Penalties

Penalty for Assessee-in-Default

Nature of Default

Penalty is attracted if an assessee fails to pay tax due and is treated as an assessee-in-default. The liability to pay penalty persists even if the tax is paid before the levy of penalty. However, penalty shall not be imposed for default in payment of penalties imposed under Chapter XXI (Sections 270A to 275).

Quantum of Penalty

• The Assessing Officer may impose a penalty not exceeding the amount of tax in arrears.

• Before levying a penalty, the person must be given an opportunity of being heard.

• Penalty shall not be levied if the assessee proves reasonable cause for the failure.

Penalty for Under-reporting and Misreporting of Income

Amount of Penalty

• Under-reporting of income: 50% of tax payable on under-reported income.

• Misreporting of income: 200% of tax payable on misreported income.

Penalty orders are passed by the Assessing Officer, Joint Commissioner (Appeals), Commissioner (Appeals), Principal Commissioner, or Commissioner.

The burden of proof for misreporting lies with the assessing officer. Penalty cannot be levied twice on the same addition or disallowance.

Definition of Under-reporting of Income

Under-reporting arises in cases such as:

• Assessed income exceeds returned income (after return processing under Section 143(1)(a)).

• Income assessed without filing a return exceeds the maximum exemption limit.

• Income reassessed, where return is filed for the first time in reassessment, exceeds the maximum exemption limit.

• Income reassessed is higher than the earlier assessment.

• Loss reported in return is reduced or converted to income on reassessment.

• Special rules apply when income is assessed under MAT/AMT provisions.

Calculation of Tax Payable on Under-reported Income

The tax on under-reported income is computed as the difference between the tax on total income, including under-reporting, and the tax on income as previously assessed or returned.

What is not considered as Under-reporting?

• Income for which a bona fide explanation is accepted.

• Income determined on estimates with correct and complete accounts.

• Additions or disallowances agreed by the assessee and included in the return.

• Transfer pricing additions where proper documentation is maintained.

• Undisclosed income under search cases (covered by other penalties).

• Unexplained income taxable under Sections 68 to 69D (subject to separate penalty under Section 271AAC).

Definition of Misreporting of Income

Misreporting includes:

• Misrepresentation or suppression of facts.

• Failure to record investments or receipts in books.

• Claiming unsupported expenditure.

• Recording false entries in books.

• Failure to report international or specified domestic transactions.

Immunity from Penalty

• Immunity from penalty may be granted on application filed electronically in Form 68 within 1 month from the end of the month in which the assessment/reassessment order is received, subject to payment of tax as per the notice of demand and no appeal has been filed.

• The Assessing Officer shall pass the order granting or rejecting immunity after expiry of the appeal period, within 3 months from receipt of the application. No rejection order can be passed without giving the assessee an opportunity to be heard.

Penalty for Failure to Keep, Maintain, or Retain Books of Account

Nature of Default

• Failure to keep or maintain books of account and other documents as mandated by Section 44AA.

• Failure to retain such books and documents for a period of 6 years.

• A separate penalty under Section 271B applies for failure to get accounts audited as required under Section 44AB.

Quantum of Penalty

• Rs. 25,000 may be imposed by the Assessing Officer, Joint Commissioner (Appeals), or Commissioner (Appeals).

• Penalty shall not be levied if the assessee proves reasonable cause for the failure.

Penalty for Failure to Keep Information in respect of an International Transaction

Nature of Default

Penalty may be imposed for:

• Failure to keep and maintain information and documents relating to international or specified domestic transactions under Section 92D.

• Failure to report such transactions as required.

• Maintaining or furnishing incorrect information or documents with respect to these transactions.

Quantum of Penalty

• The Assessing Officer or Commissioner (Appeals) may impose a penalty equal to 2% of the value of each international or specified domestic transaction.

• Where a constituent entity of an international group fails to furnish information and documents as per Section 92D(4), a penalty of Rs. 5,00,000 may be imposed by the Director-General of Income-tax (Risk Assessment).

• Penalty shall not be levied if the assessee proves reasonable cause for the failure.

Penalty in Case of Search

Nature of Default

Penalty may be imposed if a search is initiated under Section 132 between 15-12-2016 and 01-09-2024 and undisclosed income is found. Undisclosed income includes:

• Money, bullion, jewellery, or other valuable articles not recorded in books before the search date.

