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 transactions due to its acceptance and its ability to be used for transactions with anyone and in any situation.

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

Again I accept that tax is the most comfortable form of money when the government does not require, it to lay roads, provide infrastructure facilities, provide welfare schemes, and not pay salaries to government employees.

The government needs TAX money to discharge its functions, either at the state level or central level. Indian economy is cash dominant economy prior to the introduction of unified payment systems and the reduction of bank transaction charges.

In order to avoid tax evasion by taxpayers there should be proper method and rule to monitor the transactions that would bring tax revenue to the government, one 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 goods.

Example :

  1. Profits from the business of battery sales and service is Rs.25,00,000 for the financial year 2021-2022 and the auditor while in the course of the audit and filing income tax return finds that payment of Rs.50,000 was made to Mr. Elon Musk for the 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 another day, then the amount of Rs.40,000 only can be added back to the net profit thus total revised profit would be Rs.25,40,00.
  3. Similarly, the business follows a mercantile system of accounting and claims the expenditure even though not paid in the current financial year is paid in the subsequent financial year in cash for the amount of Rs.1,00,000 then the amount of Rs.1,00,000 is added to the financial year when it was paid in cash to the person.

When can cash payment be made above the prescribed limit?

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

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