Sec 269ST– Cash receipts

1. Section 269ST as per budget 2017, makes acceptance of Rs. 3,00,000/- in cash as an offence. There are no caveats like it is applicable only for business receipt etc.

2. Before I elaborate the section, I want to highlight that, there are restrictions on making payment otherwise than by cash – say for dis-allowance of expenditure [section 40A(3)] or loan transactions referred in [Section 269SS / 269T.]
Take away points

3. Section 269ST as being proposed in the budget 2017 to curb transactions in cash, the way the section has been drafted, it appears to be too stringent.

4. Though the object is noble, the manner in which it is drafted and having regard to the situation is absolutely draconian.

5. I will be happy if I go wrong in my interpretation if the objective of curbing black money is achieved without troubling honest tax payers’.

269ST. Mode of undertaking transactions
‘269ST. No person shall receive an amount of three lakh rupees 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 an account payee bank draft or use of electronic clearing system through a bank account:
Comments

6. It is on receipt side. The section is unfettered. The character of receipt is irrelevant i.e. exempt income / taxable income etc. There is no exemption even for sale of agricultural produce.
Refer clause (a)

7. so one person one day – above 3 lacs – not allowed even though he may be paying for various transactions which individually are below 3 lacs.
Refer clause (b)

8. in respect of single transaction e.g. the transaction is for 5 lacs you can-not pay above 3 lacs.
Refer clause (c )

9. One event / occasion – marriage is one occasion and the most important thing being the occasion has to be interpreted occasion for recipient.

10. For example, gift in marriage is tax free. But marriage is one occasion and a person can not receive on his / her marriage even say Rs. 100 from 3000 people as it will amount to Rs. 3,00,000/- [100 X 3000]. in the example you can change any combination of figures the multiplication of which comes to Rs. 3,00,000/-. Also it does not have restriction of days because the per day is linked to per person.

11. It extends to transactions, events and even covers occasion. The word used is “Amount” and not “sum”. In other sections, the word “sum” has been used. The word “Sum” means “sum of money”. The word “Amount” includes cash and kind. Also it has nothing to with whether that exchange of money is chargeable to tax or not.

12. On a literal meaning it may mean that, if I borrow a car from my friend of Rs. Say 15 lacs, the violation is already done. The fact that I duly return the car in the same condition to my friend does not / can not undo the violation.

13. Thus it may cover following items
• cash withdrawal from Bank by any personal
• gift in cash or in kind.
• Gift at the time of marriage
• amount to be paid to hospital
• any barter exchange the value of which exceeds Rs. 3,00,000/-
• Sale proceeds – Imagine it is a violation even for an honest / bonafide tax-payer who otherwise is maintaining correct books of account and paying correct taxes.
Refer the penalty clause i.e. proposed section 271DA

14. It requires penalty of 100% of amount of transaction. The exception requires a “good and sufficient reason”. The proviso reads as follows
Provided that no penalty shall be imposable if such person proves that there were good and sufficient reasons for the contravention.

15. Normally the criteria used in penalty provisions is “reasonable reason”

16. Also this penalty section does not have cover of section 273B which reads states that, in case the assessee is able to show a “reasonable cause” for the said failure, there will be no penalty.

17. There is a significant difference between the words “reasonable cause” vis-a-vis “ good and sufficient reasons”

18. It is possible that a particular cause may very well be a reasonable cause but not a “good and sufficient reasons”

19. Consider an example where it may fulfill the criteria of “good and sufficient reasons”
• An assessee living with his better half, both of whom are above 75.
• Both are suffering from Alzheimer. The level of alzheimer may be differing.
• They are making payment in cash to a hospital when either of them is admitted on a SOS [ save our sole] or medical emergency basis.
• In this case, the hospital may be able to prove that it has good and sufficient reasons to accept the cash.
• At the cost of repetition, I would like to highlight that the onus will be on hospital to prove the merits and not the old couple.
Some academic points-:

20. If you carefully read the section, it does not have guard of rule 6DD which is there for section 40A(3) i.e. payment for expenditure for Rs. 20,000/- [ revised 10,000] and above.

21. If one decides to make a literal interpretation, anything otherwise than below will get attracted for violation
a) by an account payee cheque or
b) an account payee bank draft or
c) use of electronic clearing system through a bank account:

22. A digital payment e.g. payment by various e-wallets or say payTM which is popular now a days is also hit by this section because these e-wallets / pay-TM are not banks where a clearing system is there as mentioned above.

