Deep analysis of cash transactions under income tax

cash payments under income tax act

Cash is the most liquid asset in the world and gives much more flexibility in business and personal transaction due to its acceptance and its ability to be used for transaction with anyone and at any situations.

I accept once again cash is most comfortable form of money, but only when there is only two parties to the transaction and there is no word called TAX in the world.

Again I accept that tax is most comfortable form of money when government does not require, to lay roads, provide infrastructure facilities, provide welfare schemes, does not pays salary to government employees.

Government needs TAX money to discharge its functions either at state level and central level. Indian economy is cash dominated economy prior to introduction of unified payment systems and reduction bank transaction charges.

In order to avoid tax evasion by tax payers there should be proper method and rule to monitor the transactions that would bring tax revenue to government, one of such efficient and practical way is to restrict cash transactions in business and high value personal cash transactions.

Summary of compliances required under Section 40A(3), 40A(3a) and Rule 6DD and 6ABBA  of income tax act

Payment made to any person for business expenditure in excess of rs.10,000 in a day other than through bank transaction is added back as profit for the business. The amount of Rs.10,000 limit is increased to Rs.35000 in case of the payment is made to transport of goods.

Example :

  1. Profits from business of battery sales and service is Rs.25,00,000  for financial year 2021-2022 and auditor while in the course of audit and filing income tax return finds that payment of Rs.50,000 was made to Mr. Elon Musk for purchase of battery, now the amount of rs 50000 can be added back to actual net profits so final net profit chargeable to tax is Rs.25,50,000 ( 25,00,000 + 50,000 ).
  2. In another case only Rs.40,000 was made on one day and payment of Rs.10,000 was made on other day, then    the amount of Rs.40,000 only can be added back to net profit thus total revised profit would be Rs.25,40,00.
  3. Similarly the business follows mercantile system of accounting and claims the expenditure even though not        paid in the current financial year it is paid of subsequent financial year in cash for the amount of Rs.1,00,000 then the amount of Rs.1,00,000 is added to financial year when it was paid in cash to the person.

When can cash payment can be made above the prescribed limit ?

  1. Payments made to banking company and money exchange
  2. Payments made to life insurance corporation of India
  3. Payments made to cottage industries for purchase of products manufactured or processed without using power
  4. Payments made to purchase agricultural, forest produce, horticulture, apiculture.
  5. Payments made to purchase livestock, meat, hides, and skin
  6. Payments made to government
  7. Payment made to person residing and carrying on business in village where there is no banking facility.
  8. Payment made to employee up to Rs.50,000 for during termination of employment in form of terminal compensation
  9. Salary paid to employee after deducting TDS if employee working for more than 14 days temporarily in different place where there is no banking facility or employee does not have bank account in that place.

The disallowance of expenditure is effective only in case of business not opting for presumptive taxation method, where business prefers presumptive taxation question of disallowance of expenditure does not arise, so business who files return under presumptive taxation need not comply with these regulations as per law in force.

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