value on the date of agreement (01/09/2019) is Rs. 1,200 lakhs, and the stamp duty value on the date of transfer (01/05/2020) is Rs. 2,100 lakhs.
Deemed Full Value: The stamp duty value as on the date of agreement, i.e., Rs. 1,200 lakhs, shall be adopted as the full value of consideration under Section 43CA because advance was received by account payee cheque on the date of agreement, even though SDV (Rs. 1,200 lakhs) exceeded 110% of consideration (Rs. 1,100 lakhs).
Deemed Full Value: The stamp duty value as on the date of transfer, i.e., Rs. 2,100 lakhs, shall be adopted as the full value of consideration because cash was accepted, completely forfeiting the agreement-date benchmark and subjecting the assessee to enormous additional tax liability on Rs. 2,100 lakhs.
2. Section 269SS: Restrictions on Taking or Accepting Cash Loans & Deposits
Under Section 269SS of the Income-tax Act, 1961, no person shall take or accept any loan, deposit, or specified sum (advance or otherwise in relation to transfer of an immovable property, whether or not the transfer takes place) from any person (depositor) by any mode other than account payee cheque, account payee bank draft, or prescribed electronic modes where:
- The amount of loan, deposit, or specified sum is Rs. 20,000 or more; or
- The aggregate of total amount of loan, deposit, and specified sum is Rs. 20,000 or more; or
- Where a person has received such loan, deposit, or specified sum from the depositor at an earlier date but the repayment of such loan, deposit, or specified sum remains outstanding, if such outstanding amount or aggregate outstanding is Rs. 20,000 or more; or
- The aggregate of all the above loans, deposit, or specified sum received in the above three transactions is Rs. 20,000 or more.
Exempted Entities (Non-Applicability to Section 269SS)
Any loan or specified sum or deposit “taken or accepted by” or “taken or accepted from” the following entities is exempt:
- (a) The Government;
- (b) Any banking company, post office savings bank, or co-operative bank;
- (c) Any corporation established under a Central, State, or Provincial Act;
- (d) Any Government company as defined in Section 2(45) of the Companies Act, 2013;
- (e) Any institution, association, or body or class thereof notified in the Official Gazette.
“According to Section 271D of Income Tax Act 1961 a loan or deposit or specified sum is accepted violating the provisions of section 269SS, then a penalty may be levied which shall be equivalent to the amount of such loan or deposit or specified sum by the Joint Commissioner.”
Consequences of Violation: Under Section 271D, if a person accepts any loan, deposit, or specified sum in contravention of Section 269SS, the Joint Commissioner may impose a penalty equal to 100% of the amount of the loan, deposit, or specified sum so accepted.
3. Section 269T: Restrictions on Repayment of Loans & Deposits in Cash
Section 269T prohibits any branch of a banking company, co-operative bank, firm, company, or other person from repaying any loan, deposit, or specified sum otherwise than by account payee cheque, account payee bank draft, or electronic clearing system through a bank account (Rule 6ABBA), if:
- (a) The amount of loan or deposit, along with the interest amount, is Rs. 20,000 or more; or
- (b) The aggregate amount of loans or deposits, including interest held by such person in his own name or jointly with any other person, is Rs. 20,000 or more.
Exempted Entities (Non-Applicability to Section 269T)
- (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 Section 617 of the Companies Act, 1956 (Section 2(45) of Companies Act, 2013);
- (e) Such other institution, association, or body notified by the Central Government in the Official Gazette.
Consequences of Violation: Under Section 271E of the Income-tax Act, 1961, the Assessing Officer / Joint Commissioner shall levy a penalty equivalent to 100% of the loan or deposit amount repaid in cash.
Illustrative Practical Examples: Sections 269SS & 269T
Mr. P takes a cash loan of Rs. 17,000 on 01/05/2019 from Mr. R and repays it on 20/12/2019 in cash. He again takes a cash loan from Mr. R of Rs. 19,000 on 01/08/2020 and repays it in cash on 29/10/2020.