• Entries in books or documents found during the search that were not disclosed before the search date.

• Bogus expenditures recorded in books that are found to be false during the search.

Quantum of Penalty

• The Assessing Officer or the Commissioner (Appeals) may impose a penalty at the rate of 30% or 60% of the undisclosed income.

• Lower rate (30%) applies if the assessee fulfils the following conditions:

🞍 Admits undisclosed income under Section 132(4).

🞍 Substantiates the source of such income.

🞍 Pays tax and interest due.

🞍 Files return declaring such income by the specified due date.

Due Dates for Filing Return to avail Lower Rate of Penalty

Penalty in Case of Undisclosed Income

What Constitutes Unexplained Income?

Unexplained income includes cash credits, investments, expenditures, money, or amounts borrowed or repaid on hundi, where the assessee fails to explain their nature or source satisfactorily.

When is Penalty Levied?

• Penalty may be imposed by the Assessing Officer, Joint Commissioner (Appeals), or Commissioner (Appeals) if unexplained income forms part of assessed income and explanation is inadequate.

• Penalty is not levied if the income qualifies as under-reporting or misreporting under Section 270A, or the assessee declares the unexplained income in return and pays tax under Section 115BBE before the relevant year-end.

Quantum of Penalty

Penalty is 10% of the tax payable on such unexplained income.

Penalty for False or Omission of Entry in Books of Account

Nature of Default

• Penalty may be imposed if, during proceedings, a person is found to have:

🞍 made a false entry in the books of account; or

🞍 omitted a relevant entry in the books to evade tax.

• It also applies to any other person who causes such false entry or omission to evade tax liability.

Meaning of False Entry

• A false entry includes the use or intended use of:

🞍 forged or falsified documents such as false invoices or other false evidence;

🞍 invoices for goods or services not actually supplied or received; or

🞍 invoices for goods or services to or from a non-existent person.

Quantum of Penalty

A penalty equal to the aggregate amount of false or omitted entries may be imposed by the Assessing Officer, Joint Commissioner (Appeals), or Commissioner (Appeals).

Penalty on Charitable Trust for Providing Benefit to Related Persons

Nature of Default

A penalty is levied if any trust or institution, referred to in Section 11 or 10(23C)(iv)/(v)/(vi)/(via), has applied its income for the benefit of an interested person.

Quantum of Penalty

• First violation: Penalty equals the amount of income applied for the benefit of the interested person.

• Subsequent violations: Penalty equals twice the amount of such income applied.

Penalty for Failure to Get Accounts Audited

Nature of Default

• Failure to get accounts audited under Section 44AB.

• Failure to furnish the audit report in Forms 3CA, 3CB, or 3CD by the due date.

Quantum of Penalty

Penalty is 0.5% of total sales, turnover, or gross receipts, as the case may be or Rs. 1,50,000, whichever is less.

Penalty for Failure to Furnish Report of International Transaction

Nature of Default

Failure to file the Chartered Accountant’s report in Form 3CEB on or before the due date as required under Section 92E.

Quantum of Penalty

• The Assessing Officer may levy a penalty of Rs. 1,00,000.

• Penalty shall not be levied if the assessee proves reasonable cause for the failure.

Penalty on Failure to Deduct or Pay Tax

Nature of Default

Penalty applies for:

• Failure to deduct tax at source wholly or partly.

• Failure to pay dividend distribution tax on dividends declared/distributed on or before 31-03-2020.

• Failure to pay tax on winnings in kind under Section 194B.

• Failure to pay tax on winnings from online games in kind under Section 194BA.

• Failure to pay tax on benefit/perquisite in kind under Section 194R.

• Failure to pay tax on consideration for transfer of VDAs in kind under Section 194S.

Quantum of Penalty

• The Assessing Officer may impose a penalty equal to the amount of tax which the person failed to deduct or pay.

• Penalty shall not be levied if the assessee proves reasonable cause for the failure.

Penalty for Failure to Collect Tax at Source

Nature of Default

Failure to collect the whole or part of the tax required under Section 206C.

Quantum of Penalty

• The Assessing Officer may impose a penalty equal to the amount of tax which the person failed to collect at source.

