RESTRICTIONS ON CASH

TRANSACTIONS UNDER THE

INCOME TAX ACT,1961
INTRODUCTION

 In order to curb black money, Indian economy is getting digitalized and is

moving towards a cashless economy.
 It ensures a money trail for a series of transactions.
 The government has introduced various provisions under section
40A(3),40A(3A),43(1),35AD,269SS,269T,269ST to limit cash payments and
acceptance of cash, violation of which leads to payment of penalty.
 There are also certain restrictions on Chapter VI-A deductions, if paid in
cash.
 SECTION 40A(3)
 Any payment made by the assessee ( individual, company or firm)above
Rs.10,000 to a person, in a single day, by cash will not be allowed as
expenditure as per section 40A(3).
 In case of cash payment for plying, hiring or leasing of goods carriage the limit
is fixed at Rs.35,000.
There are certain exceptions to section 40A(3) stated under Rule 6DD such as:
• Payment made to banking and other credit institutions.
• Payment made to government(State or Central Government)
• Payment made to producers or cultivators of agriculture, horticulture, fish
and animal produce.
• Payment made for purchase of products without aid of power in cottage
industry.
• Payment of terminal benefits in connection with retirement, retrenchment,
resignation, gratuity upto Rs.50,000.
• Payments required to be made on a day when banks are closed on account of
holiday or strike.

• Payment made to a person who carries on business in a village not served by

banks.

• Payment made by any person to his agent who is required to make payment in
cash for goods or services.

• Authorized dealers and foreign exchange money changers as registered with RBI
are required to pay cash for purchase of foreign currency

• Payment made to an employee of his salary (after deducting TDS from salary) :
when such an employee is temporarily posted for a continuous period of 15 days
or more in a place other than his normal place of duty or on a ship or he does not
maintain any account in any bank at such place or ship.
Consequences of violation of provision

 No Deduction is allowable in computation of income from business or

profession for cash payments exceeding Rs.10,000.
 This results in increase in taxable income, in computation of profits and gains
from business or profession.

Example
Suppose Mr. X purchases goods from Mr. Y and makes payment in cash of
Rs.6000, Rs.5000 and Rs.2000 on the same day to Mr. Y, here Mr. X cannot claim
expenses for purchase of goods since there is violation of Section 40A(3).
SECTION 40A(3A)
 As per section 40A(3A), when an expense has incurred a liability in a
particular year and in any subsequent year the assessee makes payment of
such expenditure in cash exceeding Rs.10,000, then this payment is
deemed to be the profit of business or profession and will be charged to
tax in such subsequent year.

Consequences of violation of provision

 The deduction claimed earlier for the expenditure will increase the taxable
income of the subsequent year when the payment in cash exceeds
Rs.10,000.
Example
Suppose, Mr. X purchases goods on credit for Rs.30,000 and a liability has been
created in the previous year on mercantile basis but the payment of Rs.30,000
has been made in cash in the subsequent year. Here, as per provisions of
section 40A(3A) ,the expenditure allowed earlier in the previous year will be
disallowed and will be deemed as income in the subsequent year.
SECTION 43(1)
 This section deals with determination of “Actual cost of Asset”.
 The cost of acquisition of any asset is determined by ignoring the amount
paid otherwise than by an account payee cheque drawn on a bank or an
account payee bank draft or use of electronic clearing system through a
bank account, in excess of Rs.10,000.

Consequences of violation of provision

 Cash payments exceeding Rs.10,000 for asset purchase will not be included
in Cost of Acquisition of Asset.
 Accordingly, no depreciation will be available on such amount paid in
cash.
 Further, such amount will not be considered as cost of acquisition, when
the asset is subsequently sold.
Example
Suppose, Mr. X purchases a machinery for Rs.8,00,000 on 01.05.2021 and
makes payment as follow:Rs.5,00,000 by cheque on 01.05.2021 and Rs.3,00,000
by cash on 03.05.2021.
Here, since the payment has been made in cash for acquisition of asset
exceeding Rs.10,000,section 43(1) has been violated and the actual cost of
asset will be considered only as Rs.5,00,000 and depreciation will be claimed
for the same.
SECTION 35AD
 Under section 35AD,assesses are eligible for deduction of 100% of capital
expenditure incurred wholly for the purpose of specified business
 Such deduction would not be available if a payment or aggregate
payment made per day to a person other than account payee
cheque/draft/use of electronic clearing system exceeds Rs.10,000.

Consequences of violation of provision

 Deduction u/s 35AD shall not be available.

