Unexplained Expenditure: Old Section 69C Is Now Section 105, And One Word Changed Everything

Most of the sections in this series carry forward with identical substance and a new number attached. This one is an exception. A single word changed between Section 69C and Section 105, and that one word removes a discretion that taxpayers have relied on in litigation for years.

Old law: Section 69C, Income Tax Act, 1961, titled Unexplained Expenditure

New law: Section 105, Income Tax Act, 2025, effective 1 April 2026, applicable from AY 2026-27

What the Section Says

Section 69C (old) and Section 105 (new) applies where an assessee has incurred expenditure during a financial year and either offers no explanation about the source of that expenditure, or the explanation offered is not satisfactory to the assessing officer. In that case, the amount of the expenditure can be treated as deemed income of the assessee for that year.

A proviso attached to this section, carried forward in both versions, adds a harsh twist: unexplained expenditure that gets added as deemed income under this section cannot be claimed as a deduction under any head of income at all, even indirectly. This means the addition is pure income with no offsetting relief, taxed at the flat rate under the applicable rate provision, an effective 78 percent after surcharge and cess.

What Actually Changed

Old Section 69C used the word may. The amount covered by such expenditure may be deemed to be the income of the assessee. Courts, including higher courts, interpreted this may as making the addition discretionary rather than automatic. Even where an assessee offered no explanation at all, or a wholly unsatisfactory one, the assessing officer technically retained discretion whether or not to treat the expenditure as income, based on the facts and circumstances of the case. This discretion became a genuine point of litigation, with taxpayers arguing in multiple cases that an addition should not automatically follow just because an explanation was found lacking.

Section 105 replaces may with shall. If no explanation is offered, or the explanation offered is unsatisfactory, the amount shall be deemed to be income. This is a mandatory deeming provision now, not a discretionary one. The assessing officer no longer has room to decline making the addition once the two triggering conditions, unexplained source and unsatisfactory explanation, are met.

Summary of what changed:

• Section number: 69C becomes 105
• Operative word: may becomes shall, converting a discretionary addition into a mandatory one
• The no-deduction proviso carries forward, now written as a clearly separated sub-section, 105(2), instead of a proviso clause attached to the main provision
• The underlying test, unexplained source and unsatisfactory explanation, remains otherwise unchanged

This is being described by tax commentators as a fundamental shift, not a cosmetic one, because it removes an argument that assessees have successfully used in the past to resist additions even when their explanation was weak.

Worked Example

Old position, Section 69C, applicable up to AY 2025-26:

During scrutiny of Mr. Nair's return for FY 2025-26, the assessing officer finds cash expenditure of Rs. 12,00,000 on home renovation that does not match any withdrawal pattern from his bank accounts or any other disclosed source. Mr. Nair offers a vague explanation involving small cash savings accumulated over several years, which the assessing officer finds unsatisfactory. Under the old Section 69C, even after rejecting the explanation, the officer retains some discretion under the may language, and Mr. Nair's counsel argues in appeal that the addition should be set aside given certain mitigating facts about his family's cash-holding habits, a defense courts have entertained in the past precisely because of the discretionary wording.

New position, Section 105, applicable from AY 2026-27:

Same facts, same renovation expense, occurring in FY 2026-27. The assessing officer rejects the explanation as unsatisfactory. Under Section 105's shall language, the addition of Rs. 12,00,000 is now automatic once that rejection is recorded. Mr. Nair's counsel no longer has the discretionary-language argument available as a line of defense. The addition proceeds, taxed at the effective 78 percent rate, with no deduction available under Section 105(2), and the only real avenue left is to challenge whether the explanation was, in fact, satisfactory in the first place, not whether the officer should have exercised discretion not to add it.

Why This Matters for Filing

• The shift from may to shall means the quality of the source explanation matters more than ever. There is no fallback discretionary argument left once an explanation is found unsatisfactory, so the explanation itself needs to be built on real, verifiable documentation, not general assertions about accumulated savings or informal cash habits.
• For any client with large cash-funded expenditure, whether renovation, weddings, or big-ticket purchases, insist on documenting the source before the expenditure happens, not after a notice arrives. Bank withdrawal trails, gift documentation, and loan agreements all strengthen the explanation and reduce the risk of an automatic addition.
• Past appellate strategies built around the discretionary nature of Section 69C will not transfer cleanly to Section 105. Any advisory built on that line of argument needs to be retired for expenditure incurred from FY 2026-27 onwards.
• This section continues to sit alongside Section 102 (unexplained credits), Section 103 (unexplained investments), and Section 104 (unexplained assets), all sharing the same effective 78 percent rate and no-deduction treatment, so a client facing one type of addition should be reviewed for exposure under the others too.

Bottom Line

Section 69C has become Section 105, and this is the one genuine language change in the entire unexplained-income family that practitioners cannot afford to treat as routine renumbering. May became shall. What used to be a discretionary addition is now a mandatory one the moment an explanation fails to satisfy the assessing officer. The defense has shifted entirely to getting the explanation right the first time, since there is no fallback argument left once it does not hold up.