Article
Unexplained expenditure (Part-1)
Section 69C
1. Introduction:
When a taxpayer earns income without recording it in the books of accounts or without declaring it in the return of income, it takes the character of unaccounted income or concealed income. The taxpayer may then find ways to use such income, either for personal expenditure, investments, or in business by incurring expenses (whether revenue or capital) without recording them in the books, or by acquiring loans, deposits, or shares with premium through accommodation entries. If the Investigation Wing of the Department is unable to trace the inflow of such unaccounted money, it may still discover the outflow of that money in the form of expenditure, which can be taxed as unexplained expenditure if the taxpayer fails to provide a satisfactory explanation. Section 69C of the Income Tax Act covers such unexplained outflow of money, which is then taxed as deemed income. In this Chapter salient features of this provision will be discussed.
2. The Provision:
2.1 Section:
“Unexplained expenditure, etc.
69C. Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the Assessing Officer, satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial year.
Provided that, notwithstanding anything contained in any other provision of this Act, such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income.”
2.2 The history of the Provision:
This section was introduced in Income tax Act by the Taxation Laws (Amendment) Act, 1975 w.e.f. 01-04-1976. From 01-04-1988, in place of Income tax Officer, expression “Assessing Officer” was inserted. The Proviso in the Section was inserted w.e.f. 01-04-1999. The Board Circular No. 772 dated 23-12-1998 explained the Proviso as under-
“Amendment of section 69C
29.1 Under the existing provisions, where an expenditure incurred by the taxpayer in respect of which he either offers no explanation regarding the source of such expenditure or where explanation offered is found unsatisfactory, the expenditure is treated as ‘income’ under Section 69C. There is no corresponding provision for disallowance of such expenditure.
29.2 This used to enable the taxpayer charged to tax under section 69C to claim the expenditure as deduction under section 37 defeating the very objective of the section.
29.3 The Act has amended section 69C of the Income-tax Act according to which unexplained expenditure deemed as income cannot be allowed as deduction under any head of income.
29.4 This amendment will take effect from 1st day of April 1999 and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.”
2.3 Highlights of the Provision:
(i) Unexplained Expenditure: This provision deals with cases where an assessee incurs expenditure but fails to provide a satisfactory explanation about the source of such expenditure. Thus, where sources of expenditure are not explained satisfactorily, the addition u/s 69C would be justified.[1]
(ii) Deemed Income: If the assessee fails to provide an explanation or if the explanation provided is deemed unsatisfactory by the Assessing Officer, the amount of such unexplained expenditure or part thereof may be deemed to be the income of the assessee for that financial year. Since, income under this section is deemed income, it can neither be considered as concealment nor under-reporting of income and therefore, penalty u/s 271(1)(c) cannot be levied.[2] Considering this view of the Court, the legislature introduced section 271AAC under which addition made as deemed income is considered for penalty.
(iii) Disallowance of Deduction: The provision states that such unexplained expenditure, which is deemed to be the income of the assessee, cannot be allowed as a deduction under any head of income, regardless of any other provision in the Income Tax Act. The proviso to the section overrules decisions to the effect unaccounted business expenditure can be allowed as a business deduction and therefore no addition u/s 69C can be made.[3]
(iv) The provision applies retrospectively: It is held that the Proviso is clarificatory in nature and therefore, it would come into effect from 01-04-1976.[4]
(v) Similarity with sections 68 or 69: Section 69C is a deeming provision in the same way as sections 68 or 69 or 69A are. In all these cases, the assessee has undisclosed funds. In section 68 they are taxed at introduction stage. In Section 69A they are taxed at possession stage (in the form of assets) and in section 69 or 69C they are taxed at outflow stage (in the form of investment or expenditure). In all these cases the unexplained inflow of funds or possession of funds or outflow of funds is taxed as deemed income, if the assessee fails to offer a satisfactory explanation to the source of such funds.
(vi) Onus: In all these cases of deemed income, the onus to prove nature and source of funds is on the assessee by giving an explanation. If the AO does not consider the explanation satisfactory, he may treat the amount of fund as deemed income u/s 68 in case of inflow in the form of credit, u/s 69A in the form of possession of various assets such as money, bullion, jewellery, u/s 69 in the form of investment and u/s 69C in the form of expenditure and tax it u/s 115BBE.
