The Finance Bill, 2017 places some restrictions on cash transactions which have far reaching implications. They will come into force with effect from 1st April, 2017. Broadly speaking, restrictions proposed in the Finance Bill are of two types:-
(i) Restriction on the amount of payments u/s. 40A(3) and 40A(3A) of the Income-tax Act, 1961 (the Act) and its extension to capital expenditure
(ii) Prohibition on receipts in cash of ₹ 3 lakhs or more — Section 269ST
Restriction u/ss. 40A(3) and 40A(3A) of the Act — Clause 15 of Finance Bill, 2017
2. As per the existing provision of sub-section (3) of section 40A of the Act, any expenditure in respect of which a payment or aggregate of payments made to a person in a day; otherwise than by a crossed account payee cheque or an account payee bank draft exceeding ₹ 20,000/- is not allowed as deduction in computing his income from business or profession.
3. Sub-section (3A) of section 40A of the Act prohibits the deduction of expenditure incurred in a particular year in computing the income from business and profession but the payment of a sum exceeding ₹ 20,000/- is made in a single day in any subsequent year otherwise than by account payee cheque or bank draft, it will be chargeable to tax as the income of the subsequent year.
4. In both the situations at paragraphs 2 and 3 above, the existing threshold of cash payment to a person on any single day is proposed to be reduced from ₹ 20,000/- to ₹ 10,000/-.
5. In order to discourage cash transactions even for capital expenditure, it is proposed to amend section 43 of the Act to provide that where an assessee incurs any expenditure for acquiring an asset for which, a payment or aggregate of payments made to a person in a day in cash exceeds ₹ 10,000/-, such expenditure shall be ignored. Besides, no deduction will be allowed in respect of capital expenditure for specified businesses covered u/s. 35AD of the Act where the cash expenditure exceeds ₹ 10,000/- in respect of which payment or aggregate of payments is made to a person in a day.
6. The specified mode of payment, namely, crossed account payee cheque or draft is also proposed to be expanded to include any payment through the use of electronic clearing system through a bank account. Such a clearing system may include Real Time Gross Settlement (RTGS), credit card or debit card payments and even payments through the Aadhaar Card System.
Prohibition on cash transactions each of ₹ 3 lakhs or more
7. The newly inserted section 269ST provides that no person shall receive in cash ₹ 3 lakhs or more,
(a) In aggregate from a person in a day or
(b) In respect of a single transaction or
(c) In respect of transactions relating to one event or occasion from a person, otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account.
8. The restriction of ₹ 3 lakhs will not apply to Government, any banking company, post office saving bank or co-operative bank or any other person or class of persons or receipts that may be notified by the Central Government. In view of the insertion of section 269ST, the provision of section 206C relating to tax collection at source @1% of the cash sale consideration of jewellery exceeding ₹ 5 lakhs has become redundant and is to be omitted.
9. The restriction on cash transactions is the result of Supreme Court’s constituted Special Investigation Team which had made such a proposal in July, 2011. The objective of imposing restrictions on cash transactions is to curb the flow of domestic black money which is not only adversely affecting the revenues of the Government but is also affecting the investment for productive purposes because most of the black money is transacted in cash, it remains unaccounted and quite a sizable amount remains unproductive and is stored in the form of cash or remains invested in low priority investments in gold, jewellery etc. The restrictions are intended to move towards a less cash economy and to reduce generation and circulation of black money.
Implications of section 269ST of the Act
10. As stated above, three kinds of restrictions on receipt of cash of ₹ 3 lakhs or more have been prescribed. They relate to:
(i) Receipts from one person
(ii) Receipts in relation to a single transaction even though payments are made on different dates and
(iii) Transactions relating to one event or occasion from a person.
11. The cash restrictions are independent of the nature of transaction. It may represent the transaction of sale of goods on trading account or capital account or it may even be a loan transaction and is in addition to the provisions of section 269SS that deals with acceptance of loans, deposits or specified sum in cash exceeding ₹ 20,000/- which will be treated as the undisclosed income and subjected to tax.
12. In the first category, receipts from different persons in a day, of an amount which is less than ₹ 3 lakhs, will be permissible. However, if they relate to a single transaction, say, purchase of an expensive diamond or luxury durables, the total value of the transaction will be the determining factor and if it is of ₹ 3 lakhs or more, it will be hit by section 269ST even if the payments are made through more than one person or they are made on different dates of individual amounts of less than ₹ 3 lakhs.
13. Likewise, the transactions relating to one event, say marriage or birthday, the aggregate of all the transactions like say, rent of tents, decoration, cost of food and beverages will be aggregated to determine the threshold limit of ₹ 3 lakhs beyond which, the restriction of cash transaction will be applicable. This provision is likely to adversely affect the sale of luxury goods and consumer durables. It will also affect adversely the marriage market by restricting the sale of gems and jewellery, designer apparels etc. However, it will reduce the size of the grey market as well as the size of the unorganised sectors of the economy. The sellers of goods and services will look for buyers who can make the payments by modes other than cash.
14. Some important issues may also arise concerning the compliance with section 269ST vis-à-vis the Sale of Goods Act, 1930, under which, most of the business transactions are made. Section 4 of the Sale of Goods Act, 1930 defines the contract of sale as a contract whereby a seller transfers or agrees to transfer the property in goods to the buyer for a price. Where the transfer of the property in the goods has to take place at a future date or is subject to some conditions thereafter to be fulfilled, the contract will be an Agreement to Sell. The contract of sale or agreement to sell may provide for the immediate delivery of the goods or immediate payment of the price or both. It may also provide for the delivery or payment by installments, or that the delivery or payment or both shall be postponed. The goods which form the subject of a contract of sale or agreement to sell may be either existing goods, owned or possessed by the seller, or future goods. The payment may be made in advance even where the transaction is not final, in that the price is required to be settled in future when the goods would come into existence.
15. There may also be situations where the price is settled but quantity and time of the delivery is uncertain. For example, when a person agrees to buy the steel rods for the construction of his house, the price may be settled but the quantity depending upon the requirement of steel may be uncertain and the delivery may also depend upon the requirements of the buyer. The price may be payable when delivery of the required lot is taken.
16. In such situations, record would be to keep of the aggregate value of the transaction and if it exceeds ₹ 3 lakhs or more, each payment, even if it is less than ₹ 3 lakhs, would need to be made other than cash.
Penalty u/s. 271DA of the Act
17. Under the newly inserted section 271DA, contravention of section 269ST prohibiting cash receipt of ₹ 3 lakhs and above is punishable with penalty which is equal to the amount of such cash receipt. The penalty is required to be imposed by the Joint Commissioner of Income Tax. No penalty will, however, be levied if the person concerned proves that there were good and sufficient reasons for the contravention. By use of the words “good and sufficient reasons” in contra-distinction to a ‘reasonable cause’, a greater burden of proof has been cast on the assessee to show that the reasons for contravention would not only be good but also sufficient. The absence of the bank account of the payer, say an agriculturist, may not qualify to be a good and sufficient reason for accepting the payment in contravention of section 269ST particularly because the Government has been laying great emphasis on opening of Jan Dhan accounts in banks by every person even though there was to be a no deposit in that account. In pursuance of the policy of the Government, several crores of such Jan Dhan bank accounts have been opened by villagers including farmers and as such, the absence of a bank account may not provide good and sufficient reason for the payee to accept the cash of ₹ 3 lakhs or more.
18. To conclude, the restriction of cash transaction, though harsh and difficult to comply, will go, in the long run, bring about great benefits to country by curbing the use of black money and other attendant evils associated with it. It will not only improve tax compliances but in the long run, accelerate economic growth by larger utilisation of money through banking and other verifiable channels unlike at present where quite a large proposition of cash representing black money stays idle or is invested in unproductive assets like gold jewellery or other precious metals.
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