Income-tax Act, 2025- Penalties – Chapter XXI – Sections 439 to 472 (Other than Sections 448 and 449 Penalties relating to tax deduction at source)  by Dr. K. Shivaram, Senior Advocate.

Summary of the speech prepared by KSA Legal Chambers.

All India Federation of Tax Practitioners (AIFTP)

on September 12, 2025 (Friday, 5 PM)

Click here to  you tube link

Key Provisions, Penalty Framework and Judicial Precedents.

1. Introduction:

The article will be dealing with certain conceptual issues relating to penalty provisions. The article is structured in eight parts:

1. An overview of the provisions under the Income-tax Act, 2025.
2. Conceptual changes under the Income-tax Act relating to the penalty provisions under the Income-tax Act, 2025.
3. Landmark cases which are applicable to penalty provisions of the Income-tax Act, 2025.
4. Waiver of penalties and their effect on prosecution.
5. How to draft the reply to show cause notices and grounds of appeal, and statement of facts.
6. Jurisdictional issues in appellate proceedings
7. Constitutional Remedies.
8. Conclusion.

1. An overview of the provisions under the Income-tax Act 2025.

The Legislature has made a very sincere attempt to simplify the Income-tax law. The 5,00,000 odd words in the present Income-Tax Act, 1961, are reduced to half their size. i.e. 2,50,000 words. The object of the Income Tax Act, 2025, is to bring clarity and simplicity. We must also acknowledge that the Select Committee of the Lok Sabha has devoted 25,000 hours to reviewing the Income-Tax Bill, 2025. We have been told that the Income Tax Department has spent nearly 60000 human hours to draft the Income-tax Bill, 2025. We must also appreciate the contribution of the chairman and members of the drafting Committee.

The legend of tax Profession Padma Bhushan Dr. N.A. Palkhivala in his article titled “Maddening instability of income tax law”. Which is published on itatonline.org. April 21, 2012. Given various reasons why the Income Tax Act, 1961, has become more complicated. One of the reasons is frequent amendment of law with retrospective effect to overcome the judgments of the Apex Court, High Courts and sometimes orders of the Appellate Tribunal. Another reason it is not the law which is complicated, it is implementation by the tax administration, which has made the present income tax law more complicated. The Income-tax Act 2025 is a very well-drafted legislation considering the needs of our country. We hope there will not be any frequent amendments.

Two major reforms which are missing in the Income Tax Act 2025 are,

(a) Accountability provision.

Dr. Raja Chellia, in his report, suggested bringing an accountability provision. In his report [(1992) 197 ITR 177 (St) (257) Para 5.9], “The Assessing Officers should be made accountable for their actions. If the percentage of demands not upheld by the Tribunals is higher than a reasonable figure, say 50 per cent, the officer should be given a blank mark and reprimanded. On the other hand, an Assessing Officer should be protected and defended if he has obeyed instructions of the Board and followed case laws even though an audit might raise concerns about his actions”.

(b) Secondly, according to us, the Drafting committee should have included at least one representative each from (1), the Judiciary, Legal profession and Accountancy.

The Chairman of the committee should have been a Retired Judge of the Supreme Court or the High Court who had experience in dealing with taxation matters.

The Income-tax Act 2025 should be able to serve the Nation at least for another 50 years. If the Government had included a few members in addition to tax officials in the committee, the New Income-tax Act 2025 would have been much better than the present Act.

The AIFTP has made details representations from time to time. As citizens of this great country, the government objectively consider the interest of the country to have a better income-tax law.

Some of the suggestions of the AIFTP have been considered by the Select Committee.

The Philosophy of Penalties: Compliance and Deterrence.

The Income-Tax Act 2025 fundamentally use penalties as a crucial instrument to ensure tax compliance and deter tax evasion. The core objective remains to penalise non-compliance, under-reporting, misreporting, and other infractions that undermine the integrity of the tax system. The penalties are designed to be deterrents, ensuring that taxpayers adhere to their obligations, from filing returns accurately to paying taxes on time and maintaining proper records.

