A buyer walks in, picks up goods worth a few lakh rupees, and offers to pay in cash. The invoice is genuine, the goods are genuine, the buyer is a regular customer, and the money is going straight into the books. Can the seller simply accept it?
The instinctive answer is yes — it is his own sale, his own money, fully accounted for. The Income-tax Act takes a different view. Since 1 April 2017 the law does not ask whether the cash is accounted for. It asks only how much cash changed hands in one go. Cross the line and the penalty is not a percentage of the amount. It is the entire amount.
This restriction was Section 269ST of the Income-tax Act, 1961. Under the Income-tax Act, 2025, in force from 1 April 2026, it is renumbered as Section 186, and the penalty provision that was Section 271DA now sits at Section 451.
The limits, the three tests and the consequences are unchanged. The 1961 numbering continues to apply to periods up to 31 March 2026, so both sets of references will remain in use for some time. This article uses the familiar numbering, since that is how the provision is still commonly discussed.
In substance, no person shall receive an amount of two lakh rupees or more, otherwise than by an account payee cheque, an account payee bank draft, or electronic clearing system through a bank account:
Three features of this drafting deserve attention, because almost every dispute turns on one of them.
First, the restriction is on the recipient. The section does not prohibit the buyer from paying. It prohibits the seller from receiving. This is the opposite of Section 40A(3), which operates on the payer. In a cash sale both parties are exposed — but under different provisions, with different limits and different consequences.
Second, the threshold is "two lakh rupees or more", not "more than two lakh rupees". A receipt of exactly ₹2,00,000 in cash is a violation. The safe ceiling is ₹1,99,999.
Third, the three clauses are independent tests, not alternatives. A receipt must clear all three. Structuring a transaction to escape clause (b) is of no help if it still fails clause (a). This is the single most misunderstood aspect of the section, and it is where the multiple-invoice question arises.
Account payee cheque, account payee bank draft and electronic clearing system through a bank account are named in the section itself. Rule 6ABBA prescribes the additional electronic modes — credit card, debit card, net banking, IMPS, UPI, RTGS, NEFT and BHIM-Aadhaar Pay. A bearer cheque or a self cheque is not a permitted mode; it is treated as cash.
The section does not apply to receipts by Government, any banking company, post office savings bank or co-operative bank. It also excludes transactions of the nature referred to in Section 269SS, and such other persons or receipts as the Central Government may notify. Notification No. 28/2017 extended relief to certain classes such as business correspondents and white label ATM operators acting for banks.
None of these help an ordinary trader, manufacturer or service provider.
A person who contravenes the section is liable to a penalty equal to the amount of the receipt.
This is worth restating plainly. If a seller accepts ₹5,00,000 in cash in circumstances that breach the section, the penalty is ₹5,00,000 — not a fraction of it, and not merely tax on it. The sale itself remains taxable as income. The penalty sits on top.
The penalty is imposable by the Joint Commissioner, and it may be waived if the person proves there were good and sufficient reasons for the contravention. In practice this is a narrow escape route. Commercial convenience, customer insistence, or the fact that the receipt was fully recorded in the books have generally not been accepted as sufficient reasons on their own. Genuine emergencies, banking failures, or receipts in locations without banking access stand a better chance, but the burden is entirely on the assessee.
Note also that the penalty falls only on the seller. The buyer suffers nothing under this provision.
Assume throughout that Sharma Traders is the seller and Verma Enterprises is the buyer, and that all payments are in cash.
Invoice dated 5 August for ₹1,80,000. Full cash received the same day.
Result: permitted. Below ₹2,00,000 on every limb.
Invoice dated 5 August for ₹2,50,000. Full cash received the same day.
Result: violation of clauses (a) and (b). Penalty ₹2,50,000.
Invoice dated 5 August for ₹2,50,000. Cash received as ₹90,000 on 5 August, ₹90,000 on 12 August and ₹70,000 on 20 August.
Result: violation of clause (b). Penalty ₹2,50,000.
No single day crosses ₹2 lakh, so clause (a) is satisfied. But clause (b) looks at the transaction as a whole, and the transaction is ₹2,50,000. Spreading the collection over time achieves nothing. This limb exists precisely to defeat that arrangement.
Two invoices dated 5 August, of ₹1,40,000 and ₹1,30,000. Total ₹2,70,000 cash received on 5 August.
Result: violation of clause (a). Penalty ₹2,70,000.
Each invoice individually clears clause (b). But clause (a) aggregates everything received from one person in one day, and ignores invoices completely. This is the trap that catches sellers who believe splitting the bill solves the problem.
Three invoices raised on 1 June, 15 June and 2 July, of ₹1,50,000 each. The buyer settles all three in cash on 10 August, paying ₹4,50,000.
Result: violation of clause (a). Penalty ₹4,50,000.
The invoice dates are irrelevant. What matters is that ₹4,50,000 was received from one person on one day. Sellers running informal credit and accepting lump-sum settlements are highly exposed here, and this is one of the most frequent real-world violations.
A caterer bills a wedding across four invoices — advance, décor, catering and service charges — of ₹1,20,000 each, raised on four different dates, with cash collected on four different dates. Total ₹4,80,000.
Result: violation of clause (c). Penalty ₹4,80,000.
Clauses (a) and (b) are both satisfied. Clause (c) is not. All four invoices relate to one occasion and one person, so they aggregate regardless of how the billing and collection were arranged. Caterers, decorators, banquet halls, tent houses, photographers and wedding planners should treat this limb as the primary risk in their trade.
