cash transaction limit under income tax act

Impact of business cash transactions under the income tax act

Cash transaction is the primary route that is opted for tax evasion, starting from capital gains transactions, hand loans, and petty business, black money is generated through unaccounted cash. In this article let us understand how cash transaction generates black money and how the income tax department has addressed this issue by mandating banking transactions.

What is the bank transaction cycle and how will it impact a person’s tax liability?

Income tax is the major revenue for the government, and income tax can be collected only when a person is liable to pay taxes. For a person to be liable to pay taxes there should be income, again income will be reported to the income tax department by the assessee only when it is accounted for.

The income tax department primarily depends on the banking transactions of the person to identify the income of the person. Therefore to move significant transactions through the banking channel there were strict income tax provisions to disallow expenses to businesses and penalties for recipients of cash.

Once the transactions are routed through the bank account of a recipient of income, the banks will file an annual return to the income tax department if the deposits in the account cross the limit specified for the savings and current account.

The recipient of income is required to file an income tax return if his deposits (cash + account transfers) in the current account exceed Rs.1 crore and in the case of a savings account the limit is Rs.50 lakhs and more. Restricting cash transactions for a person brings others under the tax net who will not otherwise file income tax returns and pay income tax.

You are being monitored by the income tax department through multiple sources, it was made possible by the income tax department by banking transactions.

What are the cash transaction limits for business?

Income tax limit for Single cash transactions in case of payments U/s 40A(3)

Rs.10,000 is the number that every business accountant and business owner should remember, cash payments exceeding Rs.10,000 in respect of any expenses of the business are disallowed and the assessing officer has the right to add back as income.

Once expenses are disallowed it boosts the income, tax liability, and incidental interest if any.

The limit is for single-day transactions to a person, therefore the restriction under this section will not apply if payments are made on multiple days of each transaction up to Rs.10,000.

In case the payment is made to the goods transporter, the limit is enhanced to Rs.35,000.

Example

M/s. Do Good, a proprietorship firm doing trading business in home appliances has paid the following payments in a single day. Net profit for the financial year is Rs.15,00,000.

  1. Payment to Mr.Rakesh for maintenance of lift amounting to Rs.12,000. – Disallowed as the limit of Rs.10,000 is exceeded.
  2. Payment to Mr.Rakesh on the next day – Rs.9,000 – Allowed as expenses as the cash payment does not exceed the limit of Rs.10,000.
  3. Payment to Suresh for an amount of Rs.40,000 for transport of home appliances to customer place. – Disallowed as the expense crosses the Rs.35,000 limit for goods transporter.

Revised net profit

Net profit + Disallowance = Rs.15,00,000 + Rs.12,000 + Rs.40,000 = 15,52,000.

Since the person’s income crossed Rs.10 lakhs and the slab rate is 30 % the additional tax on account of disallowance is Rs.15600 + educational cess and interest ( 52,000 * 30 % ).

Income tax limit for multiple cash transactions in case of receipts U/s 269ST.

Where the receipt is more than Rs.2,00,000 in a single day, towards a single transaction, or single event, a penalty equal to the amount of cash receipt is applicable.

Example

M/s. Do Good receives Payment of Rs.2,50,000 on multiple days from Miss. Divya is in cash due to her sudden international trip to Norway and payment made by her aged father in cash.

In this case, the income tax department can impose a penalty of Rs.2,50,000 which is equal to the amount received.

How does the income tax department know the details of cash transactions?

There will be 2 situations where the details of cash transactions are disclosed to the income tax department, the first one is when the department requires books of account during the scrutiny process based on income tax returns filed, and the second one is when the auditor who is a chartered account reports in his income tax audit report.

Is a UPI transaction considered a payment made through a bank?

Any kind of transaction through a banking channel is considered as payment through a bank, so payment made through Google Pay, PhonePe, and other UPI apps is considered as payment made through a bank.

Income tax provisions relating to cash transactions are overriding provisions of the entire Income Tax Act and any other act in India. Therefore even if the court orders compensation of Rs.5,00,000 and the amount is received in cash, an income tax provision relating to cash transactions exceeding Rs.2,00,000 is attracted and a penalty will be applicable equal to Rs.5,00,000.

What are the long-term disadvantages of cash transactions?

With rapid development in payment systems like UPI, online payments, and subscription systems, every transaction is brought inside banking systems for even small businesses, this will push the economy to a cashless economy in not less than a decade.

When the majority of transactions are done through banking systems, a person is forced to deposit unaccounted cash in a bank account which will alarm the income tax department. The income tax department will then send a notice explaining the sources of funds deposited in the banking account.

The income tax department also removed the benefit of indexation to long capital gains income, therefore this will again force the buyers to register the property at market value to claim the high cost of acquisition. Again you need to explain the source of income from which the property is acquired.

The income department will send an income tax notice to the person if significant cash transactions are noticed through information received from various sources.

To end this topic, let me explain the concept of capital formation, capital is formed by the accumulation of income over some time by any person. For example, if a person earns a profit of Rs.10 lakh per year and over 10 years his accumulated profit will be Rs.1 crore which is known as capital for investment or source of funds. Alternatively, if the person had disclosed a profit of Rs.5 lakhs per year by the option to cash transaction and tax evasion his capital formed will be very low at the end of 10 the year.

The disadvantage of cash transactions is the chain process in the robust income tax systems and GST systems. Therefore to gain tax advantage, improve the network, and expand business it is always suggested to move completely to cashless transactions and comply with the Income Tax Act 1961.