The Income-Tax Act, 2025, while aiming to simplify and rationalise the existing tax laws, the fundamental principles established through judicial pronouncements under the Income-Tax Act, 1961, will be applicable while interpreting and applying the provisions of the Income-Tax Act, 2025. The first principle is that the Revenue has to follow the due process of law. Meaning of “due process” as has been given in Black’s Law Dictionary, which reads as under:-

“The conduct of legal proceedings according to established rules and principles for the protection and enforcement of private rights, including notice and the right to a fair hearing before a Tribunal with the power to decide the case.”

2. Conceptual changes under the Income-Tax Act, 2025- Relating to penalty provisions.

Income-tax Act, 1961, contained various sections dealing with penalties in different Chapters, whereas the Income-tax Act 2025, all these sections under one chapter XXI. Sections 439 to 472 (34 Sections). One may refer article written by Advocate Ms. Neelam Jadav, who has given compassion of penalty provisions under the Income-Tax Act, 2025 and Income-Tax Act, 1961, which was published on 28th August 2025.

S. 472 : Bar of Limitation for imposing penalties. [Erstwhile section 275].

The limitation period for imposing penalties. Section 472 of the Income-Tax Act, 2025, replaces Section 275 of the 1961 Act.

Finance Act, 2025, effective from 1-4-2025, substituted the provision of the section. 275 to rationalise the limitation period for imposing the penalty. (2025) 474 ITR 64 (St). The Finance Act, 2025, substituted Section 275 and provided a new time limit for passing orders, imposing the penalty. The Committee observed that the provision retained the same context, with simplified language for greater insight.

Uniform time limit: As per the substituted provision, no penalty order imposing a penalty under Chapter XXI shall be passed after 6 months from the end of the quarter in which any of the following events occur.

(a) Completion of proceedings in the course of which the action for imposition of penalty has been initiated. This provision applies when the assessment order or other order is not the subject matter of an appeal under section 246, 246A, 253

(b) Passing of revision order under section 263 or 264 if the assessment order or other order is the subject matter of revision.

(c) Receipt of an appeal order under section 246 or 246A by the Jurisdictional Principal Commissioner, or Commissioner, where the assessment or other order is the subject matter of appeal under section 246 or 246A and no further appeal has been filed under section 253

(d) Receipt of an appeal order under section 253 by the Jurisdictional Principal Commissioner or Commissioner, where the assessment or other order is the subject matter of an appeal under section 253.

(e) Issuance of a penalty notice in any other case.

Further, where an assessment order is the subject of an appeal or revision, but before the appellate / revision order is passed, the tax authority passes an order imposing, enhancing, reducing, or dropping the penalty. In such a case, the penalty order can be passed within six months from the end of the quarter in which the appellate order is received by the Jurisdictional Principal Commissioner / Commissioner or the revision order is passed by the commissioner.

The substituted provision brings clarity on time limits for imposing penalties by providing a single time limit.

PCIT v. Geetaben Chandulal Prajapati [2018] 96 taxmann.com 100 (Guj)(HC)

Where penalty proceedings initiated against the assessee were dropped after considering the reply submitted by the assessee, the Assessing Officer was not justified in initiating fresh penalty proceedings on the same set of facts. [S. 275(IA)]

In respect of Section 450 (Erstwhile S 271D Penalty for defaults under section 269SS, 269T). The period of limitation starts from the date when penalty proceedings are initiated by the Joint Commissioner/DCIT and not from the date on which assessment proceedings are completed.

Deewan Chand Amritlal v. Dy. CIT (2006) 98 ITD 200 (SB)(Chd)(Trib)
CIT v. Hissaria Brothers (2016) 386 ITR 719/ 243 Taxman 174 (SC)
(CIT v. Hissaria Bros (2007) 291 ITR 244 / (2008) 169 Taxman 262 (Raj)(HC) affirmed.)

Penalty proceedings for contravention of sections 185 and 186 (Erstwhile sections 269SS & 269T, 271D, 271E) are not related to the assessment proceedings but are independent of them. Therefore, the completion of appellate proceedings arising out of the assessment proceedings has no relevance.

End of quarter: Refers to the conclusion of a quarter in a business’s fiscal year.

Issues may arise when the assessee accepts some of the disallowances and files an appeal only in respect of some of the disallowances. The limitation starts from which quarter as regards the issues which are not taken in appeal.