This is where most practical queries land. A seller supplies the same buyer repeatedly through the year, raises a separate invoice each time, and collects cash against each invoice. Is this permitted?
Yes — provided each day's total cash receipt from that buyer stays below ₹2,00,000.
The reasoning on clause (b) is supported by CBDT Circular No. 22/2017 dated 3 July 2017. Dealing with NBFCs and housing finance companies receiving loan repayments, the Board clarified that the ₹2 lakh limit under clause (b) applies to each instalment separately, and instalments are not to be aggregated for that purpose. The same principle applies to independent sale invoices: each genuine, independent sale is its own transaction.
So ten separate invoices of ₹1,50,000 each do not combine into a ₹15,00,000 single transaction. There is also no annual ceiling in the section. On a plain reading, ₹1,50,000 received on forty different days from the same buyer during the year does not breach it.
But clause (a) still applies to every one of those days, and clause (c) still applies if the supplies relate to one event.
Verma Enterprises places separate orders on 3, 11, 19 and 27 August. Sharma Traders raises an invoice for each — ₹1,60,000, ₹1,75,000, ₹1,55,000 and ₹1,90,000 — and collects cash on the respective dates.
Result: permitted. Each transaction is independent and below the limit; each day's receipt from the buyer is below the limit; there is no common event. Total cash for the month is ₹6,80,000 and the section is not breached.
Same four invoices, but the buyer pays for the first two together on 11 August — ₹3,35,000 in cash.
Result: violation of clause (a) on 11 August. Penalty ₹3,35,000.
The invoices were perfectly valid. The collection was not.
Verma Enterprises places one purchase order for ₹9,00,000. Sharma Traders raises six invoices of ₹1,50,000 each on six consecutive days against a single delivery, and collects cash on six days.
Result: high risk of being treated as a single transaction of ₹9,00,000 under clause (b). Exposure ₹9,00,000.
Nothing on the face of the invoices is wrong. The problem is the underlying commercial reality: one order, one negotiated price, one delivery. The department can and does contend that the single transaction is the contract, not the paperwork generated from it. The invoices are evidence of the transaction, not a substitute for it.
The difference is not the invoice count. It is whether the transactions are genuinely independent. The evidence that matters:
Six invoices of ₹1,99,000 issued on six consecutive days will attract scrutiny by their very arithmetic. Invoices of ₹1,63,400, ₹1,08,750 and ₹1,91,200 arising from real, separately placed orders will not.
A seller may clear this section comfortably and still hand the buyer a serious problem.
Section 40A(3) disallows any expenditure where payment exceeding ₹10,000 is made to a single person in a single day otherwise than through banking channels. The limit is ₹35,000 for payments to transporters plying, hiring or leasing goods carriages. There is no per-invoice relief here, and the exceptions in Rule 6DD are narrow and specific.
So in Example 7, Sharma Traders is fully compliant — but Verma Enterprises is denied a deduction for the entire ₹6,80,000, because every payment exceeded ₹10,000. The mismatch between the ₹2,00,000 receipt limit and the ₹10,000 payment limit is deliberate, and it catches many people by surprise.
Section 43(1) applies the same ₹10,000 test to capital assets: cash payments above that limit are excluded from actual cost, so no depreciation is available on that portion.
The practical consequence: for any business buyer claiming a deduction, cash is unattractive well before the ₹2 lakh receipt limit becomes relevant. Cash sales of consequence are therefore mostly to final consumers, or to buyers not claiming the expense.
PAN — Rule 114B. Sale or purchase of goods or services exceeding ₹2,00,000 per transaction requires the buyer to quote PAN and the seller to obtain it. Where the buyer has no PAN, a declaration in Form 60 must be collected and retained. Because this test is per transaction, per-invoice billing below ₹2 lakh keeps a seller outside it — but the requirement bites the moment a single invoice crosses the threshold, whatever the payment mode.
Form 61A / SFT-013. A person liable to tax audit must report receipt of cash payment exceeding ₹2,00,000 for sale of goods or services of any nature. Sellers with substantial cash turnover should settle the aggregation basis for this statement with their auditor, rather than assuming that per-invoice billing keeps repeated receipts outside it.
GST. GST law places no restriction on receiving consideration in cash. Invoicing, e-invoicing and e-way bill obligations are identical whatever the payment mode. The entire restriction discussed here is an income-tax one — but a mismatch between GST turnover and declared cash receipts is a standard trigger for departmental enquiry.
The section does not prohibit cash sales. It caps them, and it caps them on three independent axes: per person per day, per transaction, and per event. A seller dealing repeatedly with the same buyer may accept cash indefinitely, provided each transaction is genuinely independent and no single day's collection from that buyer reaches ₹2,00,000.
What the law punishes is not the presence of cash but its concentration — and, in practice, arrangements whose only apparent purpose is to keep each slice under the line. Because the penalty is fixed at one hundred per cent of the receipt, the cost of getting this wrong is not marginal. On a ₹5 lakh cash sale, it can wipe out several times the profit.
The safest posture for any seller with meaningful volumes is simple: keep cash for small-value transactions, route anything substantial through banking channels, and maintain a daily customer-wise cash register that can be produced on demand.
Clause (c) and the treatment of split invoicing are fact-sensitive, and the department has read them broadly. If you handle significant cash receipts, or are unsure whether your billing pattern would survive scrutiny, it is worth having the arrangement reviewed before the cash is accepted rather than after. Get in touch.
Every situation differs. Talk to us before you act on anything above.
This article is general information, not professional advice. Tax law changes frequently — please confirm your position with us before acting.