Income Tax Penalties Under the Income Tax Act

Here are some of the most common income tax penalties which are levied by the income tax department –

Watch this video to learn more about penalties under Income Tax Act.

Penalty for non-intimation of Aadhaar number

A new section 234H has been introduced by the Finance Bill 2021. The section specifies payment of a fee up to Rs 1000/- for not intimating your Aadhaar number. If you are required to furnish your AADHAR number to Income Tax Authorities and fail to do so, in such a case, this fee will be applicable. One common instance can be the non-linking of PAN and Aadhaar by the due date.

It is important to note that every person who has been allotted PAN on or before 1 July 2017 is required to link it to his/her AADHAAR number, else the PAN card will become inoperative, and all the procedures in which PAN is required will become halted.

Penalty for default in tax payment

A demand notice can be sent by the income tax department to the tax-payer for payment of tax, penalty, fine, interest or any other sum payable under Section 156. After receiving the notice, if the taxpayer does not pay the tax due within 30 days of getting the notice, a penalty for default in tax payment would be levied. The amount of penalty would depend on the Assessing Officer, and it would not exceed the total tax due

Penalty for default in paying Self-Assessment Tax

If the tax-payer is supposed to pay a self-assessment tax under the provisions of Section 140A (1) and if such self-assessment tax is not paid (either partly or fully) within the specified period, a penalty would be levied. The amount of penalty would again depend on the Assessing Officer, and it would not be more than the total tax due. Moreover, if the assessee fails to provide the return of income within the specified due date, a fee would be payable. This fee would be INR 5000 if the returns are furnished on or before 31st December of the assessment year. Moreover, if the total income is up to INR 5 lakhs, the fee would be INR 1000.

Penalty for underreporting and misreporting of income

Under-reporting of income means showing a lower income than earned so that the tax liability is reduced. If the income of the taxpayer is found to be higher than the income reported, a penalty would be levied for under-reporting of income under section 270A. The penalty would be equal to 50% of the tax liability calculated on the under-reported income. If, however, the taxpayer has resorted to misreporting income so that the income can be under-reported, the penalty would increase. In such cases, the penalty would be 200% of the tax liability calculated on the misreported income.

Penalty for not maintaining books of accounts and/or other required documents

As specified under the Income Tax Act, taxpayers are required to maintain their books of accounts according to Section 44AA. If such books of accounts are not maintained as per the provisions of this Section, a penalty would be payable under Section 271A. The amount of penalty would be INR 25,000.

If the taxpayer has entered into an international transaction, information and documentation of such transaction are required to be maintained. The income tax department might require the submission of these documents, and if the taxpayer fails to submit the required documents within 30 days of their demand, a penalty would be levied under section 271AA. The penalty would be 2% of the value of the international transaction or specified domestic transactions. If the taxpayer is an entity of the international group, the penalty might increase to INR 5 lakhs.

Penalty if a search discloses unreported income

Tax authorities usually conduct a search of the taxpayer's premises to find undisclosed income. In the case of such searches, if the tax authorities find undisclosed income, a penalty would be levied on such income under the provisions of Section 271AAB. The quantum of penalty would be as follows –

30% of the undisclosed income discovered by the tax authorities will be payable as a penalty. The assessee should admit the undisclosed income, give its source, and pay tax on the income along with interest on or before the due date. The tax return of the assessee should contain the undisclosed income.

If, however, the above-mentioned conditions are not fulfilled, the penalty would be 60% of the undisclosed income.

Penalty for income from undisclosed sources

If the tax-payer has a source of income that is undisclosed and if such an income is found by the Assessing Officer, the income would be added to the income of the tax-payer as undisclosed income under Sections 68, 69, 69A, 69B, 69C and 69D. When the undisclosed income is added under these sections, a penalty would be levied. The penalty would be 10% of the tax payable by the taxpayers. This penalty can be removed if the tax-payers discloses the source of income in his/her income tax return and pays the proportionate tax on the same.

Penalty for not getting the accounts audited or for not submitting an audit report

Section 44AB of the Income Tax Act specifies the conditions under which the accounts of the taxpayer should be audited. If the taxpayer's accounts are supposed to be audited under the provisions of Section 44AB and an audit has not been done, a penalty would be levied on the taxpayer. Even if the taxpayer does not furnish an audit report, the penalty would be applicable under section 271B. The amount of penalty would be one-half percent of turnover/sales/gross receipts of the business or INR 1.5 lakhs, whichever is lower.

Penalty for not providing an accountant’s report

Under the provisions of Section 92E of the Income Tax Act, taxpayers who enter into an international transaction or into a specified domestic transaction are required to get a report from a Chartered Accountant. The report should be in a specified form and should be furnished on or before the specified date. If these conditions are not met, and the taxpayer does not submit a Chartered Accountant’s report, a penalty would be charged, which would be INR 1 lakh under section 271BA.

