Unexplained expenditure.

105

(1) Where any expenditure has been incurred by the assessee in any tax year, and–– (a) the assessee offers no explanation about the source of such expenditure or part thereof; or (b) the explanation offered by the assessee is not satisfactory in the opinion of the Assessing Officer, then, the amount covered by such expenditure or part thereof, shall be deemed to be the income of the assessee for that tax year. (2) Irrespective of any other provision of this Act, the amount deemed as income in sub-section (1) shall not be allowed as a deduction under this Act.

Explanation

Section Summary:

Section 105 of the new income tax law addresses unexplained expenditures incurred by a taxpayer during a tax year. If a taxpayer cannot satisfactorily explain the source of such expenditures, the amount is treated as taxable income for that year. This section ensures that unexplained or unaccounted spending is brought under the tax net.

Key Changes:

1. Clarification of Unexplained Expenditure: The section explicitly states that if the taxpayer fails to provide a satisfactory explanation for the source of expenditure, it will be deemed as income.
2. No Deduction Allowed: The deemed income under this section cannot be claimed as a deduction under any other provision of the Act, which is a stricter stance compared to previous interpretations.

Practical Implications:

• For Taxpayers: Taxpayers must maintain proper records and documentation for all significant expenditures. Failure to do so could result in the expenditure being treated as taxable income.
• For Businesses: Businesses need to ensure that all expenses are properly accounted for and supported by valid documentation to avoid scrutiny.
• For Assessing Officers: This section empowers Assessing Officers to question unexplained expenditures and treat them as income if the explanation is unsatisfactory.

Critical Concepts:

• Deemed Income: The amount of unexplained expenditure is treated as income, even if it was not originally classified as such.
• Satisfactory Explanation: The taxpayer must provide a credible and verifiable explanation for the source of the expenditure. The Assessing Officer has the discretion to determine whether the explanation is satisfactory.
• No Deduction: Once deemed as income, the amount cannot be claimed as a deduction under any other provision of the Act, ensuring it is fully taxable.

Compliance Steps:

1. Maintain Records: Keep detailed records of all expenditures, including invoices, receipts, and bank statements.
2. Document Sources: Ensure that the source of funds for significant expenditures is clearly documented and can be verified.
3. Prepare Explanations: Be ready to provide explanations for any expenditures that may appear unusual or disproportionate to the taxpayer’s income.

Examples:

• Scenario 1: A taxpayer spends ₹10 lakh on a luxury car but cannot provide a satisfactory explanation for the source of funds. The Assessing Officer deems the ₹10 lakh as taxable income for that year.
• Scenario 2: A business reports an expenditure of ₹50 lakh on office renovations but fails to provide invoices or proof of payment. The Assessing Officer treats the ₹50 lakh as deemed income, and the business cannot claim it as a deduction.

This section emphasizes the importance of transparency and proper documentation in financial transactions to avoid additional tax liabilities.