Hello everyone, welcome back to TAX DESTINATION blog!! Hope you all have gone through Tax Series. If you haven’t read, please go through the same by
clicking below links

01.Tax Series-1.

02.Tax Series-2.

So far we have published two blogs on TAX Series and 12 blogs on other updates. Since the income tax due date got extended to 30/09/2021 and owing to non-functioning of IT Site we have suspended this series for some days. we are going to continue this series further in the coming days.

In this blog, you can get to know why and where you must not use
cash mode of payments and how you would be penalized if you are using cash for
making your payments exceeding specified limits. And benefits of  doing transactions in digital mode

Say “NO” to cash transactions -Break the chain of coronavirus, Eradicate black money -Go cashless, Go clean.

In the current unprecedented situation where it is uncertain and not very definite about how the Novel COVID 19 virus is transmitting, where we are heading to a third wave, switching to a digital mode of settlement not just saves oneself from contracting the virus but also greatly reduces the dependency on middlemen and banking monopolies.

What the government failed to achieve through its Demonetization, has been done by the pandemic. The share of Indians primarily using cash transactions dropped by 50% in the last 12 months. The fear of contracting the virus through currency or cash dispensing ATMs made more people take up digital payments.

If you have the habit of doing transactions in cash, you may lose certain benefits which are otherwise available to you in the income tax act and you may either end up paying hefty penalties to the income tax department.

Advantages of digital payments.

1. Breaking the chain of coronavirus.
2. No corruption, No black money
3. No fake money
4. Ensures payment of taxes and Increases government revenue
5. Reduced risk of money laundering.

Reduced cash related corruption at the micro-level and at macro level improves the employment opportunities and attracts investments from various sources – not  just national but international too In order to promote the importance of digital transaction among businesses, Govt. of India along with the Income-tax department had taken several measures via schemes, rules and regulation. Excited to know about restrictions and penalties for cash
transactions in income tax act??

Happy reading!!  

Cases where payments through cash are restricted or not allowed as per the income tax act

I.  Restriction over revenue expenditure

• sec 40A(3)
• sec 40A(3A)

II. Restriction over capital expenditure

• sec 43(1)
• 35 AD

III.Restrictions on employee deductions

• sec 80D(2B)
• sec 80G
• sec 80GGA
• sec 80GGB
• sec 80GGC
• sec 80JJAA

IV.Incentives to encourage small businesses.

• sec 44AB
• sec 44AD

V.Restrictions on loans deposits advances and cash transactions.

• sec269SS
• sec269T
• sec 269ST
• sec 269SU

VI.Restrictions on cash transactions in real estate.

• sec 50C
• sec 43CA
• sec 56(2)X

VI.TDS Provisions on cash transactions

• sec 194N

VII.Restrictions on cash transactions for charitable trust

• sec 11(1)
• sec 80G

VIII.Restrictions on cash transactions for political parties

• 13A
• 13B

IX.Restrictions on the filing of ITR

• 139

X.Statement of Financial transactions

• 285BA

So friends, above are the accumulated sections in the whole of the Income-tax Act, where it is specified restrictions on cash transactions. I have segregated these sections into 10 categories so that it will be easy for everyone who is having minimal knowledge on this topic can easily understand when they are going through this series. In this, I would like to explain in detail about first two categories

I.Restrictions on revenue expenditure 

A. Revenue expenditure:

1). What is the overall limit of expenditure that one can incur in cash?

If a person makes the payment for any expenditure in relation to his business in cash or crossed cheque or bearer cheque in excess of 10000/- in a single day to a single person then such expenditure will be disallowed from his total income while computing his tax liability at the time of filing of his ITR.

Following are the other acceptable electronic modes as per CBDT

01.Account payee cheque.

02.Demand draft.

03.Electronic clearing system through a bank account.

04.Credit card.

05.Debit card.

06.Net Banking

07.IMPS.

08.UPI

09.RTGS

10.NEFT

11.BHIM.

If the payment is made to the transporter, then the limit of 10000 will be increased to 35000.

2). Will this limit be applicable in a case where expenditure is incurred, claimed in the last year and payment made during the current year?

If a person
incurs an item of expenditure in  FY and claimed the same on the due basis as a deduction from
his total income, and later on in next financial year if the payment for the
same is made in cash in excess of 10000 in a single day to a single person, it
will be disallowed in the year in which payment is made. 

