Section 69C has been reproduced below:

“Where in any year the taxpayer 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, then the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the taxpayer for such year.

Aforesaid unexplained expenditure which is deemed to be the income of the taxpayer by virtue of section 69C shall not be allowed as a deduction under any head of income.”

Explanations with reference to case laws:

• As per proviso to Section 69C, when expenditure is deemed to be the income of the assessee, no allowance of the same can be claimed as business expenditure.
• The Jaipur Bench of [ITAT ruling in 31 DTR 456- Nisraj Real Estate] held that unverified purchases made by assessee could not be treated as unexplained expense u/s 69C and no addition can be made thereof u/s 69C proviso there under – as once sales were made by assessee, purchases were obviously made.
• Question of Addition depends on satisfactory explanation of source – Section 69C deals with unexplained source of expenditure. If from documents it appears that there was expenditure, unless its source is satisfactorily explained, the same would also be deemed to be the income of the assessee for such financial year. The question depends on the satisfactory explanation of the source. – [CIT v. Bhagwati Developers Pvt. Ltd. [2003] 261 ITR 658 (Cal.)]
• Estimation of household expenditure in a particular year cannot be made on the basis of income of subsequent years – Where the search discloses that any expenditure is found to be false, appropriate additions can be made but what is relevant is that the addition can be made only in regard to the income related to false claim of expenditure disclosed by material unearthed during the search. There is absolutely no basis for assuming that the expenditure incurred during a particular month/year should be the expenditure during the ten years also. The monthly household expenditure may depend on various circumstances, one factor being the income/earning. Estimating the household expenditure in a particular year with reference to the income of a future year (that too 5 to 10 years later) in absence of any other evidence would be arbitrary and illegal – [CIT Vs. C.L. Khatri [2005] 147 Taxman 652 (MP)]
• Invocation of Powers under Section 142A – For purpose of getting himself satisfied about purported unexplained expenditure under section 69C, powers under section 142A could not be invoked by Assessing Officer – [CIT Vs. Aar Pee Apartments Pvt. Ltd. [2009] 319 ITR 276/[2010] 188 Taxman 39 (Delhi)]
• Additions U/s.69C of the Income Tax Act is not mandatory, AO has discretion to add or not to add unexplained expenditure. [Pr. Commissioner of Income Tax Vs. Late Rama Shankar Yadav (Allahabad High Court)]
• Unexplained expenditure deserves to be deleted if explained. Freight Charges – Reasonableness is important. [ACIT vs. Vikram Vijay Mehta]
• Freight charges claimed by the assessee are reasonable and thus the adhoc disallowance cannot be justified.
• When convincing explanation in respect of major entries in the pocket diary are given the addition of all entries are not justified and will be restricted only to the entries unexplained.