23. Various payment schemes authorised by RBI whereby other person does not have a bank account and is able to get money with his identity being validated by say – AADHAR with mobile etc. Will also not be covered by the term “use of electronic clearing system through a bank account”

24. Technically even a payment by credit card / debit card . Rupay-card may not amount to clearing system through Bank account.[very very literal interpretation]
Text of Proposed Section

269ST. Mode of undertaking transactions
‘269ST. No person shall receive an amount of three lakh rupees 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 an account payee bank draft or use of electronic clearing system through a bank account:
Provided that the provisions of this section shall not apply to—
(i) any receipt by—
(a) Government;
(b) any banking company, post office savings bank or co-operative bank;

(ii) transactions of the nature referred to in section 269SS;
(iii) such other persons or class of persons or receipts, which the Central Government may, by notification in the Official Gazette, specify.
Explanation.—For the purposes of this section,—
(a) “banking company” shall have the same meaning as assigned to it in clause (i) of the Explanation to section 269SS;
(b) “co-operative bank” shall have the same meaning as assigned to it in clause (ii) of the Explanation to section 269SS.’.

Penalty for violation of section 269ST
271DA – Penalty for failiure to comply with provisions of section 269ST.
“271DA. (1) If a person receives any sum in contravention of the provisions of section 269ST, he shall be liable to pay, by way of penalty, a sum equal to the amount of such receipt:

Provided that no penalty shall be imposable if such person proves that there were good and sufficient reasons for the contravention.
Memorandum to Finance Bill, 2017

Restriction on cash transactions
In India, the quantum of domestic black money is huge which adversely affects the revenue of the Government creating a resource crunch for its various welfare programmes. Black money is generally transacted in cash and large amount of unaccounted wealth is stored and used in form of cash.

In order to achieve the mission of the Government to move towards a less cash economy to reduce generation and circulation of black money, it is proposed to insert section 269ST in the Act to provide that no person shall receive an amount of three lakh rupees or more,—
(a) in aggregate from a person in a day;
(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.

It is further proposed to provide that the said restriction shall not apply to Government, any banking company, post office savings bank or co-operative bank. Further, it is proposed that such other persons or class of persons or receipts may be notified by the Central Government, for reasons to be recorded in writing, on whom the proposed restriction on cash transactions shall not apply. Transactions of the nature referred to in section 269SS are proposed to be excluded from the scope of the said section.

It is also proposed to insert new section 271DA in the Act to provide for levy of penalty on a person who receives a sum in contravention of the provisions of the proposed section 269ST. The penalty is proposed to be a sum equal to the amount of such receipt. The said penalty shall however not be levied if the person proves that there were good and sufficient reasons for such contravention. It is also proposed that any such penalty shall be levied by the Joint Commissioner.

It is also proposed to consequentially amend the provisions of section 206C to omit the provision relating to tax collection at source at the rate of one per cent. of sale consideration on cash sale of jewellery exceeding five lakh rupees.
These amendments will take effect from 1st April, 2017.
[Clauses 71, 83 & 84]

Source : Taxguru/Yogesh S.Limaye

Tax incentive for cash less transaction

Tax incentive for cash less transaction: Deemed profit to be reduced from 8% to 6% u/s 44 AD:

New Delhi, 19th December, 2016.
Press Release

Measures for Promoting Digital Payments & Creation of Less-Cash Economy

Under the existing provisions of section 44AD of the Income-tax Act, 1961 (the Act), in case of certain assesses (i.e. an individual, HUF or a partnership firm other than LLP) carrying on any business (other than transportation, agency, brokerage and commission) and having a turnover of Rupees Two Crore or less, the profit is deemed to be 8% of the total turnover.

In order to achieve the Government’s mission of moving towards a less cash economy and to incentivise small traders / businesses to proactively accept payments by digital means, it has been decided to reduce the existing rate of deemed profit of 8% under section 44AD of the Act to 6% in respect of the amount of total turnover or gross receipts received through banking channel / digital means for the financial year 2016-17. However, the existing rate of deemed profit of 8% referred to in section 44AD of the Act, shall continue to apply in respect of total turnover or gross receipts received in cash.

Legislative amendment in this regard shall be carried out through the Finance Bill, 2017.

(Meenakshi J. Goswami)
Commissioner of Income Tax
(Media and Technical Policy)
Official Spokesperson, CBDT.

Presumptive Tax Scheme for Professionals – New Section 44ADA

Extract of Section 44ADA from Proposed Finance Bill 2016 – Special provision for computing profits and gains of profession on presumptive basis.

After section 44AD of the Income-tax Act, the following section shall be inserted with effect from the 1st day of April, 2017, namely:—

44ADA.(1) Notwithstanding anything contained in sections 28 to 43C, in the case of an assessee, being a resident in India, who is engaged in a profession referred to in sub-section (1) of section 44AA and whose total gross receipts do not exceed fifty lakh rupees in a previous year, a sum equal to fifty per cent. of the total gross receipts of the assessee in the previous year on account of such profession or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the assessee, shall be deemed to be the profits and gains of such profession chargeable to tax under the head “Profits and gains of business or profession”.