3). Circumstances in which the above limit is not applicable.

The above provisions will not be
applicable to the below cases. i.e., in the below-mentioned cases, payments can be made in
excess of 10000 by cash. 

Click to know exceptions when you can make payment in cash

The above section will not be applicable to the below cases. i.e., in the below-mentioned cases, payments can be made in excess of 10000 by cash.

01.Payment to RBI, LIC, Banks, Government.

02.Payment made through NEFT/RTGS/Debit card/ECS/Credit card

03.Payments by book-entry(Notional entries)

04. Payment of producers of agricultural product, forest product, poultry product, fish product, livestock.

05.Payment required to be made on a day when banks are closed.

06.Payment of retirement benefits to employees provided such payment is up to 50000

07.Payment to salary to an employee who is posted to any other place for 15 days or more to a place other than his normal place of residence.

08.Payment made where banking facility not available

09.Payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such                    person

10.Payment is made by an authorized dealer or a money changer against the purchase of foreign currency or traveller’s cheques in the normal course of business.

Illustration to the above

An expenditure of Rs. 30,000 is incurred for the purchase of stationary against Bill no 2 from M/s XYZ Ltd on 01/01/21. The assessee makes separate payments of Rs. 5,000, Rs. 16,000 and Rs.          9,000 all by cash, to the person concerned in a single day. the aggregate amount of payment made to a person in a day, in this case, is Rs. 30,000. Since the aggregate payment by cash exceeds Rs.10,000, Rs. 30,000 will not be allowed as a deduction in computing the total income of the taxpayer in accordance with the provisions of the Act.

In the above case, if the payment is made to the transporter, then 35000 limits will be applicable and since the total amount paid is 30000 it would not amount to a violation.

If stationery is purchased in last FY, claimed as a deduction in last year FY and payment for the same is made in cash in current FY then the same will be added to your income in CFY.

II.Restrictions on capital expenditure

1). Whether the above limit is applicable when cash is expended for capital expenditure say for purchase of (fixed assets)?

If a person makes payments in cash for revenue expenses then the same will be disallowed u/s 40A(3) . What if he incurs capital expenditure in cash like purchasing fixed assets in cash

Will it be disallowed??

Amendment to sec 43(1).

If a person incurs any expenditure in relation to acquisition of any asset or part thereof in respect of which a payment or the aggregate of payments made to a single person in a day, in cash or crossed cheque or bearer cheque, in excess of  10000/-, then such expenditure shall not form part of the actual cost of such asset and the same will not be considered for claiming depreciation expense while computing his tax liability.

As per the above provision if an assessee buys an asset and makes payment in excess of 10000 in cash the same will not be treated as actual cost and depreciation related to such expense will not be allowed as deduction.

Example:

Assessee purchases plant and machinery of Rs. 3,50,000 on 1.04.2020 and pays the entire amount in cash.

Since payment of Rs. 3,50,000/- is made by cash, it shall not be considered as part of the actual cost of plant and machinery. The actual cost of plant and machinery shall be taken to be NIL  and NIL amount shall be added to WDV of Block of assets for claiming depreciation expenses.

2). Investment-linked incentives.

Disallowance of Cash Payments under Section 35AD & Restrictions on Claim of Depreciation of Disallowed Capital Expenditure.

The investment-linked deduction is available in respect of capital expenditure made in relation to certain specified businesses. 100% Deduction will be allowed on all capital expenses except (a) land (b) Goodwill and (c) financial instruments.

However any capital expenditure in respect of which payment or aggregate of payments made to a person of an amount exceeding 10000  in a day in cash or crossed cheque or bearer cheque would not be eligible as a deduction.

If expenditure is claimed as deduction u/s 35AD the same will not be allowed for depreciation. If the expenditure is not eligible for 35 AD, then the same would be allowed for depreciation purposes ideally. However if the same is paid in cash or crossed cheque or bearer cheque the same would not be eligible for depreciation also.

Conclusion

So, friends, I hope you all enjoyed reading through this series-1

If you find this content and explanation useful, please comment your feedback, raise your queries in the comments section and share with your friends, relatives, and colleagues so that they can get a basic idea of income tax and when they start their employment they can easily get through with all IT compliances.