Sections 104 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
After unexplained credits and investments (sections 102 and 103), the Act treats three more items as income: an unexplained asset (section 104), unexplained expenditure (section 105), and amounts borrowed or repaid through a hundi or an instrument other than an account payee cheque (section 106). Section 107 says that all of them are charged to tax as per section 195. This article reads the four sections as per the Income-tax Act, 2025 as amended by the Finance Act, 2026; later amendments, rules and notifications should be checked. If you are responding to a notice on such items, our legal dispute resolution service can help.
An asset not recorded in the books (or whose acquisition cost exceeds the recorded amount) and expenditure whose source is unexplained are deemed income if the explanation is missing or unsatisfactory in the opinion of the Assessing Officer. An amount borrowed or repaid through a negotiable instrument or hundi, otherwise than an account payee cheque, or through a mode specified by the Board, is deemed income of the borrower or repayer. Unexplained expenditure is not deductible. All of this is charged to tax under section 195.
Section 104: unexplained asset
Sub-section (1)
Where in any tax year an asset is found to be owned by or belong to the assessee which is not recorded in the books of account, if any, maintained for any source of income, or the Assessing Officer finds that the amount expended in acquiring the asset exceeds the amount recorded in such books, and:
- (a) the assessee offers no explanation about the nature and source of acquisition of the asset, or the excess amount; or
- (b) the explanation offered is, in the opinion of the Assessing Officer, not satisfactory,
the value of the asset, or the excess amount, is deemed to be the income of the assessee of the tax year in which the asset was found to be owned by or belong to the assessee.
Sub-section (2): meaning of "asset"
For section 104, "asset" includes money, bullion, jewellery, virtual digital asset or other valuable article.
Example (invented). During a verification, gold ornaments worth Rs. 4,00,000 are found in the possession of Harish, and they are not recorded in any books he maintains. He offers no explanation about the nature and source of their acquisition. Rs. 4,00,000 is deemed to be his income of the tax year in which the ornaments were found to belong to him.
Section 105: unexplained expenditure
Sub-section (1)
Where any expenditure has been incurred by the assessee in any tax year, and:
- (a) the assessee offers no explanation about the source of the expenditure or part of it; or
- (b) the explanation offered about the source is, in the opinion of the Assessing Officer, not satisfactory,
the amount covered by the expenditure, or the part, is deemed to be the income of the assessee for that tax year.
Sub-section (2): no deduction
Irrespective of any other provision of the Act, the amount deemed as income under sub-section (1) is not allowed as a deduction under the Act. The deemed income cannot be reduced by claiming the same amount as an expense.
Example (invented). Pooja spends Rs. 2,50,000 on a family function in a tax year and gives no explanation of the source. The Assessing Officer is not satisfied. Rs. 2,50,000 is deemed to be her income for that tax year and, under sub-section (2), she cannot claim it as a deduction.
Section 106: amounts borrowed or repaid through a hundi or similar
Sub-section (1)
Where any amount (including interest) is borrowed or repaid through a negotiable instrument or on a hundi, otherwise than an account payee cheque, or through any mode specified by the Board in this behalf, the amount so borrowed or repaid (including interest paid on the borrowed amount) is deemed to be the income of the person borrowing or repaying, as the case may be, for the tax year in which the amount was borrowed or repaid.
The text of section 106(1) is not as clear as it could be about the relation between the two limbs: it names the cases of a negotiable instrument or hundi "otherwise than an account payee cheque" and, separately, "any mode as specified by the Board". Which modes the Board has specified is not in the text consulted.
Sub-section (2): no second assessment on repayment
Where the amount borrowed under sub-section (1) has been deemed to be the income of any person, that person is not liable to be assessed again in respect of the amount under that sub-section on repayment.
Example (invented). Imran borrows Rs. 3,00,000 on a hundi, not an account payee cheque. Rs. 3,00,000 is deemed to be his income for the tax year in which it was borrowed. When he later repays the borrowed amount, section 106(2) says he is not assessed again on it under section 106(1) as the repayer. The sub-section does not say anything about the interest component; read section 106(1) for what is included.
Section 107: charge of tax
Income referred to in sections 102, 103, 104, 105 and 106 is charged to tax as per the provisions of section 195. The rate is in section 195, which was amended by the Finance Act, 2026; read the rate from that section as it now stands. No rate is quoted here. See the live note on section 195.
Side-by-side table
| Section | Trigger | Year of income | Deduction against it |
|---|---|---|---|
| 102 | Unexplained sum credited in books | Tax year of the credit | Not stated in section 102 |
| 103 | Unrecorded or under-recorded investment | Tax year of the investment | Not stated in section 103 |
| 104 | Unrecorded asset, or cost exceeding recorded amount | Tax year in which the asset is found | Not stated in section 104 |
| 105 | Expenditure with unexplained source | Tax year of the expenditure | Barred by section 105(2) |
| 106 | Borrowing or repayment through hundi, etc. | Tax year of borrowing or repayment | Not stated in section 106 |
The first two rows are in our article on sections 101 to 103.
What to prepare when an explanation is called for
- Source documents. Each section asks for the nature and source (or the source, for expenditure); keep the bank and payment records that show them.
- The mode of payment. For loans and repayments, section 106 turns on the mode: an account payee cheque is the instrument the section carves out, and the Board may specify modes; read the section and any specification together.
- The year. Check which tax year each section places the deemed income in: the year of expenditure, the year the asset was found, or the year of borrowing or repayment.
- The rate. Read section 195 as it now stands.
The sections on set-off of losses that follow in Chapter VII start with the live note on section 108; losses against income deemed under these sections are not dealt with in sections 104 to 107, so check the loss provisions themselves.
Need help with a notice on unexplained items?
Each of these sections depends on what the assessee can show about source, mode of payment and timing. Our legal dispute resolution team can help you assemble records and prepare a reply.
Key takeaways
- Section 104 deems an unexplained asset (or excess cost) to be income of the year it is found.
- Section 105 deems unexplained expenditure to be income and bars any deduction for it.
- Section 106 deems amounts borrowed or repaid by hundi or by instruments other than an account payee cheque, or through a mode specified by the Board, to be income.
- A borrower who has been taxed under section 106(1) is not assessed again under that sub-section on repayment.
- Section 107 charges all of these as per section 195.
Read next
- Sections 101–103: total income, unexplained credits and investment
- Sections 113–115: speculation, specified business and specified activity losses
- Section 108: set off within the same head
- Income-tax Act 2025 Chapter VI
Disclaimer: Based on the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026, as consulted on 2 October 2026. It explains the words of the Act only; the Income-tax Rules, 2026, notifications, circulars, later amendments and the way the tax authorities and courts apply these provisions should be checked. This article is general information, not legal advice; check the official text before acting.