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Unexplained Expenditure: Taxation @ 78% Flat
Mr. Smart has incurred Rs. 75 Lakh in the marriage of the daughter in the year 2019. The income tax Department got to know about the expenses incurred by Mr. Smart during the course of income tax survey conducted in 2022 at the premises of M/s. Hotel Fun wherein the documents of payment/receipts were found. Expenses incurred by Mr. Smart was paid out of the unrecorded source of payment. As a result, the amount was taxed in the hands of Mr. Smart. The rate of tax applicable in such a case was 78% plus interest and penalty. Though the maximum tax rate of tax is 31.20% in normal course, there are few income / expenses wherein tax rate could be in between 78% to 138%.
Apart from the data obtained through income tax raids & surveys, the Income Tax Department is getting the financial information of the citizens from multiple sources which includes the GST Department, Travel Agents, Police, CBI, GST Department, SEBI, Banks, Registrar of Companies (ROC), etc. This data is very intensely used extensively by the Income Tax Department to check the cases of tax evasion and leakages.
There are various cases in the history of Income Tax proceeding where the amount is taxed by the income tax department considering it as “Unexplained expenditure” under section 69C of the Income Tax Act-1961. Let us know more about it. Section 69C of the Income Tax Act-1961 reads as under:
Unexplained expenditure, etc.
Section 69C: Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the Assessing Officer, satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial year:
Provided that, notwithstanding anything contained in any other provision of this Act, such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income.
Some of the most common instances wherein the taxpayers are subject to tax as a result of “unexplained expenditure” are as under:
- Low Personal Expenditure/ Withdrawals:
The taxpayers are expected to incur the personal expenditure for day to day routine & family maintenance. The expenses are normally in the nature of household expenses, electricity bill, petrol, telephone expenses, personal tour expenses, hotel expenses etc. All such expenses are expected to be incurred out of the regular fund flow of the taxpayers. If the amount shown as personal expenditure is less than satisfactory or reasonable level, then the income tax officer presumes that the taxpayers has incurred unexplained expenditure and tax it u/s 69C. Taxpayers must review the personal expenditure and its proper recording so as to avoid its treatment as “Unexplained expenditure”.
In the case of Ashok Kumar Gupta Vs. ITO (2017) 86 Taxmann.com 118 (Delhi), Income Tax Officer (ITO) noted that the amount of household expenditure declared by the assessee of Rs. 7,59,723/- appears to be on a lower side. The conclusion was arrived at by looking at joint family set up & the figures of overall expenses. With this the amount of Rs. 3 lakh was taxed as unexplained expenditure in the hands of the taxpayers.
In the case of Radheshyam Agrawal s. ITO (2015) 61 Taxmann.com 427 (Jaipur), ITO observed that no withdrawals of house expenses was shown by the Taxpayers. The courts upheld the taxation of unexplained expenditure by holding that no evidence was produced by the taxpayers to demonstrate & justify the quantum of withdrawals by two sons. The court rejected the submission of the taxpayers that taxpayers did not contribute any household expenses.
- Foreign Tour Expenses:
Foreign tour and travel expenses are on the radar of the income tax department in various proceedings. By introducing TCS on foreign tour packages, the information related to foreign tours is mostly available in the vast database & records of the taxmen. The taxpayers must keep the records of foreign tours so as to avoid its taxation as “Unexplained expenditure”. There are instances when the tickets for foreign travels are booked and paid by the son/daughter / relatives living abroad. The proper documents / records may help taxpayers in avoiding the taxation of any amount as “unexplained expenditure”.
- Marriage/Birthday or other Party Celebration:
The undocumented & unrecorded expenses on marriage, Birthday, Party celebration, etc. often results in its treatment as “Unexplained expenditure”. The taxpayers may note that documentary evidence in support of the expenditure as well as explanation with regards to its reasonableness backed by fund flow from account is necessary so as to avoid the taxation in the hands of the taxpayers as “unexplained expenditure”.
- Other Payment vis a vis Unexplained Expenditure:
Other routine amounts which may be treated as unexplained expenditure could be heavy credit card bills payment, education expenses paid without known source of payment, medical treatment expenses out of unaccounted money, unrecorded construction expense, household furniture or appliances expenses from unknown sources, etc.
Impact of treating any amount as Unexplained Expenditure
The treatment of any amount as “Unexplained Expenditure” is very hostile. It carries following repercussion:
- The amount is liable to be taxed @ 78% (It is taxable U/s 115BBE @ 60% tax rate plus 25% surcharge thereon and 4% education cess thereon).
- The amount may further attract penal & prosecution provision.
iii. The benefit of the basic exemption limit is not at all available to the taxpayers against such unexplained income.
- The amount treated as unexplained expenditure is not eligible for any deduction against any other income of the taxpayers.
Though the taxpayers may be filing income tax returns incorporating all the details of income, still there are instances where the expenditure and its correlation with income vis a vis available recorded funds is not reviewed at the time of filing it. It results in its treatment as “unexplained expenditure” of the taxpayers. As a precautionary measure, taxpayers must keep the fund flow statement in respect of all major financial events so as to avoid any taxation as “unexplained expenditure”.
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