(2) Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed.

(3) The written down value of any asset used for the purposes of profession shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.

(4) Notwithstanding anything contained in the foregoing provisions of this section, an assessee who claims that his profits and gains from the profession are lower than the profits and gains specified in sub-section (1) and whose total income exceeds the maximum amount which is not chargeable to 
income-tax, shall be required to keep and maintain such books of account and other documents as required under sub-section (1) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB.’.

Analysis of Provisions of New Section 44ADA

Why this section is proposed? • This section is proposed in line with the recommendation of Justice Easwar Committee for simplification of taxation of professionals

• Following objects are stated to be achieved through this proposal

o To bring parity between small businessmen (who enjoy presumptive taxation u/s 44AD) and small professionals

o To reduce compliance burden of small professionals

o To facilitate ease of doing profession

How this is sought to be achieved? This is sought to be achieved by inserting Section 44ADA in the Income Tax Act
Who is the eligible assessee? Resident assessee who is

• Individual (or)

• Hindu undivided family (or)

• Partnership firm (other than limited liability partnership)

Who are the beneficiaries? Certain professionals referred to in section 44AA(1) of the Income Tax Act whose total gross receipts from profession does not exceed Rs. 50 lakhs in a financial year.
Who are the eligible professionals? Persons engaged in any of the following professions:

• Legal  • Medical • Engineering • Architecture

• Accountancy • Technical consultancy

• Interior decoration • Other notified professionals

o Authorized representatives o Film Artists

o Certain sports related persons  o Company Secretaries and

o Information technology

How much is the presumptive income to be offered? Higher of:

• 50% of the gross receipts from profession (OR)

• Income from profession offered by the assessee

Benefits of following this proposed section • Assessee need not maintain books required to be kept u/s 44AA

• Assessee need not get the accounts audited u/s 44AB

When shall the assessee be required to maintain books and to get the accounts audited? If both the following conditions are satisfied, maintenance of accounts and audit are warranted:

• Income from profession is offered at a rate lower than 50% of gross receipts AND

• Total income of the assessee exceeds the basic exemption limit

If the assessee follows this section, following items shall be deemed to be allowed • All deductions from sections 30 to 38 (including depreciation and un-absorbed depreciation / allowances) shall be deemed as allowed; and

• Written down value (WDV) of depreciable assets shall be recomputed deducting depreciation which is deemed as allowed. E.g. If WDV (10% block) as on 01.04.2016 is Rs. 1,00,000, the depreciation deemed as allowed will be Rs. 10,000 and accordingly WDV as on 31.03.2017 will be Rs. 90,000.

Effective date The new section is proposed to be effective from 01.04.2017 (i.e. from Assessment Year 2017 – 18). In other words, advance tax in financial year 2016 – 17 may have to be calculated accordingly.

 

Please note • The decision as to whether this provision is to be adopted or not varies from case to case and the decision depends on the following parameters:

o Quantum of actual expenditure (i.e. not advisable for a professional having small net profit ratio)

o Interest on borrowings

o Depreciation available

o Quality of accounting systems etc.

• Businessmen covered u/s 44AD are permitted to pay the whole of advance tax by March 15. But no such concession is seen vis-à-vis a professional covered under 44ADA. That is to say, all the four installments may be paid.

• There is no provision in section 44ADA permitting a professional firm to deduct interest / remuneration paid to partners from the presumptive income offered.

• Whether or not the professional firm follows Section 44ADA, its partners can opt Section 44ADA with respect to working partners’ salary / interest received from the said firm

Critical analysis

The Presumptive NP rate of 50% on Professionals and their Partnership Firms, as proposed in the Union Budget 2016 u/s 44ADA, is on very higher side and may cause very high tax incidence on such professionals and their partnership firms. Net Profit Rate should be fixed at a lower rate instead of proposed 50%.

Besides, interest and salary to the partners should be allowed to all partnership firms including firm of professionals out of the Presumptive NP of the firm, as per prevailing provisions of Sec 44AD in force applicable to business partnership firms at present. Its disallowance, as proposed in Finance Bill 2016 may create a hardship for professionals partnership firms, where huge amount is drawn as salary by working partners in accordance with the partners’ remuneration limits as suggested u/s 40(b) of the I.Tax Act.

The presumptive NP rate on professionals and their partnership firms should be capped to 30% which is also close to the rate of 33.33% recommended, after considering the finer details, minor aspects and lot of research, by Justice R.V Easwar Committee recently.

What kind of difficulties the, provisions of Section 44ADA of Income Tax Act would be creating is outlined in brief as under. 

 The provision are only applicable on professional and this case highlights the case of partnership firms.

