Section 105 of the Income-tax Act, 2025 — Unexplained Expenditure Taxed as Deemed Income

In plain language

What Section 105 says in plain English

Section 105 of the Income-tax Act, 2025 deals with unexplained expenditure. It says that where you have spent money during a tax year and you either offer no explanation about the source of that money, or the explanation you give is not satisfactory in the opinion of the Assessing Officer (AO), the amount of that expenditure will be deemed to be your income for that tax year. In short: if you cannot show where the money to spend came from, the department treats the spending itself as your hidden income and taxes it.

This section is part of the "aggregation of income / deemed income" family (Sections 102 to 106), which also covers unexplained cash credits, unexplained investments, unexplained money, and unexplained bullion/jewellery. Section 105 is the direct successor to the well-known Section 69C of the Income-tax Act, 1961.

The big change from Section 69C (1961)

• "May" became "shall": Section 69C used the words "may be deemed to be the income". Section 105 uses "shall be deemed to be the income". The AO no longer has discretion — once the source is unexplained or unsatisfactory, the addition is mandatory.
• Deduction fully blocked: Section 105 states that, notwithstanding anything else in the Act, the deemed amount shall not be allowed as a deduction under any provision of the Act. So you are taxed on the spending AND you cannot claim that same spending as a business expense.

Who it applies to

• Every type of assessee — individuals, HUFs, firms, LLPs, companies, AOPs. There is no minimum threshold; even a modest unexplained outgo can be added.
• Most commonly triggered during scrutiny assessments, search and survey operations, and where bank statements, credit-card spends, property purchases or lifestyle do not match declared income.

How it is taxed — the sting is in Section 195

Deemed income under Sections 102–106 (which includes Section 105) is not taxed at your normal slab. Under Section 195 of the Income-tax Act, 2025, it is taxed at a flat special rate. The 2025 Act originally set this at 60%. The Finance Act, 2026 reduced it to 30% for tax years from 2026-27 onwards — a significant relief. On top of the 30% base tax, a surcharge of 25% and health & education cess of 4% apply, giving an effective rate of roughly 39%.

• No basic exemption limit is available against this income.
• No deduction for any expenditure or allowance is allowed.
• No set-off of any loss is permitted against it.

Penalty exposure

Earlier the 2025 Act carried a separate flat 10% penalty on such deemed income. Under the Finance Act, 2026 rationalisation, unexplained income has been folded into the general "misreporting of income" penalty framework, where penalty can be as high as 200% of the tax payable. In serious search cases, prosecution is also possible. So the real cost is tax + surcharge + cess + penalty.

Practical implications

• Keep a money trail. Explaining expenditure means proving where the funds came from — salary, withdrawals, loans, gifts (with donor confirmation), past savings, sale proceeds. Bald claims without documents usually fail.
• Onus is on you. The burden of proof lies on the assessee to satisfy the AO; the department only needs to point to the unexplained spend.
• Double hit for businesses. A cash purchase you cannot substantiate can be added as income under Section 105 and simultaneously disallowed as a purchase — hitting profits twice.