Income Tax Act 1961 | Penalty provisions
Section 271AAC of the Income-tax Act, 1961: Penalty on Unexplained Income
Section 271AAC provides a special penalty where assessed income includes unexplained credits, investments, money, expenditure or hundi transactions covered by sections 68 to 69D and taxable under section 115BBE. The penalty is calculated with reference to the special tax, not as 10% of the unexplained income itself.
1. Meaning and scope of Section 271AAC
Under subsection (1), the Assessing Officer may direct payment of a penalty, in addition to the tax payable under section 115BBE, when income determined includes income described in sections 68, 69, 69A, 69B, 69C or 69D. The provision expressly operates subject to section 271AAB, which deals with certain undisclosed income in search cases.
Section 115BBE provides a special tax regime for these categories of unexplained income. Section 271AAC is a distinct penalty provision; it is not itself the charging section for the underlying income.
2. Income covered by Sections 68 to 69D
| Provision | What it addresses |
|---|---|
| Section 68 | Unexplained sums credited in the books of account where the statutory explanation requirement is not met. |
| Section 69 | Unexplained investments not recorded in the books, where applicable. |
| Section 69A | Unexplained ownership of money, bullion, jewellery or other valuable articles. |
| Section 69B | Investments or valuable articles where the amount expended exceeds the recorded amount and the excess is not satisfactorily explained. |
| Section 69C | Unexplained expenditure. |
| Section 69D | Amounts borrowed on, or repaid in respect of, hundis otherwise than through the prescribed banking channels. |
The statutory requirements and available explanations differ between these sections. A mere addition or disagreement does not dispense with the need to apply the relevant legal test.
3. How the Section 271AAC penalty is calculated
The statutory formula is 10% × tax payable under section 115BBE(1)(i) on the relevant income. Section 115BBE(1)(i) prescribes tax at 60%; therefore the base penalty is effectively 6% of the covered income.
| Illustration | Amount |
|---|---|
| Unexplained income assessed | Rs. 10,00,000 |
| Tax under section 115BBE(1)(i) at 60% | Rs. 6,00,000 |
| Section 271AAC penalty: 10% of that tax | Rs. 60,000 |
This illustration excludes applicable surcharge, health and education cess, interest and other liabilities. It also assumes that the proviso excluding penalty does not apply.
4. Exception: Disclosure in the return and timely payment
The proviso to section 271AAC(1) excludes penalty to the extent the income covered by sections 68 to 69D has been included in a return furnished under section 139 and tax in accordance with section 115BBE(1)(i) has been paid on or before the end of the relevant previous year.
Both the return-disclosure and payment conditions must be considered. Merely disclosing income in a return does not, by itself, establish eligibility for the exception if the required tax was not paid within the statutory period.
5. Penalty procedure and interaction with other provisions
Section 271AAC(2): No separate Section 270A penalty
Subsection (2) states that no penalty under section