Section 105 Income Tax Act 2025: When Is Unexplained Expenditure Taxable?
Section 105 of the Income-tax Act, 2025 explains when spending with an unproved source is treated as taxable income, and why the same amount cannot be deducted.
What does Section 105 of the Income-tax Act, 2025 provide?
Section 105(1): Where an assessee incurs expenditure in a tax year and either provides no explanation of the source of the expenditure (or part of it), or provides an explanation that the Assessing Officer considers unsatisfactory, the amount of that expenditure or unexplained part is deemed to be the assessee's income for that tax year.
Section 105(2): An amount deemed income under subsection (1) cannot be allowed as a deduction under the Act, notwithstanding any other provision.
The law focuses on the source of money used to meet expenditure. An expensive transaction is not automatically unexplained merely because it is large; the actual spending and adequacy of the source explanation are central.
When can the Assessing Officer invoke Section 105?
- Expenditure must have been incurred by the assessee during the relevant tax year.
- The source of all or part of the expenditure is not explained, or the explanation is found unsatisfactory.
- The deemed income is limited to the expenditure, or the part thereof, to which the deficiency relates.
- The amount is brought to tax for the tax year in which the expenditure was incurred.
An assessment should identify the expenditure and consider the evidence and explanation on record. The statutory provision does not prescribe an automatic addition for every cash payment.
Relevant statutory terms and concepts
Practical examples of unexplained expenditure
Example 1: Entire expenditure is unexplained
An individual spends Rs. 8,00,000 on a personal event but cannot establish any source for the payment. Subject to the assessment findings, the Rs. 8,00,000 may be deemed income under Section 105(1).
Example 2: Only part of the expenditure is unexplained
A business incurs Rs. 12,00,000 of expenditure. It produces reliable records for Rs. 9,00,000 but cannot satisfactorily explain the source of the remaining Rs. 3,00,000. The unexplained portion may be added under Section 105, depending on the facts.
Example 3: Source is documented
An assessee pays Rs. 5,00,000 for repairs using a bank loan supported by a sanction letter, bank credit and payment records. If the evidence satisfactorily establishes the source, Section 105 should not be applied merely because the expenditure was substantial.
How can an assessee explain the source of expenditure?
Relevant supporting material may include bank statements, loan agreements and disbursement records, invoices, receipts, books of account, cash-flow statements, evidence of savings or earlier withdrawals, gift documentation and confirmation of genuine funding arrangements. The documents should connect the funds to the expenditure in question.
Where an addition is proposed, the assessee should respond to the notice, reconcile amounts and dates, and explain any apparent mismatch. A general statement that funds came from savings or family members may be insufficient without corroboration.
How is unexplained expenditure taxed?
Section 107 directs that income referred to in Sections 102 to 106 is taxed in accordance with Section 195. The applicable tax, surcharge and cess should therefore be computed using the operative provisions for the relevant tax year, rather than treating the amount as ordinary slab-rate income.
In addition, Section 105(2) expressly prohibits deduction of the expenditure deemed income under subsection (1). The same deemed amount cannot be used as a deductible expense to reduce taxable income.
Separate consequences relating to assessment, interest, penalties or prosecution, where applicable, require examination of their own statutory conditions; they do not arise automatically merely from the text of Section 105.
Section 105 of 2025 Act compared with Section 69C of 1961 Act
| Issue | Income-tax Act, 2025 | Income-tax Act, 1961 |
|---|---|---|
| Provision | Section 105 | Section 69C |
| Subject | Unexplained expenditure | Unexplained expenditure, etc. |
| Relevant period | Tax year | Financial year |
| Source explanation | Absent or unsatisfactory | Absent or unsatisfactory |
| Deduction | Expressly barred by subsection (2) | Barred by proviso |
The provision has been reorganized and simplified in the 2025 Act. Older decisions interpreting Section 69C may remain useful where the statutory principles and factual context are comparable.
Frequently asked questions
Is every cash expense unexplained expenditure?
No. The test is whether the source of the expenditure is satisfactorily explained. Other restrictions on cash payments may apply separately.
Can only a portion of an expense be added?
Yes. Section 105(1) expressly covers expenditure or part thereof.
Can expenditure deemed income be claimed as a deduction?
No. Section 105(2) disallows deduction of the amount deemed income under subsection (1).
Which section determines the rate of tax?
Section 107 refers the taxation of income under Section 105 to Section 195 of the Income-tax Act, 2025.
Which earlier provision corresponds to Section 105?
Section 69C of the Income-tax Act, 1961.
Official legal sources
Last reviewed: 10 November 2026. This article is general legal information; verify the legislation applicable to the relevant tax year and the facts of the assessment.