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HIGH COURT OF JUDICATURE AT ALLAHABAD

Court No. - 3

Case :- INCOME TAX APPEAL No. - 195 of 2016

Appellant :- Pr. Commissioner Of Income Tax, Varanasi

Respondent :- Late Rama Shankar Yadav
Counsel for Appellant :- Manu Ghildiyal
Counsel for Respondent :- Ashok Trivedi

Hon'ble Pankaj Mithal,J.

Hon'ble Umesh Chandra Tripathi,J.

Heard Sri Manu Ghildiyal, learned counsel for the appellant-department and Sri Ashok Trivedi, learned
counsel for the respondent assessee now represented by his heirs and legal representatives.

The appeal relates to the assessment year 2005-06. For the said assessment year an order of
assessment under Section 143(3) read with Section 148 of the Income Tax Act, 1961 (hereinafter referred
to as the Act) was passed on 16.12.2008 by the Assessing Authority.

The Assessing Authority after notice added a sum of Rs.60,15,296/- as the unexplained expenditure
under Section 69C of the Act in the income of the assessee which he had incurred in making purchases
during the period 01.04.2004 to 31.03.2005 from one M/s Chirag Deep Video, Varanasi.

On appeal being preferred, the Commissioner of Income Tax (Appeals) confined the aforesaid addition to
only 5% of the amount spent on purchases by holding that the profits on the said expenditure/purchases
would not have been more than that as per the past record of profits of the assessee.

The aforesaid order of the C.I.T. (Appeals) has been affirmed by the Income Tax Appellate Tribunal vide
order dated 24.02.2016.

The Department in challenging the aforesaid order of the ITAT� has raised the following question of law
for the consideration of this court:-

Whether in the facts and circumstances of the case, ITAT is justified in deleting the addition on account of
unexplained purchases of Rs.60,15,296/- without appreciating the fact that at no stage the assessee filed
any explanation before the Assessing Officer?

The aforesaid addition was made by the Assessing Authority under Section 69C of the Act, it is, therefore,
relevant to re-produce it before moving ahead.

Section 69C of the Act reads as under:-

"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."

A plain and simple reading of the aforesaid provision reveals that where in any financial year the
assessee incurs any expenditure and he fails to offer any explanation to justify the source of such
expenditure or if the explanation offered is not satisfactory, the amount covered by such explanation or
part thereof as may be necessary, may be deemed to be the income of the assessee for the said financial
year.

The language of Section 69C of the Act stipulates two conditions necessary for deeming the expenditure
incurred by the assessee to be his income for the said year (i) where no explanation is offered; and (ii)
where the explanation offered is not found to be satisfactory.

At the same time, the use of the word "may" in the aforesaid provision makes the deeming provision
discretionary and not mandatory. In other words, even if not explanation is offered or it is found to be
unsatisfactory, it is not mandatory to treat such unexplained expenditure to be the income of the
assessee.

This position is well settled in law vide CIT, Ernakulam Vs. Smt. P.K. Noorjahan AIR 1999 Supreme Court
1600 which lays down that the provisions of Section 69A of the Act which are pari materia to Section 69C
of the Act are not mandatory inasmuch as the legislature had used the word "May" in� the provision.

Therefore, the Assessing Officer has full discretion to add or not to add any such expenditure or any part
thereof in the income of the assessee for the financial year in question even if no explanation has been
offered or if offered is not found to be satisfactory provided the discretion is exercised in a judicious
manner.

There is no dispute that in pursuance to the notice requiring the assessee to submit explanation regarding
the aforesaid expenditure, the assessee had not furnished any explanation whatsoever. The record�
reveals that the notice was served upon the assessee on 23.09.2011 fixing 10.10.2011 for submitting the
explanation but before the expiry of time fixed for submitting the explanation,� the assessee died on
02.10.2011.

The legal heirs of the assessee in response to the said notice submitted that they have no knowledge of
the business of their deceased father or about the purchases alleged to have been so made by him.

In these circumstances, there was no explanation as contemplated under Section 69C of the Act from the
side of the assessee on record.

Thus, taking a technical view of the matter the Assessing Authority added the unexplained expenditure as
the deemed income of the assessee in the said assessment year.

In the facts and circumstances of the present case, the assessee could not submit the explanation within
the time allowed due to his death and the heirs were unable to explain the same as they had no
knowledge of the business of their deceased father.

The assessee and his heirs were prevented for sufficient good cause from submitting the explanation to
justify the expenditure or its source.

One cannot loose sight of the fact that in situations where the proprietor of the business dies and his heirs
are not in business or are not connected with the business of the deceased they may not be in a position
to furnish any explanation about the business. There may be cases where they may be living and serving
outside and are totally unconnected with the business of the deceased.
Therefore, it is to meet such type of contingency that the legislature in its wisdom has conferred a
discretionary jurisdiction upon the Assessing Officer to add or not to add such unexplained expenditure in
the income of the deceased even if there is no explanation.

In view of the above and the peculiar facts and circumstances of this case it is the most appropriate case
where such a discretion ought to have been exercised by the Assessing Authority in favour of the
assessee by not adding the unexplained expenditure in the income of the assessee inasmuch as the
assessee could not furnish the explanation for reason beyond his control.

The question raised above is answered in favour of the assessee and against the department and it is
held that as the provision of Section 69C of the Act is not mandatory in nature, the Assessing Authority
has full discretion either to add or not to add the unexplained expenditure in the income of the assessee
based upon sound judicial principles and therefore, the Tribunal has not committed any error of law in
affirming the order of the C.I.T. (Appeals) by which the addition under Section 69C of the Act has been
confined to only 5% of the expenditure.

The appeal stand decided accordingly.

Order Date :- 18.8.2017

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