Does receiving cash payment for a note sale create any IT compliance issue?

Section 269ST — the complete framework

Section 269ST, introduced by the Finance Act 2017, prohibits any person from receiving an amount of ₹2 lakh or more in cash from a single person in a single day — in respect of a single transaction, or in respect of transactions relating to one event or occasion. The prohibition applies regardless of whether the transaction is genuine, whether both parties have PAN, or whether the transaction is reported in the recipient's income tax return.

The penalty under Section 271DA is equal to the full amount of the cash received in violation. A collector who accepts ₹3 lakh in cash for a single note faces a penalty of ₹3 lakh — equal to the full cash amount, not just the excess. The penalty is mandatory; there is no discretion for partial penalty.

The aggregation rule is particularly important for numismatic fairs and exhibitions: if a buyer pays ₹1 lakh cash in the morning and ₹1.5 lakh cash in the afternoon for notes purchased on the same occasion, the total ₹2.5 lakh may be treated as a single transaction or transactions relating to one event, triggering Section 269ST even though no single payment exceeded ₹2 lakh.

The Supreme Court's 2025 enforcement direction

Section 269ST was widely known but inconsistently enforced at numismatic fairs and in private transactions. The Supreme Court's April 2025 judgment in RBANMS Educational Institution v. B. Gunashekar changed this. The Court directed that courts and sub-registrar offices must proactively report cash transactions of ₹2 lakh or more to jurisdictional Income Tax officers. While this direction was made in the context of property transactions, its implications extend to any cash transaction that comes to the attention of a court or government office.

The practical compliance rule

The practical rule is simple: never accept cash payment above ₹2 lakh for a note sale. Use UPI, NEFT, RTGS, or bank transfer for every transaction above this threshold. Below ₹2 lakh, cash is legally permissible — though banking channels remain advisable for documentation purposes. Cash provides no evidence of the transaction amount, no proof of identity of the payer, and no record that can support future capital gains cost documentation.

For dealers at numismatic fairs, the implementation of this rule at the point of sale — displaying 'UPI preferred, cash above ₹2 lakh not accepted' — is both legally compliant and practically straightforward. Buyers who insist on cash above this threshold are asking the seller to take on a 100% penalty liability. That is not a reasonable request and the seller is entitled to decline.

Additional cash-related provisions

Section 40A(3) of the Income Tax Act disallows business expense deductions for any payment above ₹10,000 made in cash — relevant for a dealer making cash purchases. If a dealer pays ₹15,000 cash to acquire a note for resale, that acquisition cost cannot be claimed as a business expense deduction. Banking channels preserve the deductibility of acquisition costs.

Section 269SS prohibits accepting loans or deposits of ₹20,000 or more in cash. If a collector receives an advance payment for a note to be delivered later, and that advance exceeds ₹20,000 in cash, Section 269SS may apply in addition to Section 269ST.

Laws & authorities referenced in this chapter

Income Tax Act 1961 — §269ST (prohibition on cash receipts of ₹2 lakh or more)

Income Tax Act 1961 — §271DA (penalty = 100% of prohibited cash receipt)

Income Tax Act 1961 — §40A(3) (disallowance of cash payment above ₹10,000 as business expense)

Income Tax Act 1961 — §269SS (prohibition on cash loans/deposits above ₹20,000)

RBANMS Educational Institution v. B. Gunashekar — Supreme Court, 16 April 2025 — §269ST court-reporting direction