Sub-section (1) deems the amount of any expenditure incurred by an assessee in a tax year to be his income for that year where he offers no explanation about the source of the expenditure or part of it, or where the explanation he offers is, in the Assessing Officer's opinion, not satisfactory. Sub-section (2) adds, overriding any other provision of the Act, that the amount so deemed to be income is not allowed as a deduction.
Why it is there
Spending is evidence of income, so where the source of the spending cannot be explained the Act taxes the amount spent rather than requiring the department to trace the receipt. Sub-section (2) prevents the same amount being claimed as a business or other deduction, so it is taxed gross.
Who it applies to
An assessee who has incurred expenditure in a tax year
The Assessing Officer (who forms the opinion on whether the explanation is satisfactory)
What this means in practice
The burden sits on the assessee: it is for you to explain the source of the expenditure, and an explanation the Assessing Officer considers unsatisfactory has the same result as offering none. The sting is in sub-section (2) — the deemed income cannot be offset by claiming the same outlay as an expense, so the whole amount is added. Section 107 charges income deemed under this section at the rate in section 195 rather than at ordinary slab rates.
An example
Illustrative only, and invented for this page. The figures are chosen to show the rule biting, not taken from any real matter.
During an assessment the Assessing Officer finds that a firm spent Rs. 30 lakh in the tax year on renovating its premises and can point to no source for Rs. 18 lakh of it. That Rs. 18 lakh is deemed to be the firm's income for the year under sub-section (1)(a) — the section bites on the unexplained part alone, since clause (a) speaks of 'such expenditure or part thereof'. Sub-section (2) then does the second half of the damage: overriding every other provision of the Act, the Rs. 18 lakh cannot be claimed as a deduction, so it is taxed gross and the renovation yields no relief at all. The same follows under clause (b) where an explanation is offered but the Assessing Officer does not find it satisfactory.
Where you meet this section
In an assessment or reassessment order, and in the show-cause notice preceding it, where the Assessing Officer records that the source of an expenditure was not explained or that the explanation was not satisfactory. The amount then appears twice in the computation — once as deemed income and once as a disallowed deduction.
The words themselves
the explanation offered about the source of such expenditure by the assessee is not satisfactory in the opinion of the Assessing Officer, then, the amount covered by such expenditure or part thereof, shall be deemed to be the income of the assessee for that tax year
s.105(1)(b), Income-tax Act, 2025.
What people get wrong
Assuming the expenditure remains deductible in the business computation. Sub-section (2) overrides the rest of the Act and denies any deduction for the amount deemed to be income.
Thinking the section bites only on wholly unexplained spending. Clause (a) covers 'such expenditure or part thereof', so a partly explained outlay can be assessed to the extent unexplained.
Overlooking the charging consequence. The rate comes from section 195 through section 107, not from the ordinary rates applicable to the assessee.
What this replaced
The correspondence is the Income Tax Department’s own, from its comparison utility for the 1961 and 2025 Acts. A renumbering is the easy half; whether the words changed is the half that decides cases.
Read this before you rely on it. Every decision below was decided under the Income-tax Act, 1961. It appears here because it is tagged to a 1961 provision that the department’s own mapping carries to section 105. That is an inference we have drawn, not a holding on the new section: where the words changed in the move, the reasoning may not survive. Treat this as the place to start looking, not as authority on the 2025 Act.
N.K. Proteins Ltd v DCITSupreme CourtHelps departmenttagged s.69C Can the whole of a bogus purchase be added, rather than a percentage?
CIT v Ratanlal Vyaparilal JainHigh CourtHelps taxpayertagged s.69C Does the jewellery instruction explain the source of the gold, or only stop the department seizing it?
PCIT v Drisha Impex (P) LtdHigh CourtHelps departmenttagged s.69C The Tribunal gave me a small percentage addition on disputed purchases. Can the department get the whole disallowance back on appeal?
PCIT v Kanak Impex (India) LtdHigh CourtHelps departmenttagged s.69C The officer says my purchases are accommodation entries. Can he add the whole purchase, or only a percentage?
PCIT v Mohommad Haji Adam & CoHigh CourtHelps taxpayertagged s.69C Your purchases are called bogus but your sales were accepted. How much can be added?
PCIT v Rajesh Suresh ChopraHigh CourtHelps taxpayertagged s.69C If an estimate on the disputed purchases cannot be avoided, is there a High Court figure I can point to?
Ankit Gems (P) Ltd v ITOITATHelps taxpayertagged s.69C The officer says I took accommodation entries from a party I have never dealt with. What do I actually have to do?
DCIT v ACE Infracity Developers P LtdITATHelps taxpayertagged s.69C My lenders are NBFCs that make hundreds of loans. How much of their own affairs do I have to prove?
DCIT v Rajeev G KalathilITATHelps taxpayertagged s.69C The only thing against my supplier is that the indirect-tax authorities have put him on a list. Is that enough to make my purchase bogus?
Diach Chemicals and Pigments P Ltd v DCITITATHelps taxpayertagged s.69C The department says my purchases are bogus. Do the suppliers' returns and the input credit allowed on those invoices count for anything in the…
Nand Lal Popli v DCITITATCuts both waystagged s.69C I return income under 44AD. Can the AO treat the balance of my receipts as expenditure actually incurred?
Seo Lehenga House v DCITITATHelps taxpayertagged s.69C I have already offered the profit on the disputed transactions. Can the officer add the broker's commission on top under s.69C?
What this page does not tell you. It does not reproduce the section. Everything above was written from the section’s own text as the Income Tax Department publishes it — the text is here, and nothing here is advice on your facts. Where a figure matters, read the sub-section it comes from.