In the Income-Tax Bill 2025, when it was introduced, it had some provisions referring to it as “Shall”, for example, Clause 441- Failure to keep, maintain or retain books of account.

After considering the various suggestions, the Parliament Committee suggested “May”. [S. 441, Referred to as “May”]

Clause 451 – Penalty for failure to comply with provisions of section 186- (Except where he proves that there were good and sufficient reasons for the said contravention)

Now the section is worded as S. 451 (Erstwhile S. 271DA) “The Assessing Officer may impose on a person, a penalty equal to the sum received by him in contravention of the provision of section. 186. (Erstwhile S. 269ST)

S. 463: Penalty for furnishing incorrect information in reports or certificates- Refers to “Shall be liable”

S. 465: Penalty for failure to answer questions, sign statements, furnish information, returns or statements, allow inspection, etc, “Shall be liable“

Section 470: Penalty not to be imposed in certain cases. [Erstwhile section 273B]
Irrespective of anything contained in the provisions of section 441or 442, or 446 or 447 or 448 or 449 or 450 or 451 or 452 or 453 or 455 or 456 or 457 or 458 or 459 or 460 or 461 or 462 or 463 or 465 (1)(c) or 456(10)(d) or 465 (2) or 466 or 467 or 468. No penalty shall be imposed on a person or Assessee for any failure referred in the said provisions, if he proves that there was reasonable cause for the said failure. If the Assessee proves that there was reasonable cause for said failure.

Section 471. Procedure. (Erstwhile section 274]

S. 471 (1): No order of imposing the penalty under this chapter shall be made- Reasonable opportunity of being heard “shall be given”

S. 471 (2): No order of imposing the penalty under this chapter shall be made without proper approval. The order will be bad in law.

Under the Income-Tax Act, 2025, the expression ‘without prejudice’ has been removed from the corresponding sections of the Income-Tax Act, 1961 Act; the provisions are as under:

S. 440.Failure to keep, maintain or retain books of account, documents, etc [S. 271A, referred to 270A or section 271]

S. 441. Failure to keep and maintain information and documents, etc, in respect of certain transactions. [S. 271AA, referred S. 270A or 271, or 271BA]

S. 444. False entry in the books of account. [S.271AAD]

S. 445. Benefits to related persons. [S. 271AAE]

S. 461. Failure to furnish statements, etc [S. 271 H]

S. 462. For furnishing incorrect information in reports or certificates. [S. 271J]

S. 463. Failure to furnish statements, etc. [S. 271K]

S. 469. Power to reduce or waive penalty, etc., in certain cases [S. 273A (Notwithstanding anything, substituted by Irrespective of anything)

With the removal of the phrase “without prejudice”. It has become unclear whether any other provisions of the 2025 Act are still fully effective or whether these provisions will override or conflict with any other penalty provisions of the 2025 Act. The assessee will argue for mutual exclusivity, contending that the specific penalty provisions should apply for the underlying default, thereby precluding additional penalties for related non-compliance or its direct consequences. This may lead to legal disputes, which may have to be settled by the Courts.

Parliament Committee stated that,

The Expert/stakeholders raised concerns that the 2025 Act still allows dual penalties for the same contravention, even without the “Without prejudice” clause, by citing the following examples:

“For recording of any false entry in the books of account, penalty at the rate of 200% of the tax payable on under-reported income is leviable under section 439 (Section 270A of 1961 Act), and penalty equal to the aggregate amount of false entry is leviable under section 444 (Section 271AD of 1961 Act). Additionally, for failure to report any international transaction or any specified domestic transaction, in addition to the penalty under section 439 (Section 270A) of the 1961 Act, a penalty at the rate of 2% of the value of each international transaction under section 442(Section 271AA of the 1961 Act).”

Stakeholders have suggested that in such cases, only one penalty provision should apply.

About this suggestion, the Department of Revenue, in its written reply, stated as follows :

“The suggestions seek to remove certain dual penalties. It is like a policy change. All the penalty provisions in the Act serve a separate purpose of deterrence, which is essential for the effective implementation of the Act. Thus, suggestion is not feasible.”