3. Initial burden of proof: The initial burden is on the AO to prove that an expenditure has been actually incurred, such expenditure has been incurred by the assessee and it is incurred in the relevant financial year. Thus, ownership of funds used in the outflow of expenditure, has to be shown to be that of assessee with evidence. Where the assessee denies having incurred the expenditure and AO did not carry out any inquiry and no evidence of incurring expenditure by the assessee was brought on record, the alleged amount could not be added as income of the assessee.[5] Once, initial burden is discharged by the AO, the burden will shift on the assessee to explain the source of expenditure, or to deny with evidence that either no expenditure was incurred or he did not incur any expenditure (somebody else in the family/firm/company incurred), or it was not incurred in the questioned Fyr.
4. What is an expenditure:
Following are some definitions of "expenditure" collected from various sources:
(i) Merriam-Webster Dictionary: Expenditure is defined as the act or process of expending, which could be an expenditure of energy, and also as something expended such as a disbursement or expense. The term is used to describe both the action of spending and the amounts spent.
(ii) Britannica Dictionary: Expenditure is formally described as both the amount of money spent on something and the act of spending money itself. It can also refer to the use of non-monetary resources like time, energy, or effort for a particular purpose.
(iii) Oxford Learners Dictionaries: Defines expenditure as the act of spending or using money; it can refer to an amount of money spent. The definition extends to cover public, government, and military spending plans, and emphasizes the growing gap between income and expenditure in budgets.
(iv) Collins English Dictionary: Describes expenditure as both something expended, such as time or money, and the act of expending. It includes further detail on how expenditure functions as part of currency and economic systems.
(v) Your Dictionary: Defines expenditure as the act or process of expending; outlay. The definition comes from the stem of Medieval Latin "expenditus," which means to weigh or pay out, highlighting its origins and evolution in usage.
These definitions collectively emphasize the dual aspect of expenditure as both an action (the act of spending) and an entity (the money or resources spent). They also illustrate the term's application in various contexts, from personal finance to business objects and beyond.
5. Principles involved in the operation of section 69C:
(i) Initial Burden of Proof on Assessing Officer (AO): Since the initial burden lies on the Assessing Officer (AO), it is the AO's responsibility to prove with evidence that an expenditure has actually been incurred. In the absence of any details furnished by the assessee, the AO's conclusion that the amount was incurred out of undisclosed sources cannot be faulted, and the additionu/s 69C has to be confirmed.[6]
(ii) Opportunity to Explain Unexplained Expenditure: The Assessing Officer (AO) can make an addition on account of unexplained expenditure only after obtaining the details of such expenditure and providing the assessee with a necessary opportunity to explain it.[7]
(iii) Section 69C Not Applicable to Bogus Expenditure: Where there is an allegation of bogus expenditure, it implies that the expenditure has not been incurred at all. Under such circumstances, section 69C cannot be invoked.
(iv) Assessee’s Right to Rebut AO’s Evidence: It is open to the assessee to prove that no expenditure has been incurred by discrediting or rebutting the evidence relied on by the AO.
(v) Treatment of Expenditure Recorded in Books of Accounts: When expenditure is recorded in the books of accounts, the source of that expenditure is typically the corresponding credit entries. The expenditure cannot be treated as unexplained if these credit entries are satisfactorily proven. If the credit entries are not satisfactorily proven, an addition may be attracted u/s 68. If no addition is made u/s 68 in respect of the credit entries in the books, it means they are accepted as genuine and can be used to explain the outflow in the form of expenditure.
(vi) Assessee's Responsibility to Explain Source of Expenditure u/s 69C: U/s 69C, the assessee is required to explain the source of the expenditure incurred. The assessee must gather evidence of the inflow of money and prepare a cash flow statement. If the generation of funds for incurring the expenditure is proven, the additionu/s 69C may not be sustained.
(vii) Payment through Banking Channels as Valid Explanation: Payment through banking channels is considered a valid explanation, provided there is no cash deposit or unexplained credit entry in the bank account.
(viii) Expenditure Debited in Books to be Addedu/s 37(1): Expenditure debited in the profit and loss account and recorded in the books, if found to be unexplained, bogus, or not incurred, can be added onlyu/s 37(1) and notu/s 69C.
