Measures taken under Income Tax Act, 1961 to discourage cash transactions

04 Apr 2017

In order to achieve the mission of the Government to move towards a less cash economy and to reduce the generation and circulation of black money, the Government has taken many measures by amending the below mentioned provisions of Income Tax Act, 1961 through Finance Act, 2017 effective from 1 April 2017.

Section 13A

To discourage cash transaction and to bring transparency in the source of funding to political parties, the following amendments have been made:

No donation of Rs. 2,000 or more is received otherwise than by an account payee cheque/draft/use of electronic clearing system through a bank account or through electoral bonds (No cash donation exceeding Rs. 2,000/-)

Income tax return to be filed u/s 139(1) – If return is not submitted (or if return is submitted belatedly), exemption u/s 13A will not be available.

Section 40A(3)/(3A)

Under the existing provisions, expenditure incurred in cash exceeding Rs. 20,000 (in the case of payment to transport contractor, it is Rs. 35,000) is not allowable as deduction as per Section 40A(3) (few exceptions are given by rule 6DD)

In order to disincentivise cash transactions, section 40A(3) has been amended. The monetary limit of cash payment has been reduced to Rs. 10,000 (however there is no change in monetary limit for payment to transport contractor).

Amended in Section 40A(3A) – Section 40A(3A) is applicable if the taxpayer had claimed deduction in respect of an expenditure in any of the earlier years. Payment pertaining to such expenditure is made exceeding Rs. 20,000 during the current year by any other mode other than account payee cheque/bank draft etc.  This monetary limit has also been reduced to Rs. 10,000 from the assessment year 2018-19.

Disallowance of depreciation, investment allowance and capital expenditure under section 35AD on cash payment and Section 43(1)

Under current provisions, there is no provision to disallow the capital expenditure incurred in cash. To discourage cash payment for purchase of capital assets, section 35AD and section 43(1) have been amended with effect from the assessment year 2018-19 as follows:

Section 35AD

Any expenditure in respect of which a payment or aggregate payment made to a person in a day, otherwise than by cheque or bank draft or electronic clearing system exceeds Rs. 10,000/-, no deduction shall be allowed in respect of such payment under section 35AD.

Section 43

The following amendments have been made to Section 43(1)

Actual cost – Actual cost not to include cash payment exceeding Rs. 10,000. Section 43(1) is amended to provide that where an assessee incurs any expenditure for acquisition of any asset in respect of which a payment or aggregate payment made to a person in a day, otherwise than by cheque or bank draft or electronic clearing system exceeds Rs. 10,000/-, such payment shall be ignored to determine the actual cost of such asset. It means no depreciation will be allowed on such payment.

Section 80G

Under the existing provisions of section 80G, deduction is not allowed in respect of donation made of any sum exceedingRs.10,000/-, if the same is not paid by any mode other than cash.

In order to provide cash less economy and transparency, section 80G has been amended so as to provide that nodeduction shall be allowed under the section 80G in respect of donation of any sum exceeding Rs. 2,000/- unless suchsum is paid by any mode other than cash.

Section 269ST and 271DA

A new section 269ST has been introduced, no person (except banking company, Government, post office co-operative & other as may notify by Government) shall receive an amount of Rs. 2 lakh or more  –

(a) In aggregate from a person in a day;

(b) In respect of single transaction; or

(c) In respect of transactions relating to one event or occasion from a person

Contravention of above mentioned provision shall attract a penalty equivalent to the amount of such receipt under section 271DA unless such person proves that there were good and sufficient reasons for the contravention. Penalty under this section shall be imposed by the Joint Commissioner.

This section impacts the payee and not the payer. It is the payee or recipient who is made liable for violation of section 269ST in the form of penalty u/s 271D