Section 271AAC and Its Role in Handling Tax Non-CompliancePenalty

Section 271AAC of the Income Tax Act, 1961, deals with penalties for unexplained income and assets. Introduced by the Finance Act, 2017, this section was designed to address non-compliance with tax laws, especially in cases of unexplained credits, investments, expenditures, or amounts. Below is a comprehensive explanation of the conditions, penalty provisions, and defenses related to Section 271AAC.

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1. Applicability of Section 271AAC

Section 271AAC applies to:

• Unexplained Income or Amounts:
  • Cash credits under Section 68.
  • Unexplained investments under Section 69.
  • Unexplained money or expenditures under Sections 69A, 69B, or 69C.
  • Undisclosed assets under Section 69D.

Key Conditions for Penalty Imposition:

1. The income must be determined by the Assessing Officer (AO) during assessment proceedings under Sections 143(3) or 147.
2. The taxpayer has not offered the unexplained income in their return of income and paid tax.
3. Penalty is applicable irrespective of whether the taxpayer provides reasonable cause under Section 273B.

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2. Penalty Rate Under Section 271AAC

The penalty for unexplained income under this section is 10% of the tax payable on the income determined under Sections 68, 69, 69A, 69B, 69C, or 69D.

Illustration:

• Unexplained Income Identified: ₹10,00,000.
• Tax Payable (60% including surcharge): ₹6,00,000.
• Penalty (10% of tax): ₹60,000.

Particulars	Amount (₹)
Unexplained Income	10,00,000
Tax Payable (60%)	6,00,000
Penalty (10% of Tax Payable)	60,000

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3. Key Features of Section 271AAC

• Mandatory Penalty: Unlike other penalty provisions, Section 271AAC does not allow relief for reasonable cause under Section 273B.
• Scope: Covers all unexplained income and assets specified in Sections 68 to 69D.
• Imposition Authority:
  • The Assessing Officer (AO) imposes the penalty during assessment.

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4. Procedure for Imposing Penalty

1. Detection During Assessment:
   • The AO detects unexplained income or assets during assessment proceedings under Sections 143(3) or 147.
2. Show-Cause Notice:
   • A notice is issued to the taxpayer to explain the source of income.
3. Evaluation of Explanation:
   • If the explanation is unsatisfactory, the AO finalizes the assessment and imposes the penalty.

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5. Defenses Available to Taxpayers

While Section 271AAC does not allow for relief under Section 273B, taxpayers can minimize penalties by:

1. Voluntary Disclosure:
   • Declaring unexplained income in the return of income and paying tax before detection.
2. Timely Compliance:
   • Responding promptly to show-cause notices and cooperating during assessment.

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6. Relevant Case Laws

1. CIT v. Mak Data Pvt. Ltd. (2013):
   • The Supreme Court held that penalties are justified when income is detected by authorities, even if subsequently disclosed.
2. CIT v. Suresh Chandra Mittal (2001):
   • Highlighted the importance of voluntary disclosure in mitigating penalties.

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7. Key Differences Between Section 271AAC and Other Penalty Provisions

Aspect	Section 271AAC	Other Provisions (e.g., 270A)
Applicability	For unexplained income under Sections 68-69D.	For under-reporting or misreporting income.
Relief for Reasonable Cause	Not available.	Available under Section 273B.
Penalty Rate	10% of tax payable.	50% to 200% for misreporting.

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8. Appeals Against Penalty Orders

Taxpayers can challenge penalties under Section 271AAC:

• Appeals: File under Section 246A to the Commissioner of Income Tax (Appeals).
• Higher Authorities: Approach the Income Tax Appellate Tribunal (ITAT) if necessary.

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Conclusion

Section 271AAC provides a stringent framework for penalizing unexplained income, with mandatory penalties for non-compliance. Taxpayers must maintain proper records, ensure accurate reporting, and address unexplained income in their returns to avoid penalties. Early disclosure and timely compliance can mitigate potential liabilities.

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Additional Resources

Learn more about Tax Provisions on the official Income Tax India website.

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