Section 105 is the substantive equivalent of 1961 s. 69 C. Where any EXPENDITURE has been incurred by the assessee in a tax year and (a) no explanation about source is offered OR (b) explanation is unsatisfactory, the amount is deemed…
105
ITA 2025 · Section 105
Section 105 — UNEXPLAINED EXPENDITURE (1961 s. 69C SUCCESSOR)
Section 105 is the substantive equivalent of 1961 s. 69C. Where any EXPENDITURE has been incurred by the assessee in a tax year and (a) no explanation about source is offered OR (b) explanation is unsatisfactory, the amount is deemed INCOME of that year. Charged at 60% punitive rate u/s 195. Sub-section (2) further: such deemed income shall NOT be allowed as deduction under any head.
STATUTORY ARCHITECTURE — DOUBLE WHAMMY
Section 105 imposes a DOUBLE-DISADVANTAGE: (a) the unexplained expenditure is deemed INCOME (added back as 'income' of the year); AND (b) it is NOT allowed as DEDUCTION in computing income under any head (no PGBP / HP / OS deduction). The double impact ensures that off-books / black-money expenditure is fully clawed back without offset.
CASE LAW
CIT v. Salem Magnesite (P.) Ltd (SC) — s. 69C addition for unexplained expenditure even where business is established and PGBP-deduction would normally apply. PCIT v. Devgan Diamonds (Del HC) — survey discovery of cash-payment to vendors; failure to identify recipient invokes s. 69C. ITAT (various) — third-party-evidence (e.g., supplier's records) sufficient to establish unexplained expenditure even if not recorded in assessee's books.
PLANNING NOTES
(i) Reconcile expenditure side periodically: bank-outflows + cash-payments-from-petty-cash vs. recorded expenditure. (ii) For undocumented commission / brokerage / bribes paid (often the litigation source), the explanation route is foreclosed — full 60% hit + double-disadvantage. (iii) Survey of business premises often yields handwritten ledgers / WhatsApp messages / vendor invoices showing off-books expenditure — these are admissible evidence under s. 105. (iv) For legacy cash-payment practices in industries (real estate / retail / food-delivery), shift to banking channels to avoid s. 105 + s. 36 cash-disallowance double-hit.
CROSS-REFERENCES