Section 69C not applicable on addition for disallowance of expenditure of salary

Provisions of section 69C not applicable for addition made on account of disallowance of expenditure on employee salary and Wages – ITAT

In a recent judgment, ITAT Varanasi has held that provisions of section 69C not applicable for addition made on account of disallowance of expenditure on employee salary and Wages as the source of funds was not disputed.

ABCAUS Case Law Citation:
4993 (2026) (01) abcaus.in ITAT

In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming addition under section 69C of the Income Tax Act, 1961 (the Act) towards disallowance of increase in the compensation to Employees/Salary and Wages.

The appellant assessee was running a Petroleum Pump under dealership for retail sale. The assessee was maintaining regular books of account which were subjected to tax audit under section 44AB of the Act.

The Assessing Officer (AO) noted that the assessee had made payments under the head ‘Compensation to Employees/Salary and Wages’. He further noted that under the same head there was nearly 33% of the increase from last year.

The AO was of the view that this hike of 33% in absence of any new facility or installation of new petrol pump was not realistic and it is only an attempt to suppress profits. On adhoc basis, AO allowed benefit of only 10% hike in increase in expenses and remaining 23% hike was added back to the income of the assessee as unexplained expenditure u/s 69C of the Act.

Before the Tribunal the assessee challenged the applicability of section 69C of the Act and not the disallowance per se. The question before the Tribunal was as to whether in the facts and circumstances of the case, the provisions of section 69C are not attracted in respect of the disallowance made by the Assessing Officer on account of unexplained expenses under head compensation to employees/salary and wages or the issue is required to be set aside to the record of the Assessing Officer for fresh adjudication?

However, there was difference of opinion between Hon’ble Judicial Member and Hon’ble Accountant Member of the ITAT. Accordingly, the Third Member of the Tribunal passed the order deciding the question.

It was observed that Section 69C is a deeming provision in respect of any expenditure incurred by without offering explanation about the source of such expenditure or part thereof or the explanation of the assessee in the opinion of the AO is not satisfactory. Thus, the pre-condition for applying this deeming provision is that there is no explanation or the  explanation  is unsatisfactory about the source of expenditure incurred by the assessee.

The Third Member noted that in this case there was no dispute about the source of the expenditure but the AO had made the addition by making the disallowance of excess expenditure.  Hence, the provisions of section 69C of the Act were not applicable to the case in hand.

Accordingly, the Tribunal held that provisions of section 69C were not applicable as far as the disallowance of expenditure on employee salary and Wages.

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