(ix) Recording of Expenditure in Personal Diaries as Prima Facie Proof: If expenses or the outflow of money are recorded in personal diaries or a duplicate set of books, it serves as prima facie proof of incurring the expenditure. However, if loose papers or personal diaries record expenditure under the head “estimate,” the AO's burden of proof is not discharged. The AO must then prove that the expenditure was actually incurred, even if recorded under the head “estimate”.
(x) Presumption of Transactions Based on Loose Papers or Personal Diaries: If the AO can prove that transactions as per some entries in loose papers or personal diaries have actually taken place, a presumption arises that transactions for other entries have also taken place. This shifts the onus onto the assessee.
(xi) Proviso to Section 69C Lacks Retrospective Effect: The proviso to section 69C does not have retrospective effect.[8]
(xii) Treatment of Excess Stock or Cash as Business Income: If excess stock or cash is found compared to what is recorded in the books, the difference can be considered as business income taxed at normal rates and not u/s 69C or section 69/69B read with section 115BBE as unexplained expenditure or investment in excess stock/cash.[9] However, contrary views may be found in cases where it was held that excess stock may be taxed u/s 69B.[10]
(xiii) Sustainability of Addition u/s 69C Based on Purchases: Once the purchases are not denied, as reliance is placed on sales accepted by the Assessing Officer (AO), the fact of the purchase is proven. Therefore, an addition u/s 69C will be sustainable if the explanation for the source of expenditure is not found satisfactory.
(xiv) Taxation of Unaccounted Expenses u/s 69C: Expenses incurred but not accounted for in the books, even if they are for business purposes, can be taxed u/s 69C and cannot be claimed as a deduction under any head, as per the proviso to Section 69C.
(xv) Withdrawal from Bank Does Not Constitute Expenditure: Mere withdrawal of money from a bank does not constitute expenditure. There must be an object, purpose, or destination for which the money is paid, or a recipient to whom the money is given. Such a proven outflow would qualify as expenditure. Ownership of the money must change hands for it to be considered an expenditure.
(xvi) Satisfactory Explanation Requires Source of Funds: Merely providing the details of the payee is not sufficient for a satisfactory explanation. One must also provide the source of funds for incurring the expenditure, and this source should be acceptable as generating the requisite funds to cover the expenditure.
(xvii) Confirmation of Addition u/s 69C Based on Penalty Proceedings: Addition u/s 69C can be confirmed on the basis of evidence collected during penalty proceedings.[11]
(xviii) No Addition u/s 69C Based on Estimation Alone: Addition u/s 69C cannot be made for alleged purchases outside the books by estimating the purchases on the basis of packing material unless there are supporting evidence.[12]
(xix) No Addition in Employee's Hands if Company Provides Funds: If the source of the funds for the expenditure is the company, then addition cannot be made in the hands of employee.[13]
(xx) Requirement of Corroborative Evidence for Addition u/s 69C: No addition u/s 69C can be made merely on the basis of statement (of director or partner) in absence of any corroborative evidence of expenditure having been actually incurred,[14] and without offering an opportunity to the assessee to cross examine the deponent who deposed against the assessee[15].
(xxi) Share Application Money Not Considered Unexplained without Rebuttal: Where evidence submitted by the assessee regarding share application money are not rebutted through investigation, such investment cannot be considered as unexplained.[16]
(xxii) No Addition u/s 69C for Purchases Paid via Bank Channels: No addition u/s 69C can be made in respect of purchases where payments were made by account payee cheques which were cleared through normal banking channels and assessee had furnished bills, delivery challans relating to said purchases, or where all purchases were reflected in stock reconciliation and there was no evidence to show that purchases made were for cash or that purchasers had returned cash corresponding to cheque payments received from assessee,[17] or where assessee had submitted tax invoice and TDS certificate as proof of transaction and no objection was raised against same by revenue, and further, payments were made through bank account.[18]
(xxiii) Addition u/s 69C Cannot Be Made for Expenditure Outside the Relevant Assessment Year: If documents found in the search revealed that expenditure does not pertain to the relevant assessment year, then addition u/s 69C for that year cannot be made.[19]
(xxiv) Impact of Error in Basis of Addition u/s 69C: If addition is made on the basis of total purchases instead of cash purchases, the error will be significant and may invalidate the order.[20]
(xxv) No Further Addition When Profit Rates Are Applied to Bogus Sales and Purchases: Where net profit rate or gross profit rate is applied on bogus sale and purchases, then no further addition on alleged payment of commission on such bogus sale or purchases is called for.[21]
To be continued……..
