Section 69C covers only current-year unexplained expenditure, while unsupported interest disallowances and duplicate additions fail.
Tax-deduction disallowance on interest does not arise where no interest is credited or paid in the relevant year; brought-forward closing balances alone do not trigger withholding. Section 69C applies only to unexplained expenditure incurred during the relevant financial year, so a recorded capital advance paid through banking channels in an earlier year cannot be treated as fresh unexplained expenditure merely because it remains in the balance sheet. Amounts already added back as capital write-offs cannot be added again. Notional interest is not taxable where no real income accrued, and project-interest disallowance fails where tax was deducted and deposited within the prescribed time. The additions and disallowances were deleted.
Issues: (i) Whether disallowance for failure to deduct tax on alleged interest accrued during the relevant year was sustainable; (ii) Whether a capital advance carried forward in the balance sheet could be treated as unexplained expenditure in the relevant year; (iii) Whether an amount forming part of a capital write-off already added back in the computation could be added again; (iv) Whether notional interest could be assessed where no income had accrued during the relevant year; (v) Whether disallowance of project interest for alleged non-deduction of tax was sustainable where tax had been deducted and deposited.
Issue (i): Whether disallowance for failure to deduct tax on alleged interest accrued during the relevant year was sustainable.
Analysis: The reconciled accounts showed that the disputed closing balances represented brought-forward interest balances. No interest was credited to the lenders' accounts or paid during the relevant year. The obligation to deduct tax arises upon credit of the income to the payee's account or payment, whichever is earlier; neither event occurred in the relevant year.
Conclusion: The disallowance was unsustainable and was deleted, in favour of the assessee.
Issue (ii): Whether a capital advance carried forward in the balance sheet could be treated as unexplained expenditure in the relevant year.
Analysis: The capital advance had been paid through banking channels in an earlier financial year and was recorded in the regular books. No payment was made in the relevant year; instead, part of the advance was refunded. Section 69C applies to expenditure incurred in the financial year for which the deemed income is proposed. A carried-forward balance does not constitute expenditure incurred afresh in every subsequent year, and a deeming provision cannot be extended beyond its terms.
Conclusion: The addition as unexplained expenditure was unsustainable and was deleted, in favour of the assessee.
Issue (iii): Whether an amount forming part of a capital write-off already added back in the computation could be added again.
Analysis: The entire capital write-off had already been added back by the assessee in computing business income. The disputed amount formed part of that self-disallowed sum. A further addition of the same component would result in taxing the same amount twice.
Conclusion: The duplicate addition was unsustainable and was deleted, in favour of the assessee.
Issue (iv): Whether notional interest could be assessed where no income had accrued during the relevant year.
Analysis: The surrounding circumstances, including the borrowers' financial distress, pending recovery proceedings, and insolvency-related developments, established that no real income resulted during the relevant year. The books of account did not record any such accrual.
Conclusion: No notional interest was taxable for the relevant year, in favour of the assessee.
Issue (v): Whether disallowance of project interest for alleged non-deduction of tax was sustainable where tax had been deducted and deposited.
Analysis: The interest-paid records established that tax had been deducted on each relevant payment and deposited during the previous year, well before the statutory due date for filing the return.
Conclusion: The disallowance was unsustainable and was deleted, in favour of the assessee.
Final Conclusion: The substantive additions and disallowances adjudicated on merits were deleted.
Ratio Decidendi: Section 69C is confined to unexplained expenditure incurred in the relevant financial year and cannot be invoked merely because a recorded balance from an earlier year continues to appear in the balance sheet.