Trading receipts in cash: is there any limit?

QUESTION: I am an accounts officer working in the Electricity Board. Our rule provides for acceptance of electricity charges either in cash or by cheques. We are in the habit of receiving electricity charges even where it exceeds Rs. 20,000 from businessmen as for high tension power in cash. Is it permissible for us to do so notwithstanding our rules?

ANSWER: As for acceptance of cash, what is barred is such acceptance of a loan or deposit under Sec. 269SS. Even in such cases trade deposits are not barred. Receipt of service charges are not required to be in cash either under Sec. 269SS or any other provision in law.

Probably the reader has in mind Sec. 40A(3) which would disallow for the payer 20 per cent of any expenditure incurred by means other than crossed cheque or crossed bank draft. This applies to the payer in cash and not recipient, so that it does not arise out of the question raised by the reader.

It is however necessary for every person in business to know this bar against payment, exceeding Rs. 20,000 in cash. Such bar is against purchases as well.

There are, however exceptions under rule 6DD, which are however extremely limited. Such exemptions cover any payments made to Governments, banks, primary agricultural credit society, LIC, IDBI, UTI and certain notified State undertakings which are engaged in industrial development. Payment for primary agricultural or forest produce or produce of dairy or poultry farming, fish or fish products, products of horticulture or apiculture, or products of cottage industries manufactured without aid of power, when they are made to producers, payments made in a village or town not serviced by any bank to a person, who ordinarily resides in that village, payments made to an employee without a bank account, if tax had been deducted at source, payment of terminal benefits to the employees, payment made on a bank holiday or strike, payment made by a person to his own agent, when such agent is required to make payment in cash on behalf of the principal are other excepted items.

The latest exception that has been made by S.O.No.806(E) dated September 6, 2000 is payments made to an authorised dealer or money changer for purchase of foreign currency or travellers' cheques in the normal course of business.

In the light of the above rules, it would appear that even payment to the Electricity Board where it exceeds Rs. 20,000 by cash may mean disallowance of 20 per cent of such payment for the payer as it does not come under any of the exceptions, since Electricity Board being a creation of a special Act and it is not Government, though it could be treated as Government company. Further because of the option to pay either by cash or cheque, the payer cannot even complain about his helplessness. At any rate, the disallowance is statutory.

The law intended to enforce transactions by cheque with the object of enabling verification should have reasonable exceptions, so that the trade is not put to any stress. Since electricity connection itself is sufficient identification, there should have been exception for payments of electricity dues in cash.

The validity of Sec. 40A(3) was upheld by the Supreme Court even as applicable to purchases by treating it as expenditure in Attar Singh Gurmukh Singh v ITO (1991) 191 ITR 667 (SC), because under the pre-existing rule 6DDJ the disallowance was not possible, if the payee could convince the assessing officer of the exceptional circumstances warranting receipt as pointed out by the Supreme Court in following words:

``Sec. 40A(3) must not be read in isolation or to the exclusion of rule 6DD. The section must be read along with the rule. If read together, it will be clear that the provisions are not intended to restrict the business activities. There is no restriction on the assessee in his trading activities. Sec. 40A(3) only empowers the assessing officer to disallow the deduction claimed as expenditure in respect of which payment is not made by crossed cheque or crossed bank draft. The payment by crossed cheque or crossed bank draft is insisted on to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of the income from undisclosed sources.

The terms of Sec. 40A(3) are not absolute. Considerations of business expediency and other relevant factors are not excluded. Genuine and bona fide transactions are not taken out of the sweep of the section. It is open to the assessee to furnish to the satisfaction of the assessing officer the circumstances under which the payment in the manner prescribed in Sec. 40A(3) was not practicable or would have caused genuine difficulty to the payee.

It is also open to the assessee to identify the person who has received the cash payment. Rule 6DD provides that an assessee can be exempted from the requirement of payment by a crossed cheque or crossed bank draft in the circumstances specified under the rule.

It will be clear from the provisions of Sec. 40A(3) and rule 6DD that they are intended to regulate business transactions and to prevent the use of unaccounted money or reduce the chances to use black money for business transactions. (Mudiam Oil Company v ITO 19730 92 ITR 519 (AP)."

But the shelter available under Rule 6DDJ was removed unceremoniously by Income-tax (14th Amendment) Rules, 1995 with effect from July 25, 1995, so that it is not permissible to urge lack of practicability or genuine difficulties to avoid the disallowance.

This oversight on the part of the Government resulting in the removal of the only justification as regards the constitutionality of the provision has not apparently even provoked any responsible representation to the Government by our trading bodies.

One is reminded of the statement of eminent jurist Mr. N. A. Palkhivala in a Souvenir published on the occasion of Golden Jubilee of the Income-tax Appellate Tribunal:

``Two things strike the student of Indian income-tax law with trepidation and amazement - the precipitate and chronic tinkering with the law by bureaucrats who are the unacknowledged legislators of India, and the anaesthetised patience of the Indian public. Truly, we Indians are a `low arousal' people. We endure injustice and unfairness with feudalistic servility and fatalistic resignation. The poor of India endure inhuman conditions which would lead to a bloody revolution in any other country. The rich endure foolish laws and unending amendments which benefits none except the legal and accountancy professions, and instinctively prefer to circumvent the law than to fight for its repeal."

S. Rajaratnam

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