• Penalty shall not be levied if the assessee proves reasonable cause for the failure.

Penalty on Receiving Loan or Deposit in Contravention of Section 269SS

Nature of Default

Penalty shall be imposed if a person accepts loan or deposit (or specified sum) in cash or prohibited mode in contravention of Section 269SS.

Quantum of Penalty

• The Assessing Officer shall levy a penalty equal to the amount of the loan or deposit or specified fund taken or accepted in contravention.

• Penalty shall not be levied if the assessee proves reasonable cause for the failure.

Penalty on Receiving Any Sum in Contravention of Section 269ST

Nature of Default

Penalty shall be imposed if a person receives Rs. 2,00,000 or more from a person in cash or prohibited mode in contravention of Section 269ST.

Quantum of Penalty

• The Assessing office shall impose a penalty equal to the amount of the sum received in contravention.

• Penalty shall not be levied if the assessee proves reasonable cause for the failure.

Penalty for Failure to Provide a Facility in Contravention of Section 269SU

Nature of Default

• The penalty shall be imposed on a person carrying on a business with total sales, turnover, or gross receipts over Rs. 50 crore in the immediately preceding year.

• Such person fails to provide an electronic payment acceptance facility as required by Section 269SU.

• Exemption applies to specified persons engaged exclusively in B2B transactions where at least 95% of receipts are non-cash.

Quantum of Penalty

• The Assessing Officer shall impose a penalty of Rs. 5,000 for each day during which the failure continues.

• Penalty shall not be levied if the assessee proves reasonable cause for the failure.

Penalty for Repayment of Loans or Deposits by Means Other Than Specified Means

Nature of Default

The penalty shall be imposed on a person who repays any loan, deposit (including interest), or specified advance in cash or any mode prohibited under Section 269T.

Quantum of Penalty

• The Assessing Officer shall impose a penalty equal to the amount of the loan, deposit, or specified advance repaid in contravention.

• Penalty shall not be levied if the assessee proves reasonable cause for the failure.

Penalty for Failure to Furnish SFT or Reportable Account

Nature of Default

The penalty shall be imposed for non-filing of SFT or Reportable Account under Section 285BA by the due date.

Quantum of Penalty

• The Director or Joint Director of Income-tax (Intelligence and Criminal Investigation) may impose a penalty of Rs. 500 per day during which such failure continues.

• If a person fails to furnish the statement within the due date, the tax authorities may issue a notice to file the statement within a specified time. If such person fails to file the statement within the specified time limit, a higher penalty of ₹1,000 per day applies from the day immediately following the day on which the time specified in the notice expires.

• Penalty shall not be levied if the assessee proves reasonable cause for the failure.

Penalty for Furnishing Inaccurate Statement of Financial Transaction or Reportable Account

Nature of Default

The penalty may be imposed if a person provides inaccurate information in the SFT or Reportable Account under Section 285BA. Up to 30^th September, 2024, the penalty may be levied if the:

• Inaccuracy is due to failure to comply with due diligence or deliberate action.

• Inaccuracy due to false or inaccurate information provided by the holder of reportable accounts.

• Person knows the inaccuracy when furnishing the statement, but doesn’t inform the tax authorities, or discovers the inaccuracy after furnishing the statement, but fails to inform and furnish correct information within 10 days.

From 1 October 2024, the penalty applies only for failure to furnish correct information within 10 days, inaccuracy due to failure of due diligence, or false or inaccurate information provided by the holder of reportable accounts.

Quantum of Penalty

• Penalty of Rs. 50,000 may be imposed by the Director or Joint Director of Income-tax (Intelligence and Criminal Investigation).

• An additional penalty of Rs. 5,000 per inaccurate reportable account is imposed on reporting financial institutions if inaccuracies are due to false information submitted by holders.

• Penalty shall not be levied if the assessee proves reasonable cause for the failure.

Penalty for Failure to Furnish Statement by an Eligible Investment Fund

Nature of Default

Failure to furnish Form 3CEK as required under Section 9A within the prescribed time limit.

Quantum of Penalty

• The Assessing Officer may impose a penalty of Rs. 5,00,000.

• Penalty shall not be levied if the assessee proves reasonable cause for the failure.

