INTRODUCTION
Taxation isn’t just about paying what’s due. It’s about playing by the rules — filing on time, declaring truthfully and cooperating with the authorities. When taxpayers cross the line, the Income Tax Act steps in with an entire chapter on penalties, designed not just to punish but to deter evasion and negligence. Sections 271 to 275 are the backbone of this penalty regime. They cover everything from concealment of income to failure to comply with notices. Let’s unpack how they work and how one famous case rattled the system.
Section 271: The Big Hammer
Section 271 is where most penalty actions begin. It grants the Assessing Officer the power to penalise a taxpayer for a range of defaults. The classic use of 271 is for concealment of income or furnishing inaccurate particulars of income.
Suppose you under-report your income by hiding a source or inflating expenses — that’s concealment. If caught, you face a penalty that can range from 100% to 300% of the tax sought to be evaded. It’s steep by design. The idea is to make evasion more painful than honest payment.
But 271 isn’t only about concealment. Fail to comply with a notice under section 142(1) or 143(2) — for instance, skipping a summons to produce documents or attend a hearing — and you can be penalised up to ₹10,000 for each failure.
There’s more: failure to maintain books under section 44AA, non-compliance with section 92D on transfer pricing documentation — all fall under 271’s net.
Section 271A: No Books? No Excuse
Where 271 deals with broad offences, 271A zooms in on books of account. Under section 44AA, certain professionals and businesses must maintain proper books. If they don’t, the penalty is straightforward — ₹25,000. Not massive, but enough to sting small businesses and remind them of their paperwork duties.
Section 271AA: Transfer Pricing Trap
As Indian business globalised, transfer pricing — pricing of cross-border transactions between related entities — became fertile ground for tax avoidance. Section 271AA tackles this. If an assessee fails to maintain prescribed documents for international or specified domestic transactions, doesn’t report them, or provides incorrect info, the penalty is 2% of the value of each such transaction.
In big MNC setups, this can run into crores. The idea is to compel transparency in related-party transactions.
Section 271B: Audit Or Else
Section 44AB mandates tax audits for businesses and professionals crossing certain turnover limits. Fail to get your accounts audited or fail to submit the audit report in time? Section 271B slaps you with a penalty — 0.5% of turnover, subject to a max of ₹1.5 lakh.
Small businesses often trip here, either through ignorance or casualness. The department rarely looks kindly on it.
Section 271C: TDS Default
TDS (Tax Deducted at Source) is the government’s way of collecting tax in advance. Employers, businesses and others deduct tax before paying salaries, rent, contractor fees and so on. If you don’t deduct TDS when you should, or deduct but don’t deposit it with the government, Section 271C applies. The penalty equals the amount of tax you failed to deduct or deposit. Simple. Painful.
Section 271D and 271E: Cash Transactions Clampdown
To curb black money, sections 269SS and 269T bar acceptance or repayment of loans or deposits in cash above ₹20,000. The penalty under 271D (for taking/accepting) or 271E (for repaying) is equal to the amount involved.
People often underestimate this. Say you accept ₹5 lakh cash as a loan to buy property. If caught, you can be penalised ₹5 lakh — the whole amount. The courts have been strict here to discourage large cash deals.
Section 271F: Late Return Filing
Section 271F used to penalise failure to file a return before the end of the assessment year. The penalty was ₹5,000. After the Finance Act 2017, this provision was effectively replaced by section 234F, which levies late fees. But older cases under 271F still pop up in litigation.
Section 271FA: Statement of Financial Transactions
Certain entities must furnish a statement of specified financial transactions (earlier called Annual Information Return). Banks, mutual funds, registrars must report high-value transactions. If they fail, 271FA prescribes a penalty of ₹500 per day of default. If they ignore a notice, it jumps to ₹1,000 per day.
Sections 271G and 271H: Reporting Non-Compliance
Transfer pricing again features under 271G — failure to furnish information/documents can attract a penalty up to 2% of the transaction value. Section 271H deals with failure to file TDS/TCS returns or filing incorrect ones. The penalty ranges from ₹10,000 to ₹1 lakh.
Section 272A–275: Other Defaults and Time Limits
Sections 272A and onwards cover other lapses — like refusing inspections, failing to answer questions, not furnishing returns or certificates — with fixed monetary penalties.
Section 275 is crucial as it sets the time limit for imposing penalties. If no time limit existed, a penalty could hang over taxpayers indefinitely. Generally, the department must levy the penalty within six months to a year of completing related proceedings.
Case: Hindustan Steel Ltd. vs State of Orissa
Though old, the Supreme Court’s 1969 decision in Hindustan Steel Ltd. vs State of Orissa remains a landmark in penalty jurisprudence. Here, the company was penalised for failing to register as a dealer under the Orissa Sales Tax Act. The Court ruled that penalty should not be imposed merely because it is lawful to do so. It must be justified by deliberate defiance or contumacious conduct.
This case shaped the principle that penalties are not automatic. Mens rea (guilty mind) or deliberate defiance must exist for harsh penalties like concealment under 271(1)(c). It continues to be cited by taxpayers to argue against mechanical penalties.
However, over time, revenue authorities have tried to stretch the scope of penalties, especially under 271(1)(c). The difference between “inaccurate particulars” and “concealment” has led to years of litigation. Sometimes genuine mistakes get labelled as concealment, leading to harsh fines. Courts often have to step in to interpret intent.
CONCLUSION
Tax penalties are serious. Many are mandatory once conditions are met. Some, like 271(1)(c), still involve a bit of discretion — and that’s where interpretation, case law and good representation matter.
What’s clear is this: keep your books in order, respond to notices, avoid large cash dealings, file returns and statements on time and report cross-border transactions with care. If you don’t, these sections have enough teeth to bite. For tax professionals and taxpayers alike, understanding the penalty provisions is as important as knowing deductions. One saves money. The other saves your peace of mind
CONTRIBUTED BY : LAKSHAY NANDWANI (INTERN)