2017 (8) TMI 858 - HC - Income Tax

Addition u/s 69C - CIT(A) confined the addition to only 5% of the amount spent on purchases based on past record of profits - sufficient good cause from submitting the explanation to justify the expenditure Held that - 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. 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 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.

Summary

Issues:
- Interpretation of Section 69C of the Income Tax Act, 1961
- Discretion of Assessing Authority in adding unexplained expenditure to income
- Impact of death of assessee on submission of explanation

Interpretation of Section 69C of the Income Tax Act, 1961:
The case involved an appeal related to the assessment year 2005-06 under Section 143(3) read with Section 148 of the Income Tax Act, 1961. The Assessing Authority added a sum as unexplained expenditure under Section 69C of the Act in the income of the assessee, which was later confined to 5% by the Commissioner of Income Tax (Appeals). The Income Tax Appellate Tribunal affirmed this decision. The key issue was whether the ITAT was justified in deleting the addition without the assessee filing any explanation before the Assessing Officer.

Discretion of Assessing Authority in adding unexplained expenditure to income:
Section 69C of the Act states that if an assessee fails to explain the source of expenditure, it may be deemed as income. The provision is discretionary, not mandatory, as highlighted in CIT, Ernakulam Vs. Smt. P.K. Noorjahan. The Assessing Officer has the discretion to add or not add such expenditure to the income of the assessee, even if no explanation is offered, provided it is done judiciously.

Impact of death of assessee on submission of explanation:
In this case, the assessee died before submitting an explanation, and the heirs had no knowledge of the business. The legal heirs were unable to explain the expenditure due to lack of information. The court emphasized that in situations where heirs are not involved in the business or lack knowledge, the Assessing Officer should consider not adding unexplained expenditure to the income. The discretion should be exercised in favor of the assessee when there are valid reasons preventing the submission of an explanation.

The court held that the Assessing Authority should have exercised discretion in favor of the assessee, considering the circumstances where the explanation could not be provided due to the death of the assessee and lack of knowledge by the heirs. As Section 69C is not mandatory, the Assessing Officer has the discretion to decide on adding unexplained expenditure based on judicial principles. Therefore, the Tribunal's decision to affirm the order of the C.I.T. (Appeals) limiting the addition to 5% of the expenditure was upheld, and the appeal was decided in favor of the assessee.