Section 105 Unexplained expenditure.

Income-tax Act, 2025

At a Glance

These two texts reproduce the same substantive provision dealing with "unexplained expenditure" that is to be included in an assessee's income: one is presented as Section 105 of the Income-tax Act, 2025 (final Act text) and the other as Clause 105 of the Income Tax Bill, 2025 - Old Version (bill-stage text). Both provide that expenditure for which no satisfactory explanation as to source is offered shall be deemed income for that tax year and shall not be allowed as a deduction. The provision affects taxpayers and the assessing authority; no effective date is stated in the texts.

Background & Scope

Statutory hook: Section/Clause 105 titled "Unexplained expenditure" under the heading "AGGREGATION OF INCOME" in the Income-tax Act/Bill, 2025. The provision addresses circumstances in which expenditure incurred by an assessee in a tax year will be treated as income by deeming it unexplained and not deductible. No definitions (for example, of "expenditure", "source", "assessee", "satisfactory", or "Assessing Officer") are supplied in either document. No cross-references to other sections, rules, or schedules are included in the texts provided.

Statutory Provision Mode

Text & Scope

Both texts contain two sub-sections with substantially identical operative effects:

• Sub-section (1): Where the assessee has incurred expenditure in any tax year and either (a) offers no explanation about the source of such expenditure or part thereof; or (b) offers an explanation which is not satisfactory in the opinion of the Assessing Officer, then that amount (or the part) shall be deemed to be the income of the assessee for that tax year.

• Sub-section (2): The amount deemed as income under sub-section (1) shall not be allowed as a deduction under this Act, irrespective of any other provision of the Act.

Coverage: Any expenditure incurred by an assessee in any tax year, subject to the two alternative factual predicates in sub-section (1). The deeming is limited to the amount "covered by such expenditure or part thereof".

Interpretation

The text frames a deeming fiction: expenditure lacking an acceptable explanation of its source is converted into income for that year. The provision delegates a fact-finding and evaluative role to the Assessing Officer by reference to the officer's opinion on the sufficiency of the explanation. The provision is neutral as to the type of expenditure; it speaks broadly to "any expenditure". It also imposes a negative consequence on deduction: once deemed, the expenditure cannot be claimed as a deduction "irrespective of any other provision".

Exceptions/Provisos

No exceptions, provisos, thresholds, monetary limits, or procedural safeguards are included in either text. There is no provision for appeals, burden of proof allocation, evidentiary standards, or requirement that the Assessing Officer record reasons in writing in the texts supplied. There is no provision for partial acceptance beyond the deeming of "amount covered by such expenditure or part thereof" (which allows proportional deeming), but the criteria for apportionment are not stated.

Illustrations

• Example 1: A taxpayer incurs expenditure of Rs. 10 lakhs in a tax year and offers no explanation as to the source. Under sub-section (1)(a) Rs. 10 lakhs shall be deemed to be the taxpayer's income for that year and, under sub-section (2), shall not be allowed as a deduction. (This example is a direct application of the text; factual details beyond the legislative language are Not stated in the document.)

• Example 2: A taxpayer incurs Rs. 5 lakhs; the taxpayer offers an explanation, but the Assessing Officer considers the explanation unsatisfactory. Under sub-section (1)(b) Rs. 5 lakhs shall be deemed income and excluded from deductions. (No further guidance on what constitutes "satisfactory" is provided.)

Interplay

Neither text cites or mentions any Rules, Notifications, circulars, or other statutory provisions that would govern implementation, procedure, evidence, or appeals. The provision's sub-section (2) states a non-obstante clause ("Irrespective of any other provision of this Act") limiting the availability of deductions once an amount is deemed income, thus indicating priority over other deduction provisions in the Act. Any further interplay with provisions dealing with burden of proof, assessment procedure, search and seizure, unexplained cash credits, or penal consequences is Not stated in the document.

Practical Implications

• Compliance and risk areas: The provision places on taxpayers the practical need to be able to explain the source of expenditures. Failure to do so, or an explanation judged unsatisfactory by the Assessing Officer, results in automatic inclusion of the amount as income and a categorical bar on claiming a deduction for that amount.
• Record-keeping/evidence: The text implies but does not specify that taxpayers should retain documentary evidence relevant to the source of expenditure (bank records, invoices, contracts, receipts). Specific records required, standards of proof, or timelines to produce evidence are Not stated in the document.

Differences Between the Two Provisions & Practical Impact

Topic	Clause 105 of the Income Tax Bill, 2025 - Old Version	Section 105 of the Income-tax Act, 2025
Sub-section (1)(b) wording	"the explanation offered by the assessee is not satisfactory in the opinion of the Assessing Officer," (no express reference to "about the source")	"the explanation offered about the source of such expenditure by the assessee is not satisfactory in the opinion of the Assessing Officer," - explicitly ties the unsatisfactory explanation to the source
Explanatory note	Contains an additional explanatory sentence: "Clause 105 of the Bill provides for the circumstances or conditions in which any expenditure incurred by the assessee shall be deemed to be unexplained expenditure and be included in the total income of the assessee."	No explanatory sentence; presents the provision as codified "Section 105" in the Act.
Substantive effect	Substantively the same deeming and bar on deduction.	Substantively the same deeming and bar on deduction.

Practical impact of differences: The Act's explicit insertion of "about the source of such expenditure" in sub-clause (b) clarifies that the satisfaction inquiry for the Assessing Officer is confined to the source of the expenditure, not to other unrelated aspects (such as purpose or quantum). While the Bill wording in Clause 105 is broader and could be read to allow the Assessing Officer to treat any unsatisfactory explanation (on any aspect) as basis for deeming, the Act wording narrows the evaluative focus to the source. This narrowing reduces potential ambiguity about what the officer may assess as "not satisfactory" and may marginally constrain the scope of the Assessing Officer's evaluative discretion to source-related matters. However, both versions preserve broad discretion to the Assessing Officer, and neither supplies standards, evidentiary thresholds, or procedural safeguards; those omissions remain material in practice.

Key Takeaways

• Both texts enact a deeming provision that converts unexplained expenditure into income and disallows any deduction in respect of that amount.
• The Act version clarifies that the Assessing Officer's satisfaction pertains to the source of expenditure; the Bill language was marginally broader.
• No procedural safeguards, definitions, or evidentiary standards are provided in either text; these are Not stated in the document.
• Taxpayers bear practical risk and should maintain source-supporting documentation, although the provision does not prescribe what documentation suffices.
• The non-obstante clause in sub-section (2) prioritises this deeming over other deduction provisions in the Act.

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Full Text:

Section 105 Unexplained expenditure.

Unexplained expenditure deemed income, disallowing deduction when source is not satisfactorily explained by assessing officer. Section 105 deems expenditure to be income when the assessee offers no explanation of its source or offers an explanation the Assessing Officer deems unsatisfactory; the deemed amount cannot be claimed as a deduction under the Act, the deeming may apply to part of an expenditure, and the provision contains no definitions, procedural safeguards, evidentiary standards, or appeal mechanisms.