Here’s a detailed explanation of Penalty under Section 271AAC of the Income Tax Act, 1961, which applies to certain types of undisclosed or unexplained income:
1. Overview of Section 271AAC
Section 271AAC imposes a penalty on taxpayers who fail to account for income categorized under Sections 68, 69, 69A, 69B, 69C, or 69D of the Income Tax Act. These sections cover:
- Unexplained cash credits (Section 68)
- Unrecorded investments (Section 69)
- Unexplained money, jewelry, or assets (Sections 69A–69D).
The penalty is 10% of the tax payable under Section 115BBE, which taxes such income at a flat rate of 60% (plus surcharge and cess) without allowing deductions.
2. When Does the Penalty Apply?
The penalty is triggered if:
- The Assessing Officer (AO) identifies income under the above sections during assessment.
- The taxpayer fails to disclosesuch income in their return or does not pay the due tax under Section 115BBE by the end of the financial year.
Example: If Mr. Sharma cannot explain a cash loan of ₹10 lakhs (treated as income under Section 68), he faces a penalty of 10% of the tax calculated on ₹10 lakhs at 60% (i.e., ₹6 lakhs × 10% = ₹60,000).
3. Exceptions to Penalty
No penalty is levied if:
- The taxpayer voluntarily disclosesthe income in their return and pays the tax under Section 115BBE before the financial year ends.
- The income is already taxed under other provisions (e.g., business income under Section 28).
4. Key Differences from Other Penalties
| ASPECT | SECTION 271AAC | SECTION 270A (UNDERREPORTING) |
| Rate | 10% of tax under 115BBE | 50%–200% of underreported income |
| Applicability | Only for Sections 68–69D | General underreporting/misreporting |
| Waiver | Possible via disclosure | No waiver for misreporting |
5. How to Avoid Penalty?
- Disclose all incomein tax returns, including cash transactions.
- Maintain documentation(e.g., loan agreements, purchase bills) to explain sources.
- Use accounting softwareto track income/expenses and ensure compliance.
6. Legal Recourse
- Taxpayers can appealpenalties before the Commissioner (Appeals) or Income Tax Appellate Tribunal (ITAT).
- Recent cases (e.g., Hirapanna Jewellers) highlight that penalties are invalid if income is already declared as revenue.
7. Practical Implications
- Mandatory Nature: The penalty is not discretionary—once triggered, it must be imposed unless exceptions apply.
- No Prosecution: Unlike Section 277 (false statements), Section 271AAC only imposes financial penalties
