Section 105 of ITA'25 has become more stringent so to say as against Sec 69C of ITA'61. Under Section 69C, the use of the words "may be" has been replaced with "shall be". This therefore leaves no option for Courts to interpret the same in the assesses favour incase of any ambiguity.
The Hon'ble Supreme Court in case of CIT v. Smt. P.K. Noorjahan [1999] 237 ITR 570 (SC) in context of section 69
- Unexplained investments has held that, "3…a discretion has been conferred on the ITO under section 69 to treat the source of investment as the income of the assessee if the explanation offered by the assessee is not found satisfactory and the said discretion has to be exercised keeping in view the facts and circumstances of the particular case."
Relying on the above decision of the Hon'ble Apex Court, in case of PCIT v. Rama Shankar Yadav [2017] 85 taxmann.com 173 (Allahabad), the High Court has held that,
"10. At the same time, the use of the word "may" in the aforesaid provision makes the deeming provision discretionary and not mandatory. In other words, even if not explanation is offered or it is found to be unsatisfactory, it is not mandatory to treat such unexplained expenditure to be the income of the assessee.
17. The question raised above is answered in favor of the assessee and against the department and it is held that as the provision of Section 69C of the Act is not mandatory in nature, the Assessing Authority has full discretion either to add or not to add the unexplained expenditure in the income of the assessee based upon sound judicial principles…."
Further, The provisio to Sec 69C is much more expanded in scope under Section 105(2). Lets understand the history of the proviso to Section 69C. Circular No. 772 dated 23rd December 1998 explained the necessity of introduction of such Proviso. It states that as per section 69C of the Act, the expenditure was deemed to be income of the assessee, however, there is no corresponding provision for disallowance of such expenditure.
This used to enable the taxpayer whose income was charged to tax under section 69C to claim the expenditure as deduction under section 37 defeating the very objective of the section. Now incase of say such expenses which can be categorised as CSR expenses. Incase the AO invokes Sec 69C and incase such expenses would otherwise be classified as CSR, then it may be claimed as a deduction u/s 80G so to say incase it satisfies other conditions.
This is because ITA'61 only debars the expenditure to be claimed under any "head of Income". However, u/s 105 of ITA'25, these expenses cannot be claimed under the Entire Act, including Section 133 (Section 133 of ITA'25 - Deduction in respect of donations to certain funds, charitable institutions, 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 2[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:]
3[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.]
105. Unexplained expenditure.
(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 about the source of such expenditure 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.
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