Verdict: No violation. Because the assessment years are different and each receipt and repayment is below the statutory threshold of Rs. 20,000.
Mr. P receives a cash loan of Rs. 18,000 on 01/10/2020, and an additional loan of Rs. 22,000 by account payee cheque on 04/10/2020. Mr. P repays the entire Rs. 40,000 on 20/11/2020 by paying Rs. 15,000 in cash and Rs. 25,000 by account payee cheque.
Verdict: On receipt side, there is no violation of Section 269SS because the second receipt was via account payee cheque. However, as on 20/11/2020, the aggregate outstanding loan was Rs. 40,000 (exceeding Rs. 20,000). Therefore, repaying Rs. 15,000 in cash directly violates Section 269T, attracting a 100% penalty of Rs. 15,000 under Section 271E!
4. Section 269ST: Prohibition on Cash Receipts of Rs. 2 Lakhs or More
Section 269ST prohibits any person from receiving an amount of Rs. 2,00,000 or more in cash under any of the following three distinct statutory circumstances:
1. In Aggregate from a Person in a Day
A recipient cannot receive cash of Rs. 2 lakhs or more from a single person in a single calendar day, even if split across multiple separate invoices or transactions.
2. In Respect of a Single Transaction
A single transaction/bill cannot be settled in cash of Rs. 2 lakhs or more, regardless of whether the cash is received over multiple days or split across dates.
3. In Respect of a Single Event or Occasion
Transactions relating to one event or occasion (e.g., wedding, catering, conference) cannot involve aggregate cash receipts of Rs. 2 lakhs or more, irrespective of number of bills or days.
Exemptions from Section 269ST
- (a) Government, any banking company, post office savings bank, or co-operative bank;
- (b) Transactions of the nature referred to in Section 269SS (acceptance of loans, deposits);
- (c) Such other persons or class of persons/receipts notified by Central Government;
- (d) Any corporation established by a Central, State, or Provincial Act.
“Failure to comply with Section 269ST would attract penalty under Section 271DA of the Act, equivalent to the amount receipt in cash.”
Three Practical Case Studies on Section 269ST
- Single Day Aggregation Breach: Mr. A receives Rs. 2,35,000 in cash on the same day for two separate invoices (Rs. 1,00,000 and Rs. 1,35,000) from Mr. B. Section 269ST is violated because daily aggregate from one person exceeds Rs. 2,00,000.
- Single Bill Split Over Multiple Dates: Mr. A sells goods for Rs. 3,50,000 on 02/05/2020. He accepts cash of Rs. 1,90,000 on 10/10/2020 and Rs. 1,60,000 on 12/12/2020. Section 269ST is violated because total cash received for a single transaction/bill exceeds Rs. 2,00,000.
- Single Occasion / Event: Mr. A undertakes a catering and decoration contract for a marriage and receives Rs. 3,00,000 in cash in full. Section 269ST is violated because the receipt pertains to a single event/occasion.
“Section 269ST is applicable on payee and not payer for any receipt whether capital or revenue. This indicates that a borrower remains out of the purview of Section-269ST.”
5. Section 40A(3) & 40A(3A): Disallowance of Cash Business Expenditures
Section 40A(3) read with Rule 6DD: Where an assessee incurs any expenditure in respect of which payment or aggregate of payments made to a person in a single day, otherwise than by an account payee cheque, account payee bank draft, ECS, or prescribed electronic modes under Rule 6ABBA (Notification No. 8/2020 dated 29.01.2020), exceeds Rs. 10,000, no deduction shall be allowed in respect of such expenditure.
Section 40A(3A): Where an assessee had previously claimed and been allowed a deduction for an expenditure incurred in a preceding year on mercantile basis, and subsequent payment in respect thereof is made in the current year in cash exceeding Rs. 10,000 (or Rs. 35,000 for goods carriages), the payment so made shall be deemed to be profits and gains of business and taxed in the year of payment!
