Generally speaking, in these days of digital and plastic cash and even digital holding of shares, holding of or transporting huge amounts of cash may fairly invite suspicion since many disreputable activities such as money laundering, evasion of tax laws, corruption, etc, require dealings in cash. The infamous case of Harshad Mehta and his suitcase immediately comes to mind. In today's times, in view of the vast network of banks, advances in technology, etc, we have reached a stage where even payment by cheques is also avoided and direct electronic transfers are becoming more and more common. Of course, despite such developments, there could be several situations where payments may have to be made in cash. An example of this is thesituation when salary payments to factory labourers has to be made by cash.

Holding or transporting large amounts of cash is not prohibited per se and the police or the income-tax authorities do not have powers to seize and forfeit such cash merely on account of this. However, it often happens that the police, other revenue departments or the tax authorities, when they come across a person holding such large amounts of cash on his person seize such amounts. If one government department finds that it has no powers to hold such cash seized, it promptly informs other departments, particularly the tax department which, in turn, attempts to seize and appropriate such amounts.

As stated earlier, the tax law does not prohibit a person from holding or transporting any amount of cash. However, it is common knowledge that unaccounted money is often held or transacted in cash. Accordingly, the tax department does have power to inquire into the reasons for holding large amounts of cash and particularly whether suchcash has been duly accounted for. For this purpose, it can, subject to certain safeguards, seize such cash and appropriate a proper portion of it towards income-tax and other dues.

A recent example of this can be seen in a recent decision of the Gauhati high court in the case of BR Metal Ltd vs CIT (1999) 239 ITR 329 (Gau). In this case, an employee of the petitioner company took a sum of Rs 50 lakh in two suitcases while travelling on an airline. It seems that the airport authorities or the airlines were not informed that he was possessing such a large amount of cash. The airlines came to know of this fact and one of its officials informed the matter to the police and income-tax authorities. The police promptly seized the cash. Interestingly, it has to be noted that the employee carried authority letters from the petitioner-company (his employer) where it was stated that he was possessing such cash for payment of customs duty and such letters were also seized by the police. The petitioner had to approachthe court for directing the release of the cash and a sum of Rs 40 lakh was ordered to be released. The income-tax department issued a warrant of authorisation for the seizure of such cash.

Note that, in this case, the issue was not whether the money was fully accounted for but whether the tax department had authority, in the circumstances, to validly issue such a warrant and seize the cash. In this case, the court found that the petitioner company was a regular assessee, was regularly paying tax and had also paid advance-tax. Other evidence as to the fact of payment of huge amounts of customs duty was also available. Further, there is a safeguard in the provisions of income-tax law that such a seizure can only be made if the tax department has "reason to believe" that such money was unaccounted. From the facts, the court noted that, in that case, the tax department only had "suspicion" and no "reason to believe" that such money was unaccounted. Accordingly, the court ordered release of the cash. However,the court rightly noted that this was only partial disposal of the case in the sense that the tax department had full powers to inquire into whether such money was fully accounted for. If this was not the case, exercise the provisions of law whereby such money can be deemed to be the income of the petitioner company and levy tax.

In fact, there are provisions of tax law which state that if a person is found to be holding accounted sums of money, or other assets, such moneys, if the assessee cannot explain the source thereof, be deemed to be the income of the assessee and taxed and even penalty could be levied.

There are of course, certain laws which do place some restrictions over cash movement. The classic example is the Foreign Exchange Regulation Act, 1973, which prohibits a person from transferring cash outside the country.

Thus, to conclude, while a person is not prohibited from holding or dealing in large amounts of cash by the income-tax law, he would have some rigorous explanation to make as tothe source of such cash and, to establish his case in general, the reason for holding such cash. In particular, proper linkages and documentation would be a must.

The author is a Mumbai-based chartered accountant