Decoding the Accounting of Purchases and Section 105 of the Income-tax Act, 2025

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 Interlinking Between Purchases and Section 105 of the Income-tax Act, 2025

 (A Technical Perspective for Tax Professionals)

1. Concept of Purchase Accounting

Purchase accounting forms the backbone of trading and manufacturing concerns. Purchases represent the cost of goods acquired for resale or for use in production. From an accounting standpoint, purchases are recorded when:

1. Ownership of goods is transferred.
2. A liability toward the supplier arises.
3. The transaction is supported by documentary evidence (invoice, delivery challan, GRN, etc.).

Under the mercantile system of accounting, purchases are recorded on an accrual basis, irrespective of payment. The correct recording of purchases ensures:

1. Accurate computation of Gross Profit
2. Proper valuation of closing stock
3. Correct determination of taxable income

Any misstatement—intentional or accidental—distorts profitability and tax liability.

2. Error of Omission (Unrecorded Purchase) – Explanation and Definition

An Error of Omission occurs when a transaction that should have been recorded in the books of accounts is completely or partially left unrecorded.

In the context of purchases, an unrecorded purchase may arise due to:

1. Failure to enter supplier invoices
2. Suppression of purchases to manipulate profit
3. Transactions conducted outside books (off-book purchases)
4. Loss of documentation

Types of Omission

1. Complete Omission – Purchase not recorded at all.
2. Partial Omission – Recorded in supplier ledger but omitted from purchase register or inventory records.

Implications

1. Artificial inflation of Gross Profit
2. Suppression of expenditure
3. Potential application of unexplained expenditure provisions
4. Exposure to penal consequences

Where purchases are made but not recorded, the issue transitions from an accounting lapse to a taxation concern.

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3. Section 105 of the Income-tax Act, 2025 and Section 69C of the Income-tax Act, 1961

The newly enacted Income-tax framework under the Income-tax Act, 2025 restructures and renumbers several provisions of the earlier law, namely the Income-tax Act, 1961.

Section 105 of the 2025 Act broadly corresponds to Section 69C of the 1961 Act.

Section 69C – Income-tax Act, 1961

Section 69C dealt with Unexplained Expenditure, providing that:

1. Where an assessee incurs expenditure, and
2. Offers no explanation about the source, or
3. The explanation is unsatisfactory,

The amount may be deemed to be income of the assessee.
Further, such unexplained expenditure was not allowed as a deduction.

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Section 105 – Income-tax Act, 2025

Section 105 continues the legislative intent in a modernized structure:

It provides that where an assessee:

1. Has incurred any expenditure, and
2. Fails to satisfactorily explain the source of such expenditure,

The amount shall be deemed income for that tax year.

Additionally:

1. No deduction shall be allowed in respect of such unexplained expenditure.
2. The burden of proof lies on the assessee.

Thus, Section 105 represents a continuity provision, strengthening anti-evasion measures under the new Act.

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5. Decoding Section 105

Section 105 can be understood in five analytical layers:

1) Expenditure Must Be Incurred

There must be evidence that expenditure has actually been incurred (e.g., purchase of goods, payments to suppliers).

2) Source Must Be Explained

The assessee must demonstrate:

1. Identity of source
2. Genuineness of transaction
3. Capacity of the funding source

3) Burden of Proof

1. The initial burden lies entirely on the assessee.

4) Deemed Income Provision

1. If explanation fails, the amount is deemed income—irrespective of actual profit.

5) No Deduction Allowed

Even though the expenditure is taxed as income, deduction is expressly denied.

This creates a double impact:

1. Increase in taxable income
2. Disallowance of corresponding expenditure

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6. Interlink Between Purchases and Section 105

The inter-link becomes critical in the following situations:

Scenario	Accounting Treatment	Tax Implication Under Sec 105
Purchase recorded but supplier non-genuine	Expense debited	May be treated as unexplained expenditure
Purchase made in cash without source	May or may not be recorded	Entire amount taxable as deemed income
Unrecorded purchase detected during survey	Not in books	Addition under Sec 105
Bogus purchase entries	Inflated expense	Disallowance + addition

Core Linkage

1. Unrecorded Purchases → Indicates possible unexplained expenditure.
2. Bogus Purchases → Indicates lack of genuineness.
3. Cash Purchases Without Trail → Raises source explanation issues.
4. Suppressed Purchases → Can distort stock reconciliation and trigger reassessment.

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7. Practical Risk Areas for Assessees

1. Transactions with accommodation entry providers
2. Circular trading
3. GST–Income Tax data mismatch
4. Stock variation during survey/search
5. Cash-intensive businesses

Where purchases cannot be reconciled with:

1. Stock records
2. Bank statements
3. Supplier confirmations

Section 105 exposure becomes imminent.

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8. Conclusion

The relationship between purchase accounting and Section 105 of the Income-tax Act, 2025 is deeply structural rather than incidental.

1. Purchase accounting determines profit.
2. Section 105 tests the legitimacy of expenditure.

An unrecorded or unexplained purchase does not remain a mere accounting error—it becomes a taxable event.

Thus, professionals must ensure:

1. Robust purchase documentation
2. Supplier due diligence
3. Banking trail integrity
4. Periodic reconciliation of stock and books

In the era of data analytics and cross-verification between regulatory databases, the interlink between purchases and unexplained expenditure provisions has become sharper and more enforceable than ever.

Disclaimer: This article is for academic and informational purposes only. It’s not legal advice or a substitute for professional judgment. Readers should verify provisions, check updates, and seek specific advice. No liability for errors or reliance.