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This article will help you understand taxation of unexplained cash credits and cash transactions limits.

What does Unexplained Cash Credits Really Mean?

Any money found credited in the books or deposited in bank statements for which you have no valid explanation about the nature and source of the cash, or if the assessing officer is not satisfied with the explanation provided is called unexplained cash credits.

It means any money that has been received by you which can be evidenced in the books of accounts or your bank statement, but you do not disclose the source or nature of the cash credit.

Unexplained Cash Credits

For example, Mr. Anish was credited with a sum of Rs 1.5 lakh in his bank statements. On enquiry by the assessing officer, he was not able to provide the source and nature of funds. Mr. Anish has to give the names and complete address of the depositor/lender along with PAN, preferably, when asked by the assessing officer. As he does not have a valid source to cite, the amount of Rs 1.5 lakh credited to his bank statement is termed as an unexplained cash credit.

For a closely held company, unexplained cash credit refers to the amount credited (which comprises share application money, share capital or share premium), for which no explanation is received from the resident assessee. It is also so called when the assessing officer is not satisfied with the explanation offered by the resident assessee. 

How are Unexplained Cash Credits Taxed?

Any cash credit appearing in the books or bank statement with no explanations offered is treated as income in the year in which received. These receipts are taxable at 30%. Cess and surcharge are also to be added over and above the 30% tax.

Limits on Cash Payments for Financial Year 2017-18

For assessees carrying on business, any expenditure incurred for which payment in cash of an amount exceeding Rs 10,000 in a single day will not be allowed as an expenditure.

For example, Ms. Roshni is a freelancer. She made a cash payment of Rs 12,000 to purchase a domain name. Since the expenditure made by Ms. Roshni was is cash, and also it is above the monetary limit of Rs 10,000, the expenditure for purchase of domain will not be allowed as a deduction from the total freelancing receipts for computing profits from the profession for the year.

In simple words, Ms. Roshni will have to pay tax on any cash payments made for expenditure above Rs 10,000 in a single day.

Also, no person should accept an amount of Rs 2 Lakh or more, unless it is in the form of account payee cheque/draft or ECS –

  1. In aggregate from one person in a day
  2. In respect of a single transaction
  3. In respect of transactions one event or occasion from a person

There are some exceptions to this rule specifying to whom this section is not applicable.

Contravention of this provision attracts a penalty which is equal to the amount so received.

Post demonetisation, the law has become more stringent to curb high-value transactions in money.

Here are a few Do’s and Dont’s

Do’s

Dont’s

Always receive payments through account payee cheque or draft

Never accept money in excess of 2 Lakh in cash
Do collect the address or PAN of the depositor money in your account

Do not make payment for expenses in excess of Rs 10,000 (in cash) to a single person on the same day

 

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