The Income Tax Department closely monitors cash transactions across various sales and purchases. This oversight includes the sale of property, financial interactions between taxpayers, large cash withdrawals or deposits in bank accounts, cash sales and purchases, and transactions related to debts and credits. It also encompasses undisclosed bank accounts and discrepancies in bookkeeping.
If any discrepancies surface, taxpayers risk receiving an income tax notice. In Indore (Madhya Pradesh): Mahesh Agarwal, a senior advocate and tax practitioner, emphasized this point during his keynote address at a seminar organized by the Tax Practitioners Association (TPA) and the Indore CA branch on Friday. The seminar focused on “Cash Transactions and Income Tax Implications.”
Agarwal explained that the Income Tax Department receives reports of cash transactions from banks and other institutions through mechanisms such as “Suspicious Cash Transactions” and “Cash Transaction Reports.” These reports are then cross-referenced with the taxpayer’s declared income and the nature of that income.
Notices are issued if suspicious transactions are detected. He elaborated that the Income Tax Department acts on reports including Cross Border Wire Transfer Reports (related to international dealings), reports from the Finance Intelligence Unit (FIU) of the Finance Ministry, high-risk refund reports, donations to recognized and unrecognized political parties, and instances of bogus refunds. If cash transactions indicate potential criminal activity or money laundering, the Enforcement Directorate (ED) may also get involved.
Given the current landscape, Agarwal stressed the importance of minimizing cash transactions. Even considerable cash gifts received during weddings or celebratory events can trigger inquiries into their legal sources. He pointed out that in this digital age, the Income Tax Department has access to a wealth of information about taxpayers.
Today, PAN and Aadhar are linked, and mobile numbers are connected to Aadhar as well. This network allows the Income Tax Department to monitor every transaction made by the taxpayer, including online food orders, purchases from major brands, air travel, high-end dining, and acquisitions of expensive gadgets.
As a result, virtually all financial activities of taxpayers fall under the scrutiny of the Income Tax Department. Hence, it becomes essential to limit cash transactions and related expenses. A significant number of CAs and tax practitioners, including CA Shailendra Singh Solanki, CA Rakesh Mittal, CA Ajay Samaria, CA Pramod Garg, CA Kunal Agarwal, CA Deepak Maheshwari, Govind Goyal, CA Avinash Agarwal, and Mrinal Agarwal, were present at the seminar.
Below are several cash transactions subject to vigilant monitoring by tax authorities:
Acquisition of real estate assets
In accordance with Section 12 of the Prevention of Money Laundering Act, 2002 (PMLA), property registrars are mandated to notify tax authorities about any acquisitions or sales of immovable properties valued at ₹30 lakh or higher. This notification must be submitted within 30 days from the date of property registration. The property registrar must furnish the following details to the tax authorities:
- The names and addresses of both the buyer and seller
- The transaction date
- The property type (e.g., land, house, apartment, etc.)
- The property’s location
- The sale or purchase price of the property
This data is utilized by tax authorities to monitor substantial cash transactions and identify potential instances of tax evasion and money laundering. The property registrar must report all transactions involving the purchase and sale of immovable property valued at ₹30 lakh or higher, irrespective of whether the payment is made in cash or by cheque.
Acquisition of stocks, mutual funds, debentures, and bonds
Companies or institutions that issue bonds or debentures must compulsorily report any receipt of ₹10 lakh or more from an individual during a financial year for the acquisition of bonds or debentures. This reporting measure is implemented to prevent tax evasion and money laundering.
Likewise, companies that issue shares must report any receipt of ₹10 lakh or more from an individual within a financial year for the acquisition of shares. This reporting obligation also extends to the purchase of mutual funds.
The company or institution must provide the following information to the Income Tax Department:
- Investor’s name and address
- Investor’s PAN number, if provided
- Purchase date
- Purchase amount
- Type of security acquired (e.g., bond, debenture, share, mutual fund unit).
This data enables the Income Tax Department to identify taxpayers who may not be disclosing their complete income or who are engaging in suspicious investment activities.
The reporting mandate is applicable to investments made by individuals, Hindu Undivided Families (HUFs), and partnership firms, and it does not extend to investments made by companies.
