Penalty Notices, and Immunity under Section 270AA

An assessment order often ends with a line initiating penalty proceedings, and a separate notice follows. The amounts can be large: half the tax on the addition for under-reporting, twice the tax for misreporting. Yet the same order also opens a door to immunity, if the taxpayer pays and does not appeal within a short window. The reader’s difficulty is knowing which penalty is proposed, what the notice must say, and whether accepting the assessment in exchange for immunity is available on the facts.

Which Act governs which years

Section 536(2)(d) of the Income-tax Act, 2025 provides that “any proceeding for the imposition of a penalty in respect of any tax year beginning before the 1st April, 2026, may be initiated and any such penalty may be imposed under the repealed Income-tax Act, as if this Act had not been enacted”. Penalties for assessment year 2026-27 and earlier therefore remain under the Income-tax Act, 1961:

• Assessment year 2017-18 onwards: penalty for under-reporting and misreporting is under section 270A, which replaced section 271(1)© from that year.
• Earlier years: section 271(1)© governs any surviving proceedings.
• Tax year 2026-27 onwards: the 2025 Act applies.

Point	1961 Act	2025 Act
Under-reporting and misreporting	s.270A	s.439
Immunity	s.270AA, Form No. 68 (rule 129, 1962 Rules)	s.440, now “Waiver of penalty and immunity from prosecution”; Form No. 161 (rule 231, 2026 Rules)
Unexplained credits and investments (ss.68–69D)	s.271AAC, 10 per cent	s.443 omitted by the Finance Act, 2026; such income is now misreporting under s.439(11)(g)
False entries in books	s.271AAD	s.444
Procedure	s.274	s.471
Time limit	s.275	s.472

Under-reporting and misreporting under section 270A

Section 270A(2) lists when a person “shall be considered to have under-reported his income”. The main cases are:

• the income assessed exceeds the income determined on processing under section 143(1)(a);
• the income reassessed exceeds the income previously assessed;
• no return was filed and the income assessed exceeds the amount not chargeable to tax;
• a loss is reduced or converted into income.

Section 270A(6) excludes from under-reported income:

• an amount for which the explanation is “bona fide and the assessee has disclosed all the material facts”;
• estimated additions where the accounts are correct and complete;
• an estimate where the assessee had itself offered a lower figure on the same issue and disclosed the facts;
• transfer pricing additions where the documentation was kept and the facts disclosed;
• undisclosed income covered by section 271AAB.

The rates are fixed:

• Under-reporting: “fifty per cent of the amount of tax payable on under-reported income” (section 270A(7)).
• Misreporting: “two hundred per cent” where the under-reporting “is in consequence of any misreporting” (section 270A(8)). Section 270A(9) gives a closed list of misreporting cases:
  1. misrepresentation or suppression of facts;
  2. failure to record investments in the books;
  3. a claim of expenditure “not substantiated by any evidence”;
  4. a false entry in the books;
  5. failure to record a receipt bearing on total income;
  6. failure to report an international transaction or specified domestic transaction.

The 2025 Act’s section 439 keeps the same structure: 50 per cent in section 439(9), 200 per cent in section 439(10), and the six cases in section 439(11)(a) to (f). The Finance Act, 2026 added a seventh case, clause (g): “income referred to in section 195(1)(b)”. This brings unexplained credits, investments and expenditure into the 200 per cent category, and section 443, the counterpart of section 271AAC, was omitted at the same time. The Budget Speech of 1 February 2026 (Part B, Annex) described this as merging the 10 per cent penalty on such income “with penalty for underreporting of income in consequence of misreporting”.

Section 271AAC for 1961 Act years

For income treated as unexplained under sections 68 to 69D, section 271AAC imposes a penalty of “ten per cent of the tax payable under clause (i) of sub-section (1) of section 115BBE”. No penalty under section 270A can then be imposed on the same income (section 271AAC(2)). The penalty does not apply to the extent the income was included in the return and the tax under section 115BBE was paid by the end of the previous year (proviso to section 271AAC(1)).

What the procedure requires

Section 274(1) states that “No order imposing a penalty under this Chapter shall be made unless the assessee has been heard, or has been given a reasonable opportunity of being heard”. An order by:

• an Income-tax Officer imposing more than Rs 10,000, or
• an Assistant or Deputy Commissioner imposing more than Rs 20,000

needs the prior approval of the Joint Commissioner (section 274(2)).

Section 274(2A) enables a scheme for faceless penalty proceedings. The Faceless Penalty Scheme, 2021, made under it and amended in 2022, provides for penalties to be dealt with through the faceless centres.

For 2025 Act years, the Finance Act, 2026 changed the procedure in two ways:

• Show cause in writing: section 471(1) now requires the hearing to be given “by way of a show-cause notice to that effect”.
• Penalty inside the assessment: under section 471(4), for any draft or assessment or reassessment order made on or after 1 April 2027, the penalty under section 439 “shall constitute part of such draft assessment” or “shall be imposed as a part of such order of assessment or reassessment”. Separate penalty orders will thus end for 2025 Act assessments from that date. Section 411(3)(b), also inserted by the Finance Act, 2026, stops interest on a penalty demand under section 439 until the Commissioner (Appeals) decides.

