RESTRICTIONS ON RECEIPT AND PAYMENT OF CASH IN INCOME TAX ACT

 

Note discusses implications under Income Tax Act on any company, firm, individual who pays or receives cash beyond certain limits.

I)            Business Receipts – Sec 269ST, Sec 271DA (Penalty) and Sec 37

 

1)   Sec 269ST – Receiving Amount more than 2 Lacs

 

No person (means individual, company, LLP, Partnership firm, AOP etc) shall receive an amount more than Rs 2 Lacs for:

 

a)    In aggregate from person in a day (payment may relate to different transaction)

b)   In respect of single transaction (receipt can be on different days in Cash)

c)    In respect of transactions relating to one occasion or event Will Sec 269ST apply to bearer cheques – Yes

Penalty u/s Sec 271DA – Amount equal to total amount received. Ex: If Rs 2.5 Lacs was received in Cash then penalty will be Rs 2.5 Lacs. Hefty penalty equal to amount of Cash received is imposed on recipient of Cash!!

Implications:

i)             Aggregate of payments for a transaction (like Sale or service provided) may be received in Cash at different point of times but in aggregate this payment should not exceeds Rs 2 Lacs.

 

Ex: Hospital charges Rs 3 Lacs to a patient and same is paid in cash by patient in 5 parts. This will attract penalty of 3 Lacs

 

ii)            Wholesaler of medicines sells different products of different companies to a retailer and raises 5 different bills which in aggregate of Rs 2.5 Lacs. Such retailer pays total amount of 2.5 Lacs though pertaining to different transactions on same day. The recipient (wholesaler) will be liable for penalty of 2.5 Lacs.

 

Is the penalty paid a deductible expense to calculate taxable profits? - NO

Explanation 1 of Sec 37 clarifies that any penalty paid by recipient will not be available as deductible expense for such recipient. Simply put, income tax department does not consider such an expense like penalty as an expense for purpose of calculating taxable income (profits)

II)         Expenditures incurred in Cash for Business:

 

Overall Limit for incurring expenses (Capital or Revenue) in Cash is Rs 10,000

 

A)                                             Capital Expenditure exceeding Rs 10,000 incurred in Cash:

(Sec 43 and Sec 32)

 

Depreciation on such capital expenditure is not allowed.

 

2nd proviso to Sec 43 mentions that if any capex is incurred exceeding Rs 10,000 then depreciation is disallowed on entire expense incurred.

 

Example: Person incurs 5 Crs of capital expenditure in cash for buying office and shows as fixed assets in his books of accounts. For depreciation purpose such expenditure of 5 Crs is not considered. Foregoing depreciation on 5 Crs will be massive hit and additionally recipient will have to pay penalty of Rs 5 Crs.

 

B)      Revenue Expenditure exceeding Rs 10,000 incurred in Cash is disallowed as an expenditure:

Example – A company purchases stationery of Rs 15,000 and pays in cash. Such expenditure will not be considered as expenditure incurred for calculating Taxable income (profit). This increases profits of the company and consequently income tax amount is increased.

Sec 40A(3) and (3A) stipulates such restriction.