Hemant Mishra/Mint
Hemant Mishra/Mint

How penalties for cash transactions would apply

The Rs2 lakh limit for cash transactions, after which a penalty may apply, can be calculated in different ways depending on the situation

The past one year has seen many actions by the government targeting black money. One such action was the introduction of a new provision in tax laws in this year's Budget, which targeted all cash transactions above a limit of Rs2 lakh. The aim of this amendment is to restrict the use of black money for legitimate transactions. So far, a person receiving cash could deposit it in his bank account and offer the same to tax as his income, without suffering any adverse consequences, other than payment of tax on such amount. 

The amendment, which applies to all receipts from 1 April 2017, is in the nature of a prohibition on receipt of any amount exceeding Rs2 lakh, other than by account payee cheque, bank draft or electronic bank transfer. Since the requirement is on receipt by an account payee cheque, even a receipt by a bearer cheque would be a violation of the provision.

The prohibition is on the receipt, and not on the payment. The payer, who disposes of his black money by such payment, does not suffer any adverse consequences. 

There is a penalty introduced for receipt of such cash, equivalent to the amount of such receipt for violation of this provision. If there is a valid reason for such receipt, then the penalty may not be levied. There is no provision for a lesser penalty if the circumstances so warrant—either the penalty is levied at 100% of the amount of receipt, or no penalty is levied.

How does one apply this limit of Rs2 lakh? There are three alternative situations that one needs to consider: the aggregate receipts from a person in a day, receipts in respect of a single transaction, or receipts in respect of transactions relating to one event or occasion from a person. The limit would apply to all three situations.

If one receives cash exceeding Rs2 lakh from a single person in a day, though against multiple bills for goods sold or services rendered, this would amount to a violation of the provision. It would attract the penalty, though the value of each bill may be small.

The receipt need not be in the nature of income. Take a situation where you have incurred an expenditure on behalf of a friend by account payee cheque. If he reimburses you in cash, though such reimbursement is not your income, the prohibition would still apply. Similarly, the prohibition would equally apply to receipt of a gift, though the gift may be from a close relative, which is otherwise exempt. It would also apply to farmers selling agricultural produce, though agricultural income is not taxable.

There is subjectivity involved in deciding as to what would amount to a single transaction. While the sale of one asset, such as a property or a motor car, would definitely amount to a single transaction, can the tax authorities say that multiple transactions of rendering of different services to the same person is really one single transaction? Ultimately, the matter would have to be decided on the facts and surrounding circumstances. 

If one sells a property against cash to a purchaser for a total sales value exceeding Rs2 lakh, and the entire sales proceeds is received in cash, though on different dates, the amount received on each date being less than Rs2 lakh, this would amount to receipt of more than Rs2 lakh in respect of a single transaction. This would also, therefore, be a violation. Even if the property is sold to multiple joint owners, and the cash receipt from each joint owner is less than Rs2 lakh, since the aggregate value of the transaction in cash exceeds Rs2 lakh, this also amounts to a violation.

Fortunately, the limit in respect of transactions relating to one event or occasion is in relation to each payer, and not in relation to the event or occasion in aggregate. Therefore, receipts in cash from different persons for sale of tickets for a particular event would not attract the provision, even if the total sale in a day exceeded Rs2 lakh, unless the receipt from a single person in a day (or on multiple days relating to one sale) exceeds Rs2 lakh. Similarly, gifts received in cash on the occasion of a marriage may exceed Rs2 lakh in aggregate, but would not attract the penalty, unless the cash receipt from a single person exceeded Rs2 lakh.

The prohibition applies to all persons; it would, therefore, apply even to charitable and religious trusts. If a charitable trust receives cash exceeding Rs2 lakh from a single donor, this would attract the penalty. Of course, if the donations are anonymous, and the trust is not able to provide the names of the donors, the onus would be on the tax authorities to prove that the receipts are from a single donor. At worst, the 30% tax on anonymous donations would apply to such receipts.

The restriction announced by the finance minister in his Budget speech of the limit of Rs2,000 for donations to charitable trusts does not apply to the trust itself. It is really only a prohibition on claim of deduction under section 80G (under income tax laws) by the donor for the donation made in cash, which is reduced from Rs10,000 to Rs2,000.

Fortunately, there is an exemption for deposits in banks, as well as for withdrawals from banks. Similarly, the prohibition would not apply to receipts by the government. 

Would these restrictions inhibit the growth of black money? They would definitely help curb the menace, and reduce the cash culture, as a person with black money would find limitations on the amount of black money that he can use. Unfortunately, many genuine transactions may also get affected—receipt in cash by a hospital in an emergency is one such example. One hopes that the government uses its power to exempt certain types of receipts or persons, in a manner that genuine transactions do not get affected. 

Gautam Nayak is a chartered accountant