Chapter XXI of the Income Tax Act, 1961, encompasses provisions related to the levy of penalties for various defaults and non-compliances by taxpayers. The primary objective is to ensure compliance and deter willful evasion or negligence in adhering to tax laws. Below is a detailed breakdown of the key provisions under this chapter, with relevant sections, examples, and case references for clarity.

1. Overview of Chapter XXI

Chapter XXI includes sections that deal with penalties for a range of defaults, such as under-reporting income, failing to maintain records, and non-compliance with specific provisions. The penalties are generally monetary and aim to promote adherence to tax laws.

Section	Nature of Default	Penalty
270A	Under-reporting or misreporting of income	50% to 200% of tax on under-reported income.
271A	Failure to maintain books of account	Fixed penalty of ₹25,000.
271B	Failure to get accounts audited	₹1,50,000 or 0.5% of turnover, whichever is lower.
271C	Failure to deduct or pay TDS	Equal to the tax not deducted or paid.
271DA	Receipt of cash above the prescribed limit	Amount equal to the sum received in violation.

2. Key Provisions in Detail

a) Section 270A: Under-Reporting and Misreporting of Income

• Under-Reporting: Penalty of 50% of the tax payable on under-reported income.
• Misreporting: Penalty of 200% of the tax payable.
• Examples of Misreporting:
  • Falsifying documents.
  • Failing to record investments in books of accounts.

Example	Under-Reported Income	Penalty
Case 1	₹2,00,000	50% of tax on ₹2,00,000.
Case 2	₹5,00,000 (misreported)	200% of tax on ₹5,00,000.

b) Section 271AAB: Penalty in Search Cases

• Applicable in cases where undisclosed income is detected during search proceedings.
• Penalty Rates:
  • 30% if admitted during the search and tax is paid promptly.
  • 60% for other cases.

c) Section 271AAD: False or Omitted Entries in Books

• Imposes penalties on both the taxpayer and anyone assisting in falsifying records.
• Penalty Amount: Equal to the aggregate value of false or omitted entries.
• Illustration:
  • False invoices worth ₹10,00,000 were issued.
  • Penalty = ₹10,00,000.

d) Section 271C: Failure to Deduct Tax at Source

• Failure to deduct or deposit TDS attracts a penalty equal to the unpaid tax.

Default	Penalty Amount
Non-deduction of ₹1,00,000	₹1,00,000

e) Section 271DA: Receipt of Cash Above Limit

• Receiving cash in excess of ₹2,00,000 in a single transaction or from a single person attracts penalties.
• Penalty Amount: Equal to the amount received in violation.

f) Section 273B: Exemptions for Reasonable Cause

• No penalty shall be imposed if the taxpayer proves reasonable cause for non-compliance.

3. Procedure for Levy of Penalty

• Penalty proceedings are initiated by issuing a show-cause notice under Section 274.
• The taxpayer is given an opportunity to explain why the penalty should not be imposed.

4. Appeals Against Penalty

• Penalty orders can be challenged:
  • Commissioner of Income Tax (Appeals): Section 246A.
  • Income Tax Appellate Tribunal (ITAT): Section 253.

5. Case Law References

• CIT v. Dharam Chand L. Shah (1993): Penalty proceedings are distinct and independent of assessment.
• CIT v. Onkar Saran and Sons (1992): Penalty is imposed based on the law at the time of default.

Conclusion

Chapter XXI of the Income Tax Act provides a robust framework for imposing penalties to ensure compliance. Understanding the provisions and defenses available, such as those under Section 273B, can help taxpayers mitigate the impact of penalties. Adhering to tax laws and maintaining proper records remain the best ways to avoid penalties.

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Additional Resources

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

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