Unexplained expenditure and reimbursement disallowance: verified pre-operative costs were not taxable additions on these facts.

Verified pre-operative expenditure supported by books, bills and vouchers could not be treated as unexplained expenditure under section 69C where the source was explained through share capital and share application money and the Assessing Officer found no evidence that the spending was bogus or personal. Section 69C applies only when the expenditure itself remains unexplained, not merely because its business necessity is questioned. Reimbursement-based pre-commencement payments at actuals, with no profit element shown, were also held not liable to disallowance under sections 40(a)(ia) or 40A(3) on these facts, so the addition and disallowance were deleted.

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Issues: Whether the addition made as unexplained expenditure under section 69C of the Income-tax Act, 1961 could be sustained in respect of pre-operative expenses whose source and genuineness were supported by books, bills and vouchers; and whether sections 40(a)(ia) and 40A(3) of the Income-tax Act, 1961 could be invoked to disallow reimbursement-based pre-commencement expenditure.

Analysis: The source of the expenditure was explained through share capital and share application money, and the Assessing Officer had verified the supporting bills and vouchers without finding the expenditure to be bogus or personal in nature. A disallowance under section 69C requires unexplained expenditure itself, not merely a perceived lack of justification for incurring the expenditure. Where the books record the expenditure, the supporting evidence is verified, and the source is not in doubt, section 69C has no application. The payments to the third party were reimbursements at actuals and no profit element was shown. In that situation, there was no basis for invoking section 40(a)(ia), and section 40A(3) was also inapplicable on the facts.

Conclusion: The addition was rightly deleted and the disallowance was not sustainable; the decision was in favour of the assessee.

Ratio Decidendi: Section 69C applies only where expenditure itself remains unexplained, while verified and genuine pre-operative expenditure supported by evidence cannot be disallowed merely because its business necessity is questioned; reimbursement at actuals does not attract disallowance under sections 40(a)(ia) or 40A(3) on these facts.

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