Practical Examples: Section 40A(3) & 40A(3A)
- Five Invoices of Rs. 6,000 in a Day: Payments of 5 invoices of Rs. 6,000 each made in cash on 04/08/2020 to Mr. Ram (leasing of goods carriages). No disallowance under Section 40A(3) because total aggregate payments are Rs. 30,000, which does not exceed the Rs. 35,000 carriage threshold.
- Two Invoices on Separate Days: Payments of two invoices of Rs. 19,000 each made in cash to Mr. Ram (goods carriages) on 27/10/2020 and 28/10/2020. No disallowance under Section 40A(3) because aggregate payments did not exceed Rs. 35,000 in a single day.
- Subsequent Cash Settlement of Past Expense: Cash payment of Rs. 38,000 made to Mr. Ram (goods carriages) against an invoice previously booked and allowed as deduction in FY 2017-18. Disallowance under Section 40A(3A) is attracted because payment exceeds Rs. 35,000, and Rs. 38,000 will be taxed as business income in the current year.
Specific Cash Prohibitions Across Deductions & Entities (Sections 6 to 12)
6. Tax Exemptions to Political Parties (Section 13A)
Registered political parties retain 100% tax exemption on income from house property, other sources, capital gains, and voluntary contributions only if:
- They receive no donation exceeding Rs. 2,000 in cash (must be by account payee cheque/draft, ECS, or Rule 6ABBA electronic modes).
- For each voluntary contribution (other than electoral bonds) exceeding Rs. 20,000, they maintain and furnish full donor audit records.
7. Donations under Section 80G
Deductions for contributions to charitable institutions and relief funds are available to all assessees (individuals, companies, firms). Donations in kind are completely ineligible. Furthermore, any donation exceeding Rs. 2,000 must be made in non-cash modes to qualify for tax deduction.
“Section 80G covers contributions made to charitable institutions and certain relief funds. The deduction under Section 80G is available to all persons whether a company, individual, firm or any other person. Donations in kind are not entitled for any tax benefits.”
8. Deduction under Section 80D (Health Insurance & Medical Expenditure)
Deduction is available for medical insurance premiums and medical expenditure for senior citizens. The statutory deduction is allowable only if payment is made in a mode other than cash. Cash payment is legally permitted exclusively for preventive health check-ups (up to the overall ceiling of Rs. 5,000).
9. Disallowance of Capital Asset Actual Cost: Section 35AD read with Section 43(1)
Under the second proviso to Section 43(1), where an assessee incurs expenditure for acquiring a capital asset, and payment or aggregate payments made to a person in a day otherwise than by account payee cheque/draft, ECS, or Rule 6ABBA electronic modes exceeds Rs. 10,000, such expenditure shall NOT form part of the actual cost of the asset for depreciation or investment deductions under Section 35AD.
10. Deduction U/s 80GGA (Donations for Scientific Research & Rural Development)
Available to non-business assessees (no PGBP income) for donations to research associations, universities, rural development programs, or the National Urban Poverty Eradication Fund. To discourage cash usage, no deduction is allowed if cash contribution exceeds Rs. 10,000.
11. Employment Incentive: Deduction under Section 80JJAA
Provides an incentive deduction equal to 30% of additional employee cost incurred by an assessee subject to tax audit under Section 44AB, allowable for three consecutive assessment years.
“Section 80JJAA provides that deduction of 30% of additional employee cost incurred by the assessee shall be allowed as deduction for 3 assessment years.”
Banking Mandate: No deduction shall be allowed under Section 80JJAA if emoluments are paid in cash. Emoluments must strictly be disbursed through account payee cheque, bank draft, or electronic clearing system.
12. Section 36(1)(ib): Employer-Paid Employee Health Insurance
Explicitly disallows business deduction for any expenditure incurred by an employer towards premium paid for the health insurance of its employees if such premium is paid in cash.