Example
A warehousing facility incurred a capital expenditure of Rs.50lakhs.Out of
which Rs.10lakhs is paid in cash.
Here, only a capital expenditure of Rs.40lakhs for specified business can be
claimed as deduction under section 35AD.
SECTION 269SS
 Under this section, a taxpayer is prohibited from taking/accepting loans or
deposits or advances of a sum of more than Rs.20,000 in cash. However,
section 269SS is not applicable when loans or deposits are accepted from
the entities below:
• Government,
• Any banking company, post office saving bank or co-operative bank,
• Any corporation established by a Central, State or Provincial Act
• Any Government company as defined in clause (45) of section 2 of the
Companies Act, 2013
• An institution, association or body or class of institutions, associations or
bodies notified by Central Government in the official gazette.
Consequences of violation of provision
 Section 271D of income tax act states when the provisions of section 269SS
is contravened, a penalty equal to amount of loan or deposit accepted
may be levied.
 If the cause is proved, then such penalty will not be levied by virtue of
section 273.

Example
Mr. X ,seller of land, has entered into an agreement with Mr.Y for sale of land
worth Rs.10,00,000. With regard to this ,Mr.Y has made an advance of Rs.
1,00,000 to Mr.X in cash. Here, Mr. X ,will be penalized for acceptance of
advance more than Rs.20,000
SECTION 269T

 Under this section, income tax act provides that no branch of a banking
company or a cooperative society, firm or other person shall not repay any
loan or deposit otherwise than by an account payee cheque or account
payee bank draft drawn in the name of the person,

(a) The amount of the loan or deposit together with interest is Rs 20000 or
more,
(b) The aggregate amount of loans or deposits held by such person,
either in his own name or jointly with other person on the date of such repayment
together with interest, is Rs 20000 or more.
Consequences of violation of provision

 Section 271E of income tax act states when the provisions of section 269T is
contravened, a penalty equal to amount of loan or deposit repaid may be
levied.
 If the cause is proved, then such penalty will not be levied by virtue of
section 273.

Example
Mr. X has borrowed a sum of Rs.60,000 from Mr.Y. In this case Mr.X cannot
settle his due by paying Rs.60,000 in cash ,since it’s a contravention of section
269T and he would be liable to pay a penalty of Rs.60,000 under section 271E.
SECTION 269ST
 Section 269ST prohibits any person to receive a sum of Rs.2 lakhs and above
in cash
• Aggregating payments in a day, from a person,
• In respect of single transaction,
• In respect of transactions relating to one event or occasion.
 However, this provision shall not apply to
• Any receipt from government or banking company.
• Transactions referred in section 269SS
• Persons from whom loan or deposit is taken or accepted having
agricultural income.
 Under section 269ST,for a payment, single transaction constitutes one
installment of loan repayment and not aggregate of all transactions.
Consequences of violation of provision

 When the provisions of section 269ST is contravened, a penalty equal to

amount of such receipt will be levied.

Example
Mr.X has made a supply to Mr.Y for Rs.4 lakhs. Mr.X received amounts of
Rs.1.5 lakh and 2.5 lakhs in cash on different dates. In this case, Mr.X will be
penalized since he has received cash more than Rs.2 lakhs in respect of a
single transaction(i.e. for one invoice)
SECTION 40A(2)

 Section 40A(2) states that any payments made to specified person(relative

of individual or director of a company) is excessive or unreasonable with
regard to fair market value of goods, services .

Consequences of violation of provision

 The amount of expenditure considered to be excessive or unreasonable
shall not be allowed as deduction.

Example
Mr.X purchases goods from a specified person for Rs.30,000(market value
being Rs.25,000),here the amount paid in excess of Rs.25,000 will not be
allowed as deduction.
SECTION 80D(2B)
 Section 80D states the deduction available to individual in respect of
payments with regard to medical insurance premium, preventive health
checkup and medical expenses when medical insurance premium is not
taken.
Consequences of violation of provision
 According to section 80D(2B),when these expenses are paid in cash other
than preventive health checkup, they will not be allowed as deduction.

Example
Mr.X has taken a medical insurance premium on himself and his spouse, for
which he has paid an amount of Rs.20,000 as premium in cash. This payment
will not be eligible under section 80(D) since the premium has been paid in
cash.
SECTION 80G(5D)

 Section 80G deals with the deductions available for contributions made to
certain relief funds and charitable institutions.
 Only certain donations as notified will be eligible for deduction.
 The deduction can be claimed when the contribution is made by any other
mode than cash when it exceeds Rs.2000.

Consequences of violation of provision

 No deduction will be allowed under chapter VI-A if donation is paid in cash
exceeding Rs.2000.

Example
Mr. X has contributed a sum of Rs.5000 in cash to Prime Minister’s National relief
Fund. In this case, he will not be eligible claim deduction under section
80G(5D).
SECTION 80GGA(2A)

 Deduction under section 80GGA is available to those(who does not have

income from business or profession) who make contributions to scientific,
social or statistical research or rural development or an eligible project or
National urban Poverty Eradication Fund.
 No deduction will be allowed when the sum exceeding Rs.2000 is paid in
cash.