Penalty for Failure to Furnish Information or Document Relating to International Transaction

Nature of Default

• Failure to furnish information or documents as required by the Assessing Officer or Commissioner (Appeals) in the course of transfer pricing proceedings as referred to in Section 92D.

Quantum of Penalty

• The Assessing Officer or TPO or Commissioner (Appeals) may impose a penalty equal to 2% of the value of the international transaction or specified domestic transaction for each such failure.

• Penalty shall not be levied if the assessee proves reasonable cause for the failure.

Penalty for Failure to Furnish Information or Document under Section 9(1)(i) and Section 285A

Nature of Default

A penalty is levied if an Indian concern fails to furnish any information or document in Form 49D as required under Section 285A.

Quantum of Penalty

• 2% of transaction value if the right of management or control is transferred (directly or indirectly).

• Rs. 5,00,000 in any other case.

• Penalty shall not be levied if the assessee proves reasonable cause for the failure.

Penalty for Failure to Furnish Report under Section 286

Penalty for Failure to Furnish Report [Section 271GB(1)]

• The penalty may be imposed if a reporting entity fails to furnish a report in Form No. 3CEAD.

• The Director-General of Income-tax may levy a penalty of:

🞍 Rs. 5,000 per day where the period of failure does not exceed 1 month.

🞍 Rs. 15,000 per day where the period of failure exceeds 1 month.

🞍 Rs. 50,000 per day from the date of service of the penalty order if failure continues.

• Penalty shall not be levied if the assessee proves reasonable cause for the failure

Penalty for Failure to Produce Information [Section 271GB(2)]

• The penalty may be imposed if a reporting entity fails to produce the information or documents required by the Director-General of Income-tax within the period allowed for it.

• The Director-General of Income-tax may levy a penalty of:

🞍 Rs. 5,000 per day during which the failure continues.

🞍 Rs. 50,000 per day from the date of service of the penalty order if failure continues.

• Penalty shall not be levied if the assessee proves reasonable cause for the failure.

Penalty for Furnishing Inaccurate Information [Section 271GB(4)]

• The penalty may be imposed if the reporting entity furnishes inaccurate information and:

🞍 knew of the inaccuracy when furnishing the report but failed to inform the Director-General of Income-tax;

🞍 discovered the inaccuracy later but did not inform or correct it within 15 days; or

🞍 provided inaccurate information or documents in response to a notice.

• Director-General of Income-tax may levy a penalty of Rs. 500,000.

• Penalty shall not be levied if the assessee proves reasonable cause for the failure

Penalty for Failure to Submit Statement under Section 285 by a Non-Resident Liaison Office

Nature of Default

A penalty is levied if a non-resident having a liaison office (LO) in India fails to submit an annual statement in Form No. 49C to the jurisdictional Assessing Officer within 8 months from the end of such financial year.

Quantum of Penalty

• The Assessing Officer may levy a penalty of Rs. 1,000 per day if the period of failure does not exceed 3 months.

• Rs. 1,00,000 in any other case.

• Penalty shall not be levied if the assessee proves reasonable cause for the failure.

Penalty for Failure to File the TDS/TCS Statement

Nature of Default

The penalty may be imposed if a person fails to furnish the TDS/TCS Statement on or before the due dates or furnishes inaccurate information in such Statements.

Quantum of Penalty

• The Assessing Officer may impose a penalty of Rs. 10,000, which may extend to Rs. 100,000.

• No penalty if the TDS/TCS statement is filed within one month from the due date after payment of tax deducted or collected, along with applicable interest and fees. However, this relaxation applies only to the delay in filing, not to furnishing inaccurate information.

• Penalty shall not be levied if the assessee proves reasonable cause for the failure.

Penalty for Failure to Furnish Information or Furnishing Inaccurate Information under Section 195

Nature of Default

The penalty may be imposed if a person, responsible for paying to a non-resident, fails to furnish information in Form 15CA or Form 15CB or Form 15CC or Form 15CD, as the case may be, or furnishes inaccurate information.

Quantum of Penalty

• The Assessing Officer may impose a penalty of Rs. 100,000.

• Penalty shall not be levied if the assessee proves reasonable cause for the failure.

