Restriction on cash transaction under the Income tax Act

Ashish M. Shaji

13 Sep, 2022

There are different sections under the Income Tax Act which puts a limitation on the usage of cash. Some sections create the disallowance of the expense, and others penalise the person doing the cash transaction. In this article, we shall take a look at restriction on cash transaction under the Income Tax Act.

Restriction on cash transaction under the Income tax Act:  Various Sections

• Section 13 A

This relates to special provision relating to income of political parties. Exemptions to the political party will not be given in case the donation exceeding 2,000 rupees is received otherwise than by account payee cheque/draft/use of electronic clearing system via bank account or through electoral bonds.

• Section 35 AD

This relates to deduction in respect of expenditure on specified business. No deduction shall be permitted under section 35AD in respect of a payment or aggregate payment per day which is made to a person against such expenditure otherwise than an account payee cheque/draft/use of the electronic clearing system via bank account is more than 10,000 rupees.

• Section 36

This relates to other deductions. Deduction would be permitted in case of any premium paid by a payment mode apart from cash by the assessee as an employer to effect or to keep in force the insurance on health of his employees under the scheme framed in this behalf by GIC approved by the central government or by any other IRDAI approved insurer.

• Section 40 A(3) and Section 40 A(3A)

This relates to expenses or payment not deductible in certain circumstances. If any payment is made to a person in a day, other than by a banking channel or via such different electronic mode as prescribed, exceeds 10,000 rupees, no deduction would be permitted in respect of such expenditure.

• Section 43 (1)

This relates to actual cost of asset. If an assessee incurs expenditure for acquisition of any asset in respect of which the payment or the aggregate payment made to a person in a day, otherwise than by a cheque or bank draft or by the electronic clearing system is more than 10,000/- rupees, such payment would be ignored to determine the actual cost of the asset.

• Section 43CA

This relates to the special provision for full value of consideration for transferring assets apart from capital assets. As per this section, sales consideration is deemed to be stamp duty value on the transfer date of asset, not being capital assets, land or building or actual consideration, whichever is higher. In case the agreement date for fixing sales consideration and date of registration of asset are not the same, the stamp duty value may be consideration on the date of agreement subject to the condition that the transaction is executed through the banking channel.

• Section 44AD

This relates to special provision for computing profits & gains of business on presumptive basis. The Presumptive profit would be deemed at 6% rather than 8% in respect of amount of total turnover or gross receipts which is obtained via banking channel during the previous year or before the due date prescribed under sub-section (1) of section 139 in respect of that previous year.

• Section 80D

This relates to deduction concerning health insurance premium. No deduction would be permitted from gross total income in case where the health insurance premium is paid by the taxpayer in cash.

• Section 80G

This relates to deduction in respect of donations to charitable institutions. No deduction shall be allowed under Chapter VIA of the Income tax act^[1] from Gross Total Income in case where the donation paid in cash exceeds 2,000 rupees.

• Section 80GGA

This relates to deductions for donation for scientific research or rural development. No deduction shall be permitted in case where the contribution is paid in cash more than 10,000 rupees.

• Section 194N

This relates to TDS on cash withdrawal. Banks or Post office will deduct tax at 2% on cash payment to any person on the amount of more than 1 Crore during the previous year. Moreover, in case of a recipient who hasn’t filed income returns for all of the 3 assessment years relevant to 3 previous years, for which time limit of filing the return of income under sub-section (1) of section 139 has expired, tax would be deducted at the rate of 2% on the amount exceeding 20 lakhs to 1 Crore and at the rate of 5% after that.

Conclusion

One should be aware of the restriction on cash transaction. Hence when you do cash transactions, you should be careful not to default. Default can invite penal consequences, which can be huge to bear.

Read our article:Information concerning Defective Income Tax Return in ITR E-Filing 2.0