The notice must say which limb

Because the rate and the immunity both turn on the distinction, the notice and the order must identify whether under-reporting or misreporting is alleged, and on what facts.

In Schneider Electric South East Asia (HQ) Pte Ltd v. ACIT (Delhi High Court, W.P.© 5111/2022, 28 March 2022), the assessee had accepted its assessment for assessment year 2018-19. The assessment was largely a voluntary computation offered “to buy peace”, and the dispute was a pure question of law. The assessee applied for immunity, and the Assessing Officer rejected the application on the ground that penalty had been initiated for misreporting. The Court set the rejection aside. It held that the penalty notice “failed to specify the limb - ‘underreporting’ or ‘misreporting’ of income” and that there was “not even a whisper as to which limb of Section 270A of the Act is attracted and how the ingredient of sub-section (9) of Section 270A is satisfied”. It directed the grant of immunity. The decision has been followed by Tribunals. An appeal by the Revenue to the Supreme Court against it was not traced.

Immunity under section 270AA (1961 Act years)

The conditions are in section 270AA(1):

• “the tax and interest payable as per the order of assessment or reassessment under sub-section (3) of section 143 or section 147 … has been paid within the period specified in such notice of demand”; and
• “no appeal against the order … has been filed”.

The procedure follows from the rest of the section:

• Timing and form. The application is made “within one month from the end of the month in which the order … has been received” (section 270AA(2)), in Form No. 68 under rule 129 of the Income-tax Rules, 1962.
• When it is granted. The Assessing Officer grants immunity after the appeal period has expired, “where the proceedings for penalty under section 270A has not been initiated under the circumstances referred to in sub-section (9)” (section 270AA(3)). Immunity is therefore not available where misreporting has been properly alleged.
• Order on the application. It is passed within three months from the end of the month of receipt (section 270AA(4)). The Finance Act, 2025 substituted “three months” for “one month” from 1 April 2025. No rejection is allowed without a hearing.
• Effect. Once immunity is granted, no appeal under section 246 or 246A, and no revision under section 264, lies against that assessment (section 270AA(6)). Immunity covers both the section 270A penalty and prosecution under sections 276C and 276CC.

Waiver and immunity under section 440 (2025 Act years)

The Finance Act, 2026 substituted section 440(1) to (4). It now offers “waiver of penalty levied under section 439” and immunity from prosecution under sections 478 and 479, including for misreporting. The conditions are:

• the tax and interest under the assessment or reassessment are paid within the demand period;
• for misreporting under section 439(11)(a) to (f), additional income-tax of 100 per cent of the tax on under-reported income is paid within the demand period, “in lieu of such penalty”;
• for clause (g) income, the additional income-tax is 120 per cent;
• no appeal is filed against the assessment, the reassessment or the levy.

The application is still due within one month from the end of the month of receipt. No waiver is allowed “if any proceeding has been initiated under Chapter XXII” (section 440(4)). Rule 231 prescribes Form No. 161, though the rule’s wording still describes the pre-amendment “immunity”.

Time limit for the penalty order

Section 275, substituted by the Finance Act, 2025 from 1 April 2025, bars any penalty order “after the expiry of six months from the end of the quarter in which” the relevant event occurs. The event depends on the route the assessment takes:

• the proceedings are completed, where there is no appeal;
• the revision order is passed;
• the appellate order is received by the jurisdictional Commissioner;
• in any other case, the penalty notice is issued.

Section 472 of the 2025 Act carries the same rule.

What to have ready

• The assessment order, read for the exact sentence initiating penalty and the section and limb named.
• The penalty show-cause notice, with its date.
• The demand notice and challans for tax and interest paid, with dates. These matter for the immunity conditions.
• Evidence for any section 270A(6) exclusion: the bona fide explanation, disclosure in the return, transfer pricing documentation.
• The date of receipt of the assessment order, which starts the one-month immunity window.

Responding on the portal

Penalty notices appear in e-Proceedings among notices “issued by Assessing Officer or any other Income Tax Authority”. The portal’s user manual describes Submit Response, with a written reply and categorised attachments, and Seek/View Adjournment.

Summary

1. Fix the year. Section 536(2)(d) keeps penalties for assessment year 2026-27 and earlier under the 1961 Act.
2. Identify the penalty: section 270A at 50 per cent or 200 per cent, section 271AAC, section 271AAD, or another. Check that the notice names the limb and the facts.
3. Within one month from the end of the month in which the assessment order was received, decide on immunity. Pay the tax and interest within the demand period, file no appeal, and apply in Form No. 68 (or Form No. 161, with the additional tax, for 2025 Act years).
4. Otherwise, reply to the show-cause notice with the facts supporting a section 270A(6) exclusion, and seek a hearing.
5. Check that any penalty order was passed within the section 275 or section 472 limit.

The next guide in this set covers rectification of mistakes under section 154.