Example
Mr. X has contributed a sum of Rs.10,000 in cash to a specific scientific
research. In this case, he will not be eligible claim deduction as per section
80GGA(2A).
SECTION 80GGB

 An Indian company is eligible to claim deduction for contribution to any

political party or electoral trust.
 No deduction will be allowed if the contribution is made in cash.

Consequences of violation of provision

 There is no cash limit for contribution under this section, hence any amount
paid as cash will not be eligible for deduction.

Example
M/s.XYZ Ltd., an Indian company has contributed a sum of Rs.50,000 to
electoral trust in cash. Since, the contribution has not satisfied the conditions in
section 80GGB , deduction cannot be claimed.
SECTION 80GGC

 Any person can claim deduction under section 80GGC for contribution made
to electoral trust or political party.
 However, this deduction will not be available to a local authority and an
artificial juridical person, wholly or partly funded by the government.

Consequences of violation of provision

 No deduction will be allowed under this section, if contribution is made in cash.

Example
Mr. X has contributed a sum of Rs.10,000 in cash to a political party registered
under Section 29A of Representation of the people Act,1951.However,he wont be
eligible for deduction under section 80GGC,since the contribution has been made
in cash.
SECTION 13A
 Political parties registered with the Election Commissioner of India are
exempted from income from house property, other sources, capital gain
and voluntary contributions received .
 However, the exemption from voluntary contribution would be available
only when the political party maintains a record of contribution in excess of
Rs.20,000 and the name and address of contributor.
 Moreover, no contribution exceeding Rs.2,000 to be received in cash.
 The return of income must be furnished u/s 139(4B).

Consequences of violation of provision

 The contributions received in cash in excess of Rs.2000 is subject to tax.
 When there is no record for donations received in excess of Rs.20,000,the
amount will be subject to tax.
Example
A political party has received a sum of Rs.2400 from 10 members in cash which
has been recorded in books of accounts. However, this income will not be
exempt under section 13A,since it does not satisfy the conditions under section
13A of cash receipt less than Rs.2000.
SECTION 194N
 Under this section, a bank, a co-operative bank, post office are liable to
deduct TDS when the withdrawals from one or more accounts exceeds Rs.20
lakhs or 1 crore depending upon filing under sec 139(1) in three years
preceeding the previous financial year.
 When the return has been filed under section 139(1) for three years
preceeding the previous financial year,
• TDS would be deducted at the rate of 2% when the amount or
aggregate of amount exceeds Rs.1 Crore.
 When return has not be filed under section 139(1) for three years preceeding
the previous financial year ,
• TDS would be deducted at the rate of 2% when the amount or
aggregate of amount paid is in excess of 20 lakhs but not more than 1
crore.
• TDS would be deducted at the rate of 5% when the amount exceeds
Rs.1 Crore.
Example
Mr. X has made a withdrawal of Rs.70 lakhs from his current account and Rs.50
lakhs from his savings account during the FY 21-22. Mr. X is regularly filing return
for past 5 years. In this case, Mr. X has made a total withdrawal of Rs.1.20
crores, so the amount in excess of 1 crore will be liable to TDS @ 2%.The
amount of TDS deducted by bank would be Rs.40,000.
HIGH VALUE TRANSACTIONS LEADING
TO INCOME TAX NOTICE
 CBDT has made it mandatory for banks or cooperative banks to report cash
deposits aggregating to Rs.10 lakhs or more during a financial year in one
or more accounts(other than current account and time deposit),to report if
a person deposits an amount aggregating to Rs.10 lakhs or more in a
financial year(other than a time deposit made through renewal of another
time deposit, cash deposit of more than Rs.50 lakhs in current account in a
financial year.
 Payment of credit card bills due aggregating to 1 lakh or more in cash
have to be reported and settlement of credit card dues more than 10 lakhs
(any mode) have to be reported.
 Cash withdrawal limit from bank and post office withdrawal limit at Post
Office is ₹20,000 per customer. No branch postmaster (BPM) shall accept
cash deposit transaction for more than ₹50,000 in an account in a day.
 Property registrar will have to report to tax authorities "purchase or sale by
any person of immovable property for an amount of Rs 30 lakh or more.
 Companies or institutions issuing bonds or debentures will have to
mandatorily report receipt from any person an amount aggregating to Rs
10 lakh or more in a financial year for acquiring bonds or debentures. A
similar limit is set for reporting purchase of shares and mutual funds.
 Purchase of foreign exchange, which includes travellers cheque and forex
cards, debit or credit cards, aggregating to Rs 10 lakh is reported to the tax
department.
TCS PROVISIONS ON CASH
TRANSACTIONS
 1% TCS applicable on receipt of cash exceeding Rs.2 lakhs for sale of goods
or services.
 Under 206CL Seller is liable to collect TCS at the rate of 1% for sale of motor
vehicles, when the payment is received in cash or any other mode, for a
value exceeding Rs.10,00,000 for a single sale.