[1] Grand Bazaar v. ACIT [2007] 292 ITR 269 (Mad.)
[2] CIT v. Baroda Tin Works [1996] 221 ITR 661 (Guj).
[3] M.K. Mathivathanan v. ITO [1989] 31 ITD 114 (MAD.)
[4] Yadu Hari Dalmia v. CIT [1980] 126 ITR 48 (Del.)
[5] CIT v. Lubtec India Ltd. [2009] 311 ITR 175 (Del.).
[6] Sudarsanan P.S. v. CIT [2021] 130 taxmann.com 375 (Kerala)
[7] Bausch and Lomb India (P.) Ltd. v. AU, NFAC [2024] 162 taxmann.com 597 (Delhi)
[8] DGP Windsor (India) Ltd. v. DCIT [2003] 84 ITD 641 (MUM.)
[9] Tejpal Singh v. ACIT [2024] 158 taxmann.com 679 (Amritsar - Trib.); Overseas Leathers v. DCIT [2023] 152 taxmann.com 595 (Chennai - Trib.); Bunty Kumar v. ACIT [2023] 157 taxmann.com 245 (Amritsar - Trib.); Tarlochan Singh v. DCIT [2024] 159 taxmann.com 1252 (Chandigarh - Trib.); Veer Enterprises v. DCIT [2024] 158 taxmann.com 655 (Chandigarh - Trib.); Montu Shallu Knitwears v. DCIT [2024] 159 taxmann.com 677 (Chandigarh - Trib.); ITO v. Riddhi Siddhi Jewellers [2023] 157 taxmann.com 467 (Rajkot - Trib.); Chokshi Hiralal Maganlal v. DCIT [2011] 45 SOT 349 (Ahmedabad); PCIT v. Bajargan Traders [2017] 86 taxmann.com 295 (Rajasthan)
[10] SVS Oil Mills v. ACIT [2020] 113 taxmann.com 388 (Madras)
[11] CIT v. C.L. Verma [1995] 78 TAXMAN 231 (DELHI)
[12] CIT v. Paul Devaraj [2021] 129 taxmann.com 178 (Madras)
[13] Jitendra Virwani v. DCIT [2021] 129 taxmann.com 38 (Bangalore - Trib.); JCIT v. Narayana Reddy Vakati [2021] 128 taxmann.com 377 (Hyderabad - Trib.)
[14] Kohinoor Crafts v. ACIT [2021] 133 taxmann.com 365 (Delhi - Trib.); DCIT v. VVD & Sons (P.) Ltd. [2024] 158 taxmann.com 395 (Chennai - Trib.); PCIT v. Nitin Cylinders Ltd. [2024] 159 taxmann.com 649 (Bombay)
[15] PCIT v. Shapoorji Pallonji and Co. Ltd. [2022] 141 taxmann.com 509 (SC); Sarwan Kumar Poddar v. UOI [2022] 142 taxmann.com 34 (Calcutta)
[16] Adhoi Vyapar (P.) Ltd. v. ITO [2022] 134 taxmann.com 95 (Mumbai - Trib.)
[17] PCIT v. Jagdish Thakkar [2022] 145 taxmann.com 414 (Bombay); ACIT v. Sanjay Kumar Kochar [2023] 147 taxmann.com 446 (Raipur- Trib.); DCIT v. Curosis Healthcare (P.) Ltd. [2023] 150 taxmann.com 10 (Jaipur - Trib.)
[18] Satia Industries Ltd. v. NFAC [2023] 151 taxmann.com 358 (Amritsar - Trib.)
[19] Pujala Mahesh Babu v. ACIT [2023] 151 taxmann.com 157 (Hyderabad - Trib.)
[20] Ziyauddin Traders v. NFAC [2024] 162 taxmann.com 708 (Allahabad)
[21] Seo Lehenga House v. DCIT [2024] 163 taxmann.com 668 (Chandigarh - Trib.)