Section 69 of Income Tax Act: Unexplained Investments
Reproducing Section 69:
Where in the financial year immediately preceding the assessment year the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year.
In Simple words, Section 69 if the Income- Tax Act says that Where an assessee had made investments but failed to record them in books of accounts if any maintained by him for any source of income, the value of such investments is deemed to be his income provided
- The assessee offers no explanations about the nature and source of investments.
- The explanation offered by him is not found satisfactory by the assessing officer.
Analysis of Section 69:
By reading above it is clear that the investment shall be deemed to be the income of the assessee only in the case where both the conditions are fulfilled i.e. investments made in the financial year is not recorded in the books AND no satisfactory explanation is offered by the assessee Since the word “AND” has been used in the section. One thing must be noted that this is a deeming provision means even if assessee has no real income it may be deemed to be his income for that year.
The use of the words ‘if any’ in the section indicates that it is not compulsory that the assessee must have maintained the books of accounts. He can prove the genuineness of the investments by some other evidence which proves investment out of disclosed source.
The word ‘explanation’ indicates that the opportunity of being heard must be given to the assessee to prove the nature and source of investments. The use of word ‘may’ and absence of the word ‘shall’ in the section indicates that the Assessing Officer has discretion to treat the particular investment as the income of the investor-assessee depending of the facts and circumstances of each case at a particular situation of time.
Financial year in which the investment is made may be taken as the previous year [Ram Swarup vs. CIT 192 ITR 537].
Where the assessee gives a credible explanation that is found to be satisfactory, no addition can be made to his income [CIT vs. Nitin 248 ITR 478]
Explanation should not be called for belatedly
The length after which an assessee is called upon to explain a transaction is relevant factor while considering the sufficiency of the evidence. After the lapse of a decade an assessee should not be placed upon the rack and called upon to explain not nearly the origin and source of capital contribution but also the origin and source of that source as well.[S.Hastimal vs. CIT (1963) 49 ITR 273]; Upasana vs. CIT 229 ITR 220.
Discrepancies in stores may be treated as undisclosed income
If there are differences between the value of stocks declared hypothecated to the bank and the value recorded in assessee’s books and the assessee failed to explain the differences, no exception could be taken to the addition made by the authorities[Century foam p ltd Vs. CIT (1994) 210 ITR 625].
Where books of accounts reveals sales but there is no corresponding material to show that the assessee could purchase the commodity for the purposes of offering for sales the situation is an invitation to assessee to explain as to how and from what source he held the amount of the commodity with regards to its purchase before it was offered for sale. In absence of an explanation the deeming provision of section 69 is applicable [CIT vs. Anandarajan (1997) 228 ITR 664]
Secrete dealings are covered
Where the sales were conducted by the assessee secretly and were not entered in his books of accounts and the relevant dealings involved assessments, additions could be made by invoking section 69[Himmatram Laxminarain Vs. CIT(1986) 161 ITR 7]