Penalty for Furnishing Incorrect Information in Reports or Certificates

Nature of Default

A penalty may be imposed if a Chartered Accountant, Merchant Banker, or Registered Valuer furnishes incorrect information in a report or certificate under any provision of the Act or the rules made thereunder.

Quantum of Penalty

• The Assessing Officer, the Joint Commissioner (Appeals), or the Commissioner (Appeals) may impose a penalty of Rs. 10,000 for each such report or certificate.

• Penalty shall not be levied if the assessee proves reasonable cause for the failure.

Penalty for Failure to Furnish a Statement or Certificate of Donation

Nature of Default

Penalty may be levied for failure to deliver a donation statement or furnish a donation certificate by institutions under Section 35(1)(ii)/(iii), or companies under Section 35(1)(iia), or institutions or funds under Section 80G.

Quantum of Penalty

The Assessing Officer may impose a penalty of Rs. 10,000 or more, which may extend to Rs. 100,000.

Penalty for Failure to Co-operate or Comply with Statutory Requirements

Nature of Default and its Penalty

• Any person who commits any of the following defaults is liable to pay a penalty of Rs. 10,000 for each such default or failure:

🞍 Refusal to answer questions legally required by the Income Tax Authorities.

🞍 Refusal to sign statements made by him during any proceedings.

🞍 Non-compliance with summons under Section 131(1) to give evidence or produce books of account or other documents.

🞍 Failure to comply with notices under Sections 142(1) or 143(2).

🞍 Failure to comply with directions for special audit under Section 142(2A).

• Any person who commits any of the following defaults is liable to pay a penalty of Rs. 500 for every day during which the failure continues:

🞍 Failure to furnish information within the prescribed time limit relating to shares or securities (Section 94(6)).

🞍 Failure to notify discontinuance of business or profession within 15 days (Section 176(3)).

🞍 Failure to furnish information required by the Assessing Officer (Section 133).

🞍 Failure to allow inspection or provide copies of the register (Section 134).

🞍 Failure to file the return of a charitable trust or institution within the prescribed time limit (Sections 139(4A), 139(4C)).

🞍 Failure to furnish perquisite statements or statement of profits in lieu of salary (Section 192(2C)).

🞍 Failure to deliver nil deduction declaration in due time (Section 197A).

🞍 Failure to issue TDS or TCS certificates (Sections 203, 206C).

🞍 Other specified defaults as per Sections 206A, 206C(1A), 226(2), 285B, etc.

For defaults relating to declarations mentioned in Section 197A or TDS/TCS certificates, the penalty shall not exceed the amount of tax deductible or collectable.

Penalty shall not be levied if the assessee proves reasonable cause for the failure.

Authority to Levy Penalty

• Defaults occur during any proceeding: the penalty shall be imposed by an authority not lower than the Joint Director or the Joint Commissioner.

• Defaults occur in compliance with an enquiry or special audit notices: the penalty shall be imposed by the authority that issued the notice/direction.

• Defaults related to non-delivery of Section 197A declarations: the penalty shall be imposed by the Principal Chief Commissioner, Chief Commissioner, Principal Commissioner, or Commissioner.

• Other defaults: the penalty shall be imposed by the Joint Director or the Joint Commissioner.

Penalty for Failure to Furnish Information Required under Section 133B

Nature of Default

A penalty is levied if any person fails to furnish the information required in Form 45D by the Income Tax Authorities, who have entered into a place of business to collect certain information.

Quantum of Penalty

• The Joint Commissioner, Assistant Director, Deputy Director, or Assessing Officer may impose a penalty which may extend to Rs. 1,000.

• Before levying a penalty, the person must be given an opportunity of being heard.

• Penalty shall not be levied if the assessee proves reasonable cause for the failure.

Penalty for Failure to Comply with the Provisions of PAN

Nature of Default

The penalty can be imposed for the following defaults:

• Failure to apply for PAN when required.

• Failure to quote PAN or Aadhaar in returns, challans, or other documents.

• Failure to intimate PAN or Aadhaar to the deductors or collectors of tax.

• Quoting or intimating a false or incorrect PAN or Aadhaar knowingly.

• Failure to quote PAN or Aadhaar in documents pertaining to financial transactions prescribed under Rule 114B;

• Failure to authenticate PAN or Aadhaar.

• Obtaining more than one PAN.