(Source: Taxman Master Guide 2025, P. 1, 189)

Repeals and savings. Section 536(2)(d): Any show cause notice, penalty proceedings, or litigation arising from past assessments will remain adjudicated under the old law. Penalty proceedings initiated under sections 270A and 271 (1)(c) of the Act will not be invalidated merely due to the repeal. [Erstwhile Section 297]

3. Landmark cases which apply to the Income-tax Act, 2025

The judiciary has consistently emphasised certain fundamental principles in penalty proceedings. These principles, rooted in natural justice and legislative intent, will continue to be crucial. Some of the important case laws which are referred in day to day practice are referred to for the reference of the tax professionals.

Mens Rea / Genuineness of the explanation.

CIT v. Reliance Petroproducts Pvt. Ltd. (2010) 322 ITR 158 (SC)

This landmark Supreme Court judgment clarified that merely making an incorrect claim in the return of income would not, by itself, attract a penalty for furnishing inaccurate particulars. The burden is on the Revenue to establish that the assessee acted deliberately or with a guilty mind. This case is crucial because it distinguished between a mere “claim” and a “furnishing of inaccurate particulars.” While Section 270A (and by extension, Section 439 of the 2025 Act) explicitly refers to “under-reporting” and “misreporting,” the underlying principle of mens rea (guilty mind) in misreporting cases will continue to be debated and interpreted in light of such judgments.

Dilip N. Shroff v. CIT (2007) 291 ITR 519 (SC)

Supreme Court judgment was rendered under the erstwhile Section 271(1)(c), its emphasis on the requirement of “concealment of income” or “furnishing of inaccurate particulars of income” to be established by the Revenue, and that a mere claim which is later disallowed does not automatically invite penalty, holds significant persuasive value. The 2025 Act, in Section 439, differentiates between “under-reporting” (50% penalty) and “misreporting” (200% penalty), with misreporting having an exhaustive list of actions.

UOI v. Rajasthan Spinning & Weaving Mills (2009) 180 Taxman 609 (SC)

The Court observed as under: “ At this stage we need to examine the recent decision of this court in UOI v. Dharmendra Textiles (2008) 306 ITR 277 (SC). In almost every case relating to penalty, the decision is referred to on behalf of the Revenue as if it laid down that in every case of non-payment or short payment of duty, the penalty clause would automatically apply and the authority had no discretion in the matter. One of us (Aftab Alam, J) was a party to the decision in Dharmendra Textile, and we see no reason to understand or read that decision in that matter”

Discretionary Nature of Penalty:

CIT v. Anwar Ali (1970) 76 ITR 696 (SC)
This Supreme Court judgment, though older, established that penalty proceedings are distinct from assessment proceedings and the mere fact that an assessment has been made does not automatically warrant a penalty. The use of “may” on facts and circumstances, guided by the principles of reasonableness.

Hindustan Steel Ltd. v. State of Orissa (1972) 83 ITR 26 (SC)
This Supreme Court case laid down the principle that “An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct virtually amounting to a contumacious or dishonest disregard of its obligation.” This fundamental principle of mens rea being necessary for penalty, unless the statute specifically dispenses with it, remains highly relevant.

The Supreme Court in Hindustan Steel Ltd. v. State of Orissa (83 ITR 26) said it beautifully: “An order imposing penalty is the result of a quasi-criminal proceeding. Penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest.”

CIT v. Khoday Easwaras and Sons (1972) 83 ITR 369 (SC)

Though original assessment proceedings, for computing tax, may be a good item of evidence in penalty proceedings, but penalty cannot be levied solely based on the reasons given in the original order of assessment.

Procedural Aspects and Natural Justice:

Sahara India (Firm) v. CIT (2008) 300 ITR 403 (SC)
Principle of natural justice and due process of law. While the Income-Tax Act 2025 aims for more digital and faceless assessments, the underlying requirement for procedural fairness remains.

This Supreme Court case, though not directly on penalties, is relevant for all quasi-judicial proceedings under the Income-Tax Act, including penalty proceedings. It emphasised the importance of granting a proper opportunity to be heard, stating that a post-decisional hearing cannot substitute a pre-decisional hearing unless explicitly provided by the statute. The ratio of the judgment is that the tax authorities to follow due process before imposing penalties.

Bonafide mistake.