The provisions provides as follows:

  1. a) 50% of the Gross Receipts would be treated as the Net Income of the assessee firm.
  2. b) No deduction towards Remuneration and Interest would further be allowed to the firm.
  3. c) The deduction towards Interest and Remuneration would be deemed to be allowed to the firm.
  4. d) The Remuneration and Interest would again be taxed in the hands of the partners as Individual Income.

Just want to highlight what difficult these provisions would be creating….

Consider following things in the light of above provisions:

  1. a) Gross Receipts of the Firm : Rs 30 Lakh
  2. b) Deemed Income as per the Provisions: 50% of Rs 30 Lakh: Rs 15 Lakh
  3. c) Partnership Deed provisions for remuneration are on similar lines as per 40 (b)

(It would be deemed that Remuneration and Interest as provided in the books has been allowed and firm has to pay tax on a Net Taxable Income of Rs 15 Lakh.

  1. d) Maximum Allowed Remuneration as per Section 40(b) of the Income Tax Act in case a firm declares normal taxable Income of Rs 15 Lakh would have been Rs 24.75 Lakh

How this figure has been arrived at

1) Total Income after allowing all expenses but before Interest and Remuneration works out to be : Taxable Income Rs 15 Lakh + Maximum allowable Remuneration as per 40 (b) Rs 24.75 Lakh i.e. Rs 39.75 Lakh

Working of Remuneration of 24.75 Lakh on a Profit of Rs. 15 Lakh ?

For First 30 Thousand of Profit- Rs. 2.70 Lakh Remuneration

For Next 14.70 Lakh Profit – 22.05 Lakh Remuneration

Hence, the government in a way is deeming a situation which is not proactible,  wherein on a gross total income of Rs 30 Lakh, the firm is having Income after allowing all expenses but before remuneration and interest of Rs 39.75 Lakhs.??? They are denying a right to the assessee of a deduction for what they are eligible.

Is this provision Just and Equitable and whether a deeming provision allows government to estimate Income more than what is the gross receipts of the assessee ?

 

 

 

Is Temporary discontinuance of Business allowed under Income tax act ?

As per Income tax Act, can the business be discontinued temporarily, if so please explain the legal provisions ?

 It is not necessary that a business to be in existence should have worked all the time. There may be long intervals of inactivity and a concern may still be a going concern, though it may for some time be quiet and dormant. The Hon’ble Allahabad high court in Inderchend hari ram vs CIT 23 ITR 437 observed that The mere fact that a businessman has not been able to obtain a contract and the business has for some time been in that sense dormant would not mean that it has ceased to exist. If the assessee continues to maintain an establishment and incur expenses in the expectation that work would come and the business would be successful. There is therefore, a marked distinction between “Lull in Business” and “Going out of business”. The Hon’ble Bombay high court in Hindustan chemical works ltd vs CIT 124 ITR 561 observed that, a temporary discontinuation of business may in certain circumstances give rise to an inference that a business is goint through a lean period of transition and it can be revived if proper circumstances arise and as such, it will not be a closure of business.

Whether the ownership of business is essential as per income tax Act ?

Income tax act says “Person carrying on the business” , in that case, is ownership of business essential ?

As per section 28 of Income tax Act, it is the person who carries on the business who is liable to tax. As per Hon’ble Bombay High court decision in Saifuddin Alimohammed vs CIT (1954) 25 ITR 237(Bom) & Balwantrai Jethalal vaidya (1958) 34 ITR 187 (Bom) what is emphasised is not the ownership of the business, but the fact of the business being carried on by the assessee. Accordingly as per Hon/ble Madras high court decision in CIT vs.United India Life Insurance co ltd (1966) 62 ITR 610-614 (Mad) it will be sufficient if the assessee carried on the business in the previous year under some title, though not a beneficial character, as emphasised in Honble supreme court in the case of Executors of the Estate of J.K.Dubash vs. CIT (1951) 19 ITR 182 (SC)

Is carrying on business throughout previous year necessary ?

As per Income tax Act, can the business be carried on by the assessee throughout the previous year or not  necessary , please explain the legal provisions ?

There is nothing in the Income tax Act on the basis of which it can be argued that for profit of the business to be taxable, the business must be actively carried on for the whole of the previous year, or till the end of the previous year. Under the scheme of Income tax act, whenever an assessee receives in the course of his business money or money’s worth, income embedded there in accrues or arises to him and becomes subject to an ambulatory charge. If at the end of the previous year, on making up accounts, there is no overall income, the charge does not crystallize because there is no income on which the charge of tax may settle. These views are held by two judgments of the Hon’ble Supreme court in CIT vs Bangalore transport co ltd 66ITR 373 and Turner Morrison and co ltd vs CIT 23 ITR 152. The Hon’ble Calcutta high court in Lakhsmi narayan Board mills pvt ltd vs CIT in 205 ITR 88 held that, it is not necessary that a business to be in existence should have worked all the time in the previous year.