Quantum of Penalty

• Penalty of Rs. 10,000 for each default may be imposed by the Assessing Officer.

• Before levying a penalty, the person must be given an opportunity of being heard.

• Penalty shall not be levied if the assessee proves reasonable cause for the failure.

Penalty for Failure to Apply or Quote TAN

Nature of Default

The penalty can be imposed in the following circumstances:

• Failure to apply for TAN when required under law;

• Failure to quote TAN on documents where quoting is mandatory;

• Quoting a false TAN, knowingly or with belief that it is false or not believed to be true.

Quantum of Penalty

• The Assessing Officer may impose a penalty of ₹10,000 for any of the above defaults.

• Before levying a penalty, the person must be given an opportunity of being heard.

• Penalty shall not be levied if the assessee proves reasonable cause for the failure.

Power to Reduce or Waive Penalty

For Penalty under Section 270A

Reduction or waiver of penalty under Section 270A may be granted by the Principal Commissioner or Commissioner, subject to the following:

• Voluntary Disclosure: The assessee must have made true and full disclosure of under-reported income voluntarily and in good faith before its detection by the Assessing Officer.

• Co-operation: The assessee must have cooperated during assessment or other proceedings.

• Tax Payment: Tax and interest arising from the relevant order must have been paid or a satisfactory arrangement made.

• Approval from the higher authorities: Where the income on which the penalty is imposed exceeds Rs. 5 lakh, prior approval of the Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General is required.

• Once in a lifetime: The benefit of waiver or reduction is allowed only once in the lifetime of the assessee.

For Other Penalties

The Principal Commissioner or Commissioner may also reduce or waive any other penalty or stay/compound related recovery proceedings, subject to:

• Written Reasons: The relief must be supported by reasons recorded in writing.

• Genuine Hardship: Relief must be necessary to avoid genuine hardship to the assessee.

• Co-operation in Proceedings: The assessee must have co-operated in assessment or recovery proceedings.

• Approval Threshold: Where the penalty or aggregate penalty exceeds Rs. 1 lakh, prior approval of the Principal Chief Commissioner, Chief Commissioner, Principal Director General or Director General is required.

• Order Timeline: The order must be passed within 12 months from the end of the month in which the application is received. The assessee must be heard before any rejection.

• Finality of Order: Orders accepting or rejecting an application shall be final and not subject to challenge.

• Once in a lifetime: This relief is also allowed only once in a lifetime.

Procedure to Impose Penalty

Opportunity of Being Heard

Before imposing any penalty, the assessee must be given a reasonable opportunity of being heard.

Approval Requirement for Imposing Penalty

• Income-tax Officer requires prior approval of the Joint Commissioner if the proposed penalty exceeds ₹10,000.

• Assistant Commissioner or Deputy Commissioner requires prior approval of the Joint Commissioner if the penalty exceeds ₹20,000.

Service of Penalty Order

Upon passing the penalty order, a copy must be sent to the Assessing Officer unless the order is passed by the Assessing Officer himself.

Quantum of Penalty

The penalty amount is determined based on the law in force at the time the default was committed. Provisions applicable in the relevant assessment year do not apply unless made retrospective.

Faceless Proceedings

The Central Government is empowered to implement a scheme for faceless imposition of penalty to ensure transparency, accountability and efficiency. The scheme may include:

• Elimination of direct interface between the assessee and tax authority;

• Resource optimisation and functional specialisation;

• Dynamic jurisdiction for penalty imposition.

The Faceless Penalty Scheme was notified via Notification No. S.O. 117(E), dated 12-01-2021.

The Central Government may issue directions modifying procedural or jurisdictional provisions for imposing a penalty. No such direction can be issued after 31-03-2022; however, amendments to existing directions may be made by notification in the Official Gazette.