Price Waterhouse Coopers Pvt. Ltd. v. CIT (2012) 348 ITR 306/211 Taxman 40 (SC)
Reintroduced the idea of bona fide error or absence of fraudulent intent. No penalty can be imposed.

Faceless Regime and due opportunity.

Faceless schemes must adhere to natural justice, else orders are liable to be quashed. Refer Section 471, No order imposing penalty under this chapter(Chapter XXI) shall be made unless the assessee has been heard or has been given a reasonable opportunity of being heard.

Not specifying the charge.

Mohd. Farhan A. Shaikh v. Dy. CIT (2021) 434 ITR 1/ 280 Taxman 334 (Bom.)(HC). (FB)
Not specifying the charge, the notice is held to be bad in law; the order passed on the basis of said notice is also held to be bad in law. No DIN in show cause notice. The Authorities are bound to quash the proceedings; these are not procedural irregularities.

4. Waiver of penalties under section 469 of the Act. [Erstwhile section 273A of the Act]

Section 491 (3). (Erstwhile S.279(IA). A person shall not be proceeded against for an offence under section 478 (Wilful attempt to evade tax) Erstwhile S. 276C) or 482 (False statement in verification, etc [Erstwhile S. 277) in relation to the assessment for a tax year for which the penalty imposed or imposable on him under section 439 (Penalty for under-reporting and misreporting of income (Erstwhile, 270A) has been reduced or waived by an order under section 469. Once a penalty is waived partly or fully, no prosecution can be launched by the Commissioner.

Let me share with a live example, in one of the assesses, the penalty levied was 10 lakhs. We approached the commissioner to waive the penalty. The commissioner said I cannot waive the entire penalty. No sir, please waive at least 1 lakh. We will make a payment of 9 lakh penalty. The commissioner was very happy that the assesseee had paid a penalty of 9 lakhs. By this, the assessee is saved from the prosecution proceedings. The tax consultants may have to visualise the chances of prosecution and take an appropriate measure.

P. Jayappan v. S.K. Perumal, First ITO (1984) 149 ITR 696 (SC)
Ratio: Though the Supreme Court held that prosecution and assessment can proceed independently, it clarified that where the penalty is waived under the section. 273A, the bar under section 279(IA) applies and prosecution cannot be pursued.

Specific sections.

Prem Brothers Infrastructure LLP v. NFAC (2022) 288 Taxman 768 (Delhi)(HC)

Disallowance u/s 14A. Difference in quantum of disallowance cannot be held to be misreporting of income.

S. 446: Failure to get accounts audited. [S. 271B]

CIT v. S. K. Gupta & Co. (2010) 322 ITR 86 (All)(HC)

No books of account maintained – Penalty cannot be levied.

S. 450: Failure to comply with provisions of section 185. [S. 271D, 269SS]
CIT v. Ajitnath Hi Tech Builders (P) Ltd (2018) 92 taxmann.com 228 (Bom)(HC). (CIT v. Adinath Builders (P.) Ltd.(2019) 261 Taxman 168 (SC), SLP of revenue dismissed.)
Journal entries constitute a recognised mode of recording transactions. In absence of any adverse finding by authorities that journal entries were made with a view to achieve purposes out side normal business operations or there was any involvement of money, there is a reasonable cause for not complying with section 269SS and penalty under section 271D is not to be imposed.

S. 453: Failure to comply with provisions of section 188 [S.271E, 269T]

CIT v. Rugmini Ram Ragav Sinners (P)Ltd (2008) 304 ITR 417(Mad)(HC)

Amount received for allotment of shares is not a deposit or loan- Penalty cannot be levied.

CIT v. Shyam Corporation (2013) 218 Taxman 136 (Guj)(HC)
Advance received as taxed as undisclosed income taxed as cash credits u/s 68- Same cannot be considered as a deposit, penalty was deleted.

S. 465: Penalty for failure to answer questions, sign statements, etc [S. 272A]

CIT v. Shri Ram Memorial Education Promotion Society (2006) 152 Taxman 257 (All)(HC)

Once a person prescribed or concerned assessee has been subjected to a penalty u/s 271C for not deducting tax at source, there cannot be a penalty u/s 272A(c) and 272A(g) of the Act for non-compliance with provisions of Sections 203 and 206.