Penalty for not deducting tax at source or for not paying dividend distribution tax

Chapter XVII – B states the conditions wherein the tax-payer is required to deduct TDS. Moreover, Section 115-O states that the company paying dividends is required to deduct DDT from the dividends before they are distributed. If the taxpayer does not deduct TDS or the company does not pay DDT, a penalty would be charged under section 271C. The penalty would be the amount of TDS not deducted or the amount of DDT not paid.

Penalty for non-payment of tax on lottery or crossword puzzle winnings

Winnings from lotteries, card games, crossword games, etc., should be paid after deducting the applicable tax if the winning is more than INR 10,000. If, on the other hand, the winning is partly in cash and partly in kind and the cash winning is below INR 10,000, the winning can be paid without deducting tax. However, in that case, the person paying the winning should ensure that tax is paid by the winner on the cash amount received. If these conditions are not met, a penalty would be levied under section 271C, which would be equivalent to the tax not paid on the winnings.

Penalty for accepting or repaying loans or deposits in non-acceptable modes

Under Section 269SS, loans or deposits exceeding INR 20,000 should be accepted only through account payee cheques, demand drafts, or bank ECS. If any other mode of accepting loans or deposits is used, a penalty would be levied under section 271D. The amount of penalty would be the amount of loan or deposit accepted by the taxpayer. The same rule applies when repaying loans or deposits exceeding INR 20,000, and the penalty under section 271DA would be the amount of loan or deposit received by the taxpayer.

Penalty for collecting INR 2 lakhs or more in non-acceptable modes

Under section 269T, an amount of INR 2 lakhs or above is taken from one person in one day or for a single transaction or for multiple transactions pertaining to one event or occasion, should not be taken in any mode other than account payee cheques, demand drafts or bank ECS. However, if the taxpayer receives such an amount in any mode other than specified modes, a penalty would be applicable under section 271E, which would be the amount received by the taxpayer.

Penalties for failing to furnish statements of financial transactions or reportable accounts

The statement of financial transactions and reportable accounts are required to be furnished to tax authorities in specified formats and within the specified dates. Failure in meeting the format or in delaying the submission of such reports would result in penalties. The penalties would be as follows

• INR 500 per day if the reports are not furnished under Section 271FA,
• INR 1000 per day if the tax department sent the tax-payer a notice under Section 285BA (5), and the reports were not furnished within 30 days of receiving such notice
• INR 50,000 if the reports that are furnished are inaccurate in any way under Section 271FAA
• INR 1 lakh if an investment fund does not submit a statement is required by the income tax department regarding its activities
• If the tax-payer has entered into an international transaction or a specified domestic transaction and has not furnished the required financial statements, a penalty of 2% of the value of the transaction would be levied under Section 271G
• If the reporting entity is part of an international group and does not furnish the financial statements as per Section 286 (2), a penalty would be INR 5000 per day if the delay is up to one month. If any delay exceeds, one-month penalty would be INR 15,000 per day. Moreover, in case of inaccurate information in the reports, a penalty would be INR 5 lakhs
• If the Indian assets of an Indian company are held by a foreign company, the Indian company is required to submit some reports on such assets under Section 285A. If the reports are not submitted, the penalty would be 2% of the value of the transaction or INR 5000, depending on the case. Following are the possible cases -
• INR 10,000 if an accountant, merchant banker, or registered valuer provides incorrect information in a financial report under Section 271J,
• INR 1 lakh if payment is made to an NRI or a foreign company and reports of such payment are not furnished under Section 195 (6)

Penalty for non-filing of TDS/TCS certificates

If the TDS or TCS certificates are not filed within the due date, a penalty of INR 10,000 would be levied which might go up to INR 1 lakh under section 271H.

Penalty for not cooperating with tax authorities

If the taxpayer does not cooperate with tax authorities in respect of answering questions, signing statements, attending office to provide evidence of financial reports, and complying with notices sent to him/her, a penalty of INR 10,000 would be charged for each non-cooperative action.

Other types of penalties

There are the following types of penalties too, which are charged to taxpayers for different types of offenses –

• If the PAN number is not quoted, not applied for, not intimated, or quoted incorrectly, a penalty of INR 10,000 would be charged under section 272B.
• If the TAN number is not quoted, not applied for, not intimated, or quoted incorrectly, a penalty of INR 10,000 would be charged under section 272BB.

Relaxation of penalties

Though the above-mentioned penalties are charged in various instances, the Income Tax Act also specifies the ways to relax the penalty which is applicable. As per the provisions of Section 273A (4) of the Act, the Principal Commissioner or Commissioner of Income Tax has the power to reduce or cancel the penalty if the conditions specified in the section are fulfilled. Furthermore, Section 273B also lists exemption of penalty under various Sections if the taxpayer can show a just cause for the failure to comply with income tax rules.

Now that you have learned about the various penalties that you might have to face under the Income Tax Act, it is time to make sure you avoid these by staying vigilant and careful. Exercising a little prudence can help you avoid these penalties and make sure you don’t get entangled in the complexities of receiving and replying to notices. The best way out is to take professional advice. You can simply consult a CA and avoid getting income tax notices. Book an eCA now!