Faceless Penalty Scheme

Scope and Applicability

The scheme applies to penalty proceedings relating to specified territorial areas, persons, income, or cases. The following are excluded:

• Penalty proceeding in cases assigned to Central Charges, International Tax Charges, TDS Charges [Order F. NO. 187/4/2021-ITA-I, dated 20-1-2021],

• Penalty proceedings arising/pending in the Investigation Wing, and DG (Risk Assessment) [Order F. NO. 187/4/2021-ITA-1, dated 26-2-2021]

• Penalty proceedings arising out of other statutes [Order F. NO. 187/4/2021-ITA-1, dated 26-2-2021]

• Penalty orders by officers at the level of Commissioner and above [Order F. NO. 187/4/2021-ITA-1, dated 26-2-2021]

• Penalty proceedings in cases not having PAN or where pendency could not be created on ITBA due to technical issues [Order F. No. 187/4/2021-ITA-I, dated 10-03-2022]

Key Functional Units

National Faceless Penalty Centre (NFPC): The National Faceless Penalty Centre facilitates centralized conduct of faceless penalty proceedings. All communication related to penalty between units, the assessee, other persons, or tax authorities shall be routed through this Centre.

Penalty Units (PU): The Penalty Unit is responsible for drafting penalty orders, including identifying issues, seeking clarifications, providing the assessee an opportunity of being heard, analysing submitted material, and performing other functions required for imposing penalty. It refers to an Assessing Officer empowered by the CBDT.

Penalty Review Units (PRU): The Penalty Review Unit reviews draft penalty orders to ensure:

• all relevant evidence is on record;

• facts and legal points are properly incorporated;

• penalty issues are adequately discussed;

• applicable judicial decisions are duly considered;

• penalty computation is arithmetically correct; and

• any other necessary review functions are performed.

It refers to an Assessing Officer empowered by the CBDT.

Officers Empowered in Units

The Penalty Unit and Penalty Review Unit shall have the following authorities:

• Additional/Joint Commissioners or Additional/Joint Directors

• Deputy/Assistant Commissioners or Deputy/Assistant Directors, or Income-tax Officers

• Other Income-tax authority, ministerial staff, executive or consultant as authorised by CBDT

Procedure for Levy of Penalty

The faceless penalty proceedings are conducted through the National Faceless Penalty Centre (NFPC) as per the following procedure:

• Reference to NFPC - Where any Income-tax Authority or NFAC initiates or recommends penalty, the case is referred to NFPC in the prescribed form.

• Case Assignment - NFPC assigns the case to a Penalty Unit using an automated allocation system.

• Draft Notice or Rejection of Recommendation - The Penalty Unit issues a draft show-cause notice or records reasons for not initiating penalty proceedings and forwards it to NFPC.

• Service of Notice - NFPC serves the show-cause notice to the assessee based on the draft. If initiation is not agreed upon, the penalty is not initiated.

• Ongoing Proceedings - If proceedings have already been initiated, the Penalty Unit prepares a draft notice, which is served by NFPC.

• Filing of Response - The assessee must respond to the show-cause notice within the specified or extended time. NFPC forwards the response to the Penalty Unit; non-response is also reported.

• Request for Additional Inputs - Penalty Unit may request NFPC to gather more information from concerned authorities or the assessee, seek technical assistance, or conduct verification.

• Support by NFPC - NFPC issues a notice or requisition to submit such information and forwards filed responses or reports to the Penalty Unit. In case of no response, it is duly informed.

• Penalty Proposal - The Penalty Unit proposes either imposition or non-imposition of penalty, with reasons, and sends it to NFPC.

• NFPC’s Action on Proposal - NFPC may:

🞍 Direct passing or dropping of the penalty;

🞍 Refer the proposal for review to a Penalty Review Unit.

• Penalty Order or Dropping Proceedings - Based on NFPC’s direction, the Penalty Unit issues the penalty order or drops proceedings and communicates the outcome to the assessee via NFPC.

• Review by Penalty Review Unit - The Review Unit examines the proposal and may concur or suggest modifications. The review report is sent to NFPC, which forwards it to the Penalty Unit.

• Final Order after Review - The Penalty Unit considers the review report, passes the final order imposing a penalty or dropping the penalty proceedings, and serves it to the assessee through NFPC. If suggestions are rejected, the reasons are recorded.

• Communication to Initiating Authority - NFPC sends a copy of the order or intimation to the original Income-tax authority for further action.

• Transfer of Proceedings – The PCCIT or PDGIT, in charge of NFPC, may transfer such proceedings to the jurisdictional Income-tax authority or NFAC with CBDT approval.