5. Reply to show cause notices and grounds of appeal, and statement of facts.
We are in the era of faceless assessment and faceless appeal. If a proper reply to the show cause notice is filed, it will help in the appeal proceedings. We have observed in some of the matters, the revenue is relying on the statement of third parties, and the assesseee have neither asked for a copy of the statement nor an opportunity of cross-examination. The reply to the show cause notice must be on facts and not on law. Whether a penalty is leviable or not is always a question of fact. In spite of filing confirmation, if the AO is not satisfied with the explanation, the assessee can request the assessing Officer to issue a summons. Once a request is made in writing burden shifts on to the revenue. It may be possible that the assessee may not be in a position to produce certain documents in the Assessment proceedings. The assessee should produce the same in penalty proceedings.

In the case of CIT v. Sun Engineering Works, (1992) 198 ITR 297 (SC), it was held that the judgment of the Court has to be read as a whole in the context it was delivered. It is neither desirable nor permissible to pick out a word or a statement from the judgment, divorced from the context of the question under consideration by the court, to support their reasoning.

In Arasmeta Captive Power Company P. Ltd. v. Lafarge India Pvt. Ltd., AIR 2014 SC 525, the Court held that while reading a judgment, the ratio decidendi must be understood in the background of the facts of the case. Judgments rendered by a court are not to be read like.

While preparing a reply to a show cause notice, one has to rely on facts and not on case laws.
The Statement of Facts and the Grounds of Appeal before the Commissioner (Appeals) are very important documents when appeals are filed before the Appellate Tribunal, the High Court and even the Supreme Court. This is because in appeals before the Tribunal or the High Court, or the Supreme Court, Statement of Facts and Grounds of Appeal before the Commissioner (Appeals) form part of the record.

Before the Appellate Tribunal, there is no provision permitting a Statement of Facts.

6. Jurisdictional issue in appellate proceedings.

Tidewater Marine International Inc v. Dy CIT (2005) 96 ITD 406 (Delhi)(Trib).

It was held that the jurisdiction of reassessment proceedings can be challenged in penalty proceedings, though not challenged in quantum proceedings. Where notice under section 148 had been issued beyond the statutory period prescribed under section 149(3), an assessment made based on such notice would be null and void. Since the very basis of imposition of penalty ceased to exist by virtue of the void assessment order, the penalty imposed under section 271(1)(c) was liable to be cancelled.

Shri Manish Manmohardas Asrani v. ITO (2025) 170 taxmann.com 792 (Mum)(Trib)

Not specifying the charge. Section 270A(8) or 270A(9) – Penalty was deleted

Revision of Limited scrutiny. Not issuing the mandatory notice u/s 143(2) in the assessment proceedings. Though not challenged the assessment order, in penalty proceedings the assessee can argue that as the revision it self being without jurisdiction, penalty levied on such order may be quashed.

7. Constitutional Remedies.
When there are impossibilities of performance or gross violations of natural justice, evidence is used against the assessee without giving an opportunity of hearing. Failure to pass the speaking order. It may be possible to approach the High Court by filing a writ petition in an appropriate case.

8. Conclusion.
The Income Tax Act, 1961, refers to 106 other Acts. The Income-tax Act 2025 also refers to 116 other Acts. Knowing the general law, especially the fundamental principle of the Constitution of India, will help the tax professionals to make better representations before the Assessing Officer, Commissioner (Appeals) and Appellate Tribunal. The chairman of the Committee, Mr. Tushar Hemani, Senior Advocate, may consider similar lecture series on general law applicable to Tax proceedings, direct and indirect taxes, with special reference to the Constitution of India. In the era of a faceless regime, only 0.3% returns are selected for scrutiny. We have a moral duty to follow the mandate of the Constitution of India, i.e.. Article 265 of the constitution “No tax shall be levied or collected except authority of law” and Article 51 of the Constitution of India, “Fundamental duties of every citizen of India– Duty to the Nation Clauses (a) to (J). let me refer only clause (J). “to strive towards excellence in all spheres of individual and collective activity so that the nation constantly rise to higher level of endeavour and achievement.”

Readers may send their suggestions or queries to aiftpho@gmail.com

Posted on: September 16th, 2025