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Beware of penalty on Cash Transactions


Wherever possible, avoid cash transactions. There are draconian provisions under Income Tax Act which may hurt your peace of mind! Read this article to know more about it.


Firstly – Are you an income taxpayer? If yes, you are not allowed to accept Loan, Deposit, Repay loan/deposit by Cash in excess of Rs.20,000. Also the Income Tax Act prohibits “acceptance or payment” of an advance of Rs 20,000 or more in cash for purchase of immovable property.


What happens # 1 – What happens if you take? Suppose, Mr. Rajesh takes a hand loan of Rs.2,00,000 from his friend Mr. Rajendra and deposits such amount in his Savings Bank account. The income tax department can levy a penalty equivalent to the loan amount. In this case, IT department can levy a penalty of Rs.2,00,000


Suggestion # 1So, don’t take loan in cash. Even if you take, don’t deposit such amount in a bank account.


What happens # 2 – What happens if Mr. Rajesh treats this amount of Rs.2,00,000 as gift from Rajendra? Will it still be taxable?


Fortunately, the above penalty provision is not applicable in case of Gifts in cash! However, under Section 56, any amount received from friends or people other than relatives, over Rs.50,000 per year, either in cash or by cheque, is taxable as ‘Income from Other Sources’.


What happens # 3 – What happens if Mr. Rajesh treats this amount of Rs.2,00,000 as receipt from his father? Will it still be taxable?


If this amount is a loan, then Yes, it is taxable. However, if it a Gift, then it is not taxable, even if it is over Rs.50,000. Only thing to be noted is about the source of funds of his father. From where did he get such a big amount? Is he a taxpayer? Has he drawn such amount from the bank and given? Is he an agriculturist? In case of scrutiny by the Income Tax department, can sufficient proof be produced, to prove the source of income of his father?


Suggestion # 2 – Taking as gift from parents or relatives is the best way, provided the person giving the gift can prove the source of income. (if and when the department asks)


What happens # 4 – What happens if Mr. Rajesh fails to establish the source of Rs.2,00,000 deposited into his account?


The department may consider it as ‘unexplained credits’ and tax it at normal rates and also levy penalty for concealment of income upto 3 times the amount of tax sought to be evaded.  


What happens # 5 :What happens If Mr. Rajendra is an agriculturist and not an income taxpayer. As an agriculturist, can he lend? Will it be a problem?


Yes. Still it is a problem. Even if one of the persons (either receiver or giver) is an income taxpayer, the penal provisions will be applicable.


What will happen # 6: Mr. Rajesh is a middle class citizen, earning around Rs.10 Lakhs per year. Who will ask about cash transactions? Department may go behind big people. Is this argument right?


Definitely no. This is the only place where there is absolutely no discrimination. All small taxpayers are also treated in the same way that the Biggy’s are treated. Maybe, for big taxpayers, some leeway be shown (VIP Treatment), but not for small taxpayers. As per my experience, small taxpayers are harassed and treated badly.


Suggestion # 3: Avoid cash receipt or cash payments through bank account.


Thought for the day

Do what is right, not what’s easy 


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About CA Prasad Chartered Accountant

CA Prasad Chartered Accountant
CA Prasad is a practicing Chartered Accountant and partner in Bangalore -based CA Firm. For further information or query, please email it to [email protected]
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  • Deepak

    What happen if I withdraw cash from my friends bank account…like on the above example Mr Rajesh withdrew Rs 200000 from the bank account of Mr. Rajendra. As Mr Rajendra wants the cash but he is busy so Mr Rajesh went to bank and withdraw the cash from bank of Mr Rajendra. And bank demanded for pan card( ID proof) of Mr. Rajesh. In this case can IT department leavy penalty to any of the party.

    • gururaj

      banks will ask for the pan of holder of a/c from where money is sought to be withdrawn, in ur case, pan of Mr.Rajendra alone asked for, even if submitted others pan, its not accepted.

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