In such cases, proceedings are conducted electronically to the extent possible, and may involve video conferencing, digital tools, and compliance with Section 274(2) for approval. The jurisdictional authority shall consider all prior actions under the faceless regime. [Circular F. No. 225/97/2021/ITA-II, dated 06-09-2021]

Appeal against Penalty Order

An appeal against a penalty order passed by the National Faceless Penalty Centre (NFPC) lies before the jurisdictional JCIT(A) or CIT(A) or the NFAC, as applicable.

Electronic Communication Protocol

• All communications between NFPC and the assessee or authorised representative, as well as internal communications between NFPC, NFAC, Income-tax authorities, Penalty Unit, and Penalty Review Unit, shall be conducted electronically.

• NFPC shall authenticate records through electronic communication. Penalty-related units shall use digital signatures. The assessee or any other person shall authenticate records by digital signature, electronic verification code (EVC), or login via the e-filing portal.

• Electronic communications, such as notices or orders, shall be delivered via the assessee’s registered account, registered email address, or Mobile App, followed by real-time alerts.

• The assessee or any other person shall submit their response through the registered account. Upon successful submission, an acknowledgement with a hash result from NFPC shall deem the response as authenticated.

No Physical Appearance Required

• No personal appearance is required before NFPC, Penalty Unit, or Penalty Review Unit, either by the assessee or their authorised representative.

• An assessee or authorised representative may request a personal hearing. The hearing shall be conducted exclusively via video conferencing or telephony, using suitable telecommunication software.

• The CBDT will ensure the availability of video conferencing facilities at designated locations to prevent denial of the scheme's benefits due to the lack of access on the assessee’s end.

Administrative Powers

The Principal Chief Commissioner or Principal Director General in charge of NFPC, with prior CBDT approval, may specify format, mode, procedure, and processes for the automated operations of the NFPC, Penalty Unit, and Penalty Review Unit, including:

• Service of notices, orders, or other communications;

• Receipt of information or documents;

• Issuance of acknowledgements;

• Provision of e-proceeding facilities (login, tracking, display, download);

• Access, verification, and authentication of submissions;

• Centralised storage and retrieval of data;

• General administrative and grievance redressal mechanisms; and

• Forms for referring the penalty cases.

Time Limit for Completion of Penalty Proceedings

Section 275 of the Income Tax Act specifies the time limits within which the tax authorities must pass penalty orders. The prescribed time limits vary depending on the appellate or revision status of the related assessment or other proceedings.

• Cases where assessment or other order is not subject to appeal - Where the relevant assessment or other order is not challenged before the Joint Commissioner (Appeals), Commissioner (Appeals), or Appellate Tribunal, the penalty order must be passed within 6 months from the end of the quarter in which such proceedings are completed.

• Cases where appeal is filed to JCIT(A) or CIT(A) - If the order is appealed before the Joint Commissioner (Appeals) or Commissioner (Appeals), and no further appeal is made to the Appellate Tribunal, the penalty order must be passed within 6 months from the end of the quarter in which the appellate order is received by the Jurisdictional Principal Commissioner or Commissioner.

• Cases where appeal is filed to the ITAT - If the order is appealed to the Appellate Tribunal, the penalty order must be passed within 6 months from the end of the quarter in which the order of the Tribunal is received by the Jurisdictional Principal Commissioner or Commissioner.

• Cases where assessment order is revised - Where the order is revised under Section 263 or 264, the penalty order must be passed within 6 months from the end of the quarter in which the revision order is passed by the Principal Commissioner or Commissioner.

• Giving effect to appellate or revision orders - Where the original penalty order is passed before the appellate or revision order, a revised penalty order (if necessary) may be passed within 6 months from the end of the quarter in which the appellate order is received or the revision order is passed. Such revised order shall not be made without giving the assessee a reasonable opportunity of being heard.

• Other cases - In any other case, the penalty order must be passed within 6 months from the end of the quarter in which the notice for imposition of penalty is issued.

• Exclusion of time periods - While computing the limitation period for passing the penalty order, the following periods shall be excluded:

🞍 The time taken to give the assessee an opportunity of being reheard under Section 129 due to a change in the Assessing Officer; and

🞍 The period commencing on the date on which the proceedings for levy of penalty were stayed by any court, and ending on the date the certified copy of the stay vacation order is received by the Jurisdictional Principal Commissioner or Commissioner.