Severe tax penalties on these cash transactions; check I-T dept's latest note

The Income Tax Department has recently published a brochure stressing the importance of avoiding cash transactions to reduce the risk of tax penalties. The primary goal of this campaign is to educate taxpayers about the potential financial consequences of engaging in cash transactions, which could result in harsh penalties according to the Income Tax Act.

According to the brochure released on January 2, 2025, the Income Tax Department has urged individuals to steer clear of cash transactions. Specifically, individuals should avoid receiving, paying, and transferring cash when the transaction amounts are minimal to moderate.

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The brochure further advises taxpayers to refrain from using cash for routine transactions, especially those involving substantial sums of money. Although many individuals opt for cash payments for convenience, this practice can inadvertently lead to violations of tax laws.

Key points

Transaction limits are determined based on the type of transaction and the parties involved. The Income Tax Department has outlined clear guidelines in their brochure outlining these limits to ensure compliance and transparency.

Many individuals choose to conduct transactions involving small amounts of money through cash payments, transfers, and receipts. This preference is influenced by various factors, such as:

> Societal factors: The presence of large agricultural, informal, and non-formal sectors in the socio-economic structure necessitates individuals to rely on bartering and cash transactions.

> Individual factors: Individual factors contributing to challenges in digital banking and money transfer include limited access to digital financial services, cost considerations, and psychological hesitations regarding security and confidentiality.

> Additionally, there are networks and channels that enable unaccounted incomes and illicit financial activities, undermining the integrity of financial systems.
> The Income-tax Act, 1961, contains regulations to streamline cash transactions and combat tax evasion. These provisions are regularly updated to meet evolving needs. Non-compliance with these regulations can result in penalties equal to the amount of cash involved, along with any other applicable sanctions.

Sections and associated penalties

• Section 269SS: This section restricts the acceptance of loans, deposits, or specified sums in cash exceeding Rs 20,000, with violations resulting in a penalty equal to the amount accepted in cash.
• Section 269ST: Limits cash receipts to Rs 2 lakh or more from a single person in a day, or in respect of a single transaction or related transactions, with non-compliance leading to penalties equivalent to the cash received.
• Section 269T: Prohibits cash repayments of loans or deposits over Rs 20,000, with penalties for breaches equal to the amount repaid in cash.
• Disallowance of Deductions for Cash Payments:
• Section 40A(3): Expenditures exceeding Rs 10,000 (Rs 35,000 for payments to transporters) made in cash are not deductible in business income calculations.
• Section 80G: Deductions for donations exceeding Rs 2,000 are disallowed if made in cash.

Exceptions

Certain transactions are not subject to these limitations, such as:

Transactions involving government entities, banks, post office savings banks, or cooperative banks.
Transactions where both the payer and payee exclusively earn agricultural income and have no taxable income.