Acquisition of foreign currency
Any purchase of foreign exchange amounting to ₹10 lakh or more during a financial year must be reported to the Income Tax Department. This reporting obligation is applicable to individuals, HUFs, and partnership firms, but it does not pertain to companies.
The subsequent foreign exchange transactions must be reported to the Income Tax Department:
- Purchase of foreign currency notes and coins
- Procurement of travellers’ checks and foreign exchange cards
- Utilization of debit or credit cards for foreign currency payments
The establishment that supplies you with foreign exchange is obligated to notify the Income Tax Department of the transaction. For instance, if you buy foreign currency notes and coins from a bank, the bank must report the transaction to the Income Tax Department.
This reporting mandate is implemented to deter tax evasion and money laundering. The Income Tax Department can utilize the provided information to identify taxpayers who are either underreporting their complete income or engaging in questionable foreign exchange transactions.
Cash deposits in bank accounts
The Central Board of Direct Taxes (CBDT) has instituted a compulsory rule for banks and cooperative banks to notify the tax authorities regarding cumulative cash deposits of ₹10 lakh or more in one or more accounts (excluding current accounts and time deposits) held by an individual within a financial year. This regulation is implemented to combat tax evasion and money laundering. The bank or cooperative bank must submit the following details to the CBDT:
- The depositor’s name and address
- The depositor’s PAN number, if provided
- The date of the cash deposit
- The cash deposit amount
- The account number(s) in which the cash deposit was placed
This data empowers the CBDT to pinpoint taxpayers who may not be disclosing their entire income or engaging in questionable cash deposits. This reporting obligation is applicable to cash deposits in one or more accounts, excluding current accounts and time deposits, held by an individual. In essence, if you make several cash deposits, each of which is less than ₹10 lakh, but the cumulative cash deposit amount in a financial year reaches ₹10 lakh or more, the bank or cooperative bank is mandated to notify the CBDT.
Money deposited in fixed deposits
The CBDT has stipulated that banks are obligated to report instances where an individual accumulates ₹10 lakh or more in a fixed deposit (FD) within a financial year, spanning one or more time deposits (excluding renewals). This reporting measure is implemented to deter tax evasion and money laundering.
The bank must furnish the following details to the CBDT:
- The depositor’s name and address
- The depositor’s PAN number, if provided
- The date of the cash deposit
- The cash deposit amount
- The account number(s) where the cash deposit was made
This data enables the CBDT to pinpoint taxpayers who may be underreporting their total income or engaging in dubious cash deposits. These are instances of cash deposits into time deposits that necessitate reporting to the CBDT:
- An individual deposits ₹5 lakh in cash into a new FD in January 2023.
- An individual deposits ₹3 lakh in cash into an existing FD in February 2023.
- An individual deposits ₹2 lakh in cash into a new FD in March 2023.
The cumulative cash deposit in time deposits for the financial year 2022-2023 amounts to ₹10 lakh, therefore, the bank is obligated to report this to the CBDT. The obligation to report pertains to cash deposits in time deposits by individuals, HUFs, and partnership firms, excluding companies.
Payments made using credit cards
The CBDT has imposed a compulsory requirement on credit card issuers to notify the Income Tax Department regarding cash payments totalling ₹1 lakh or more for credit card balances. Additionally, if an individual settles credit card dues amounting to ₹10 lakh or more through any means in a fiscal year, these transactions must also be reported to the tax department.
The purpose of this reporting requirement is to combat tax evasion and money laundering. The Income Tax Department can employ this information to detect taxpayers who may not be accurately disclosing their complete income or those engaged in questionable credit card payments. The credit card issuer must provide the following details to the Income Tax Department:
- The credit cardholder’s name and address
- The credit card holder’s PAN number, if provided
- The payment date
- The payment amount
- The payment method (e.g., cash, cheque, NEFT, etc.)
Should you intend to make a cash payment of ₹1 lakh or more towards your credit card dues, it’s important to be mindful of this reporting obligation. Additionally, you should be ready to furnish the required payment details to the credit card issuer.