Library / Income-tax Act, 2025: The Professional's Master Guide

46. Penalties

Default	New	Old	Penalty
Under-reporting of income	439	270A	50% of tax on under-reported income
Misreporting (false entries, suppression)	439	270A	200% of tax
Failure to get accounts audited	Penalty chapter	271B	0.5% of turnover, max Rs. 1.5 lakh
Cash loan or deposit of Rs. 20,000 or more	Penalty chapter	271D, 271E	Equal to the amount
Cash receipt of Rs. 2 lakh or more	Penalty chapter	271DA	Equal to the amount
TP documentation and reporting defaults	Penalty chapter	271AA, 271G, 271BA	Percentage of transaction value; delays in report now a graded fee

Illustration 151: Under-reporting

Additional income of Rs. 3,00,000 is assessed for a person in the 30% slab. Tax on it = Rs. 93,600. Penalty for under-reporting = 50% = Rs. 46,800. Immunity is available if tax and interest are paid and no appeal is filed, subject to conditions.

The Finance Act 2026 converted several technical penalties into fees and decriminalised minor defaults. Check the current section before quoting a penalty.

46.1 Under-reporting and misreporting in detail

Under-reporting includes	Misreporting includes (penalty 200%)
Assessed income higher than returned income	Misrepresentation or suppression of facts
Income assessed where no return was filed and income exceeds the exemption limit	Failure to record investments in the books
Reassessed income higher than earlier assessed income	Claiming expenditure not supported by evidence
Deemed total income under MAT or AMT provisions higher than returned	Recording false entries in the books
Reduction of losses declared	Failure to record receipts affecting total income
	Failure to report international or specified domestic transactions

The penalty is computed on the tax payable on the under-reported income. Certain amounts are excluded: where the taxpayer offers a bona fide explanation and discloses all material facts; where an estimate is made on the basis of the same material and the taxpayer's own estimate was reasonable; and additions based on transfer pricing where documentation was properly maintained.

Judicial view: Penalty principles

CIT v. Reliance Petroproducts (P) Ltd. (Supreme Court, 2010): making a claim that is not sustainable in law does not by itself amount to furnishing inaccurate particulars, where all facts were disclosed. The principle continues to guide the distinction between under-reporting and misreporting.

Union of India v. Dharmendra Textile Processors (Supreme Court, 2008): civil penalties do not require proof of wilful intent (mens rea); the statutory conditions and the taxpayer's explanation are what matter.

46.2 Immunity from penalty and prosecution

Available for under-reporting cases (not misreporting).
The taxpayer must pay the tax and interest within the period in the demand notice, and must not file an appeal.
Application within 1 month from the end of the month of receipt of the assessment order.
The Assessing Officer decides within 1 month; the order is final.

Illustration 152: Immunity decision

An addition of Rs. 10 lakh is made on an estimated basis for a trader in the 30% slab. Tax Rs. 3.12 lakh; potential penalty (50%) Rs. 1.56 lakh. The trader believes his appeal has a moderate chance. By seeking immunity, he pays Rs. 3.12 lakh plus interest and avoids the penalty and any prosecution risk. By appealing, he risks the penalty and litigation cost. A risk-weighted comparison helps him decide.

46.3 Other penalties at a glance

Default	Penalty (broad)
Failure to deduct or collect tax	Equal to the tax not deducted or collected
Failure to file TDS or TCS statement or filing incorrect statement	Rs. 10,000 to Rs. 1,00,000 (converted to fees in some cases by recent amendments)
Failure to comply with notices	Rs. 10,000 for each failure
Failure to keep books or documents, or TP documentation	Specified amounts or 2% of transaction value
Accountant or valuer furnishing incorrect report	Rs. 10,000 per report
Loans, deposits or receipts in cash above limits	Equal to the amount
Failure to furnish statement of financial transactions	Rs. 500 to Rs. 1,000 per day
Undisclosed foreign assets (Black Money Act)	Rs. 10 lakh for non-reporting; undisclosed foreign income or assets taxed at 30% with a further penalty of three times the tax

46.4 Prosecution and compounding

Prosecution is a criminal proceeding before a court, separate from penalty. The main offences are: wilful attempt to evade tax, penalty or interest; failure to pay TDS or TCS deducted or collected to the government; wilful failure to file a return; false statements in verification; and abetment. Punishments range from rigorous imprisonment of 3 months to 7 years with fine, depending on the amount and offence. For TDS, recent amendments provide that no prosecution will be launched if the tax is paid by the due date of filing the quarterly statement.

Most offences can be compounded by applying to the competent authority and paying the compounding charges prescribed in the CBDT guidelines. Compounding closes the prosecution. Serious offences and repeat offenders may not be eligible.

Judicial view: Duty to file returns

Sasi Enterprises v. ACIT (Supreme Court, 2014): the statutory obligation to file a return by the due date is independent of the assessment process, and prosecution for wilful failure to file can proceed even while assessment proceedings are pending.

Key point

Prosecution notices usually start with a show cause from the department. A prompt reply showing reasonable cause (for example, delay due to cash flow problems with subsequent payment, or no wilful intent) often leads to closure. Where compounding is available, it is usually the most practical route.

Chapter summary

• Under-reporting 50%; misreporting 200% of tax.

• Immunity for under-reporting if tax paid and no appeal filed.

• Prosecution for serious offences; compounding available in most cases.