>>CASH CREDIT, UNEXPLAINED INVESTMENTS, ETC.

UNEXPLAINED EXPENDITURE – SECTION 69C

Sanjay R. Parikh
Chartered Accountant

Proviso to section 69C, inserted by Finance (No. 2) Act, 1998 w.e.f. 1-4-1999 has added a new dimension to provisions of section 69C providing for treatment of unexplained expenditure as income. The article deals with the issue in detail and situations in which the proviso would be applicable.

1. Introduction

India has been jinxed with a parallel economy almost since independence. Various factors including high tax rates, licensing policies, emergency, restrictions on movement of agricultural commodities, restrictions on imports, etc. have contributed to the building up of the parallel economy. The unaccounted money was circulated in the economy itself in various ways. While some utilised it for productive purposes like investment in business, some others used it for wasteful consumption or investments in gold and ornaments. The government time and again introduced various measures to not only curb black money but also to bring the said money in circulation officially. The Voluntary Disclosure Schemes in its various forms were aimed with the object of converting the unaccounted money into accounted money with the ultimate object that it would be used for productive purposes.

There have often been occasions when during the course of search and seizure operations an assessee was found to have invested his unaccounted money in business by way of bogus loans or was found to have invested his unaccounted money in immovable properties, or for lavish expenses. Similarly, even during assessment proceedings, assessees were found to have resorted to introducing unaccounted money by way of cash credits or having utilised the same for expenses, etc. As the cash credits were found in the assessee’s books of account the Courts had taken the stand that it was for the assessee to prove the genuineness of the cash credits. Similarly, as the unexplained expenses/investments were found to have been established by way of evidence which was found from the assessee, the Courts had taken the stand that it was for the assessee to prove that the alleged unexplained expenses/investments were duly recorded in his books of account. This view had been taken by the Madras High Court in the case of V. Ramaswami Naidu vs. CIT, 93 ITR 341.

In order to avoid litigation and put the onus on the assessee, the provisions of sections 69 to 69D have been inserted in the Income Tax Act. The Delhi High Court has in the case of Yadu Hari Dalmia vs. CIT 126 ITR 48 held that the provisions of section 69C are merely clarificatory and embody a rule of evidence, which were otherwise quite clear.

2. Section 69C

Section 69C was inserted on the statute book by the Taxation Laws (Amendment) Act, 1975 w.e.f. 1st April, 1976 and reads as under:

A reading of the provisions of section 69C clearly brings out the fact that before the provisions of section 69C can be invoked it would be for the revenue to establish that the assessee has incurred any expenditure. Unless and until the revenue can establish that expenditure has been incurred, it would not be possible for the revenue to make an addition. Further, the revenue has not only to establish that the expenditure has been incurred, but has also to establish that the said expenditure has been incurred by the assessee. The Delhi High Court has in Yadu Hari Dalmia’s case (supra), held that the addition on account of marriage expenses could not be made in the hands of the assessee as there was no evidence that the expenditure had been incurred by the assessee.

Assuming that the department is able to establish that the expenditure has been incurred and that the same has been incurred by the assessee, the revenue would first have to give an opportunity to the assessee to explain the source of such expenditure. It is only if the assessee furnishes no explanation or the explanation furnished by him is in the opinion of the Assessing Officer not satisfactory, that the Assessing Officer may make an addition.

The revenue may collect information about the expenditure from various sources. Information may be collected from sellers of valuable consumer durables, commodities, etc. Evidence may also be found during the course of search operations from the assessee’s premises. In such a case, the presumption would be that the bills pertain to the assessee and it would be for the assessee to rebut such presumption. If the assessee is unable to rebut such presumption, the bills found from his possession may be deemed to be his bills and it would then be for the assessee to explain the source of expenditure incurred. In absence of a proper and satisfactory explanation, the amounts represented in the said bills may be considered to be unexplained expenditure of the assessee and added to his income. However, it may be appreciated that the amount that can be added under the section would only pertain to unexplained expenditure. Sections 68, 69, 69A, 69B and 69D specifically provide for making additions in specific cases stated therein. Accordingly, as there are specific sections to deal with other additions, section 69C seems to be restricted only to unexplained expenditure. Accordingly, if bills are found is the possession of the assessee, which reflect purchase of capital goods the same may not be covered by section 69C but may fall under section 69; i.e., unexplained investments or under section 69B; i.e. the amount of investments not fully disclosed in the books of accounts. Accord-ingly, the revenue may not be in a position to make additions under this section on account of bills found for the purchase of jewellery as the same would represent unexplained investments and would be covered by section 69 or section 69B. However, if the bills found represent marriage expenses like payments to caterers or pandal keepers, flower decorators, etc., addition on account of unexplained expenditure on marriage can be made. Similar addition can also be made on account of unexplained household expenses, business expenses, etc. which are of a revenue nature.

Additions have also been made under this section on account of household expenses by estimating the amount of household expenses. The additions on this count have been upheld considering the living style of the individual, the school in which the assessee’s children are studying, the family status, memberships of clubs or other similar factors. Considering these factors, the Assessing Officer may determine the amount of household expenses of the assessee. If the actual expenses recorded in the books of account are less than the expenses so determined, the Assessing Officer may make an addition after giving an opportunity to the assessee. Such additions have been upheld in the following decisions :

1. CIT vs. P. S. Chelladurai 145 ITR 139 (Mad)
2. CIT vs. Bhanwarlal 225 ITR 870 (Raj).

3. Proviso to Section 69C

Earlier, assessee’s used to claim deduction with respect to unexplained business expenditure. Deduction of unexplained expenditure was upheld by various Courts u/s. 37(1). Accordingly, the very purpose for which the section was introduced was defeated. On the one hand, an addition was made on account of unexplained expenditure and on the other hand, a deduction was claimed and allowed on account of the said unexplained expenditure, considering the same to be business expenditure. This resulted in no overall impact on the income of the assessee. With a view to deny deduction of such unexplained expenditure, the proviso was inserted by the Finance (No. 2) Act, 1998. The proviso thus seeks to deny deduction on account of the unexplained expenditure, which has been added to the income of the assessee. Accordingly, where an addition has been made under section 69C on account of unexplained expenditure, the same would not be entitled to deduction under the provisions of the Act, after the amendment.

A question will arise as to whether an addition on account of unexplained stocks can be made under this section and whether the assessee would be entitled to consider the said stock as opening stock of the subsequent year/period and the same would be allowed as a deduction. This difficulty would arise on account of the fact that stock in trade, as such, is claimed as revenue expenditure on account of it being consumed. In the opinion of the author, if physical stock is found at the time of survey or search, addition on account of the same can only be made under section 69 as unexplained investment in stocks or under section 69B on account of unexplained investment in valuable articles; i.e., stock. As the addition would be on account of unexplained investment in stocks or valuable article, the same would be eligible to be considered as the opening stock of the subsequent accounting year/period. However, this would lead to a denial of deduction on account of purchases and no deduction on account of purchases of the said stock would probably be available.

A similar issue or question would also arise in case of unexplained investments made in construction of a building, plant, etc. The question is whether the assessee would be entitled to claim depreciation with respect to the amount added on account of unexplained investments in the said assets. In the opinion of the author, as the addition has been made not under section 69C but under section 69 or 69B, and in absence of a similar proviso as in section 69 or section 69B, the assessee cannot be denied the claim of depreciation. However, if the assessee is in the business of constructing buildings, the expenditure incurred on such construction may be considered to be unexplained expenditure and assessee may be denied deduction on account of such expenditure.

4. Conclusion

With the comparative reduction in tax rates, let us hope that the generation of black money would be considerably reduced. The sluggishness in the economy has adversely effected business and almost all businessmen have been complaining that there is no business. In such circumstances, the generation of black money is bound to reduce. With the reduction of black money generated, there would hopefully be a time when the provisions contained in sections 68 to 69D would become redundant and a day hopefully would come when the same may have to be deleted. However, there is a fear in the minds of the tax-payer that inspite of he disclosing his correct income, he would continue to face harassment from tax officials. A tax-payer does not need "Sanman" for the taxes paid by him. His only desire is that he should not be looked upon suspiciously as a criminal but should be respected and trusted by the departmental authorities. One only hopes that the change in the attitude percolates from the top level organization to the lowest level.

Next

Lex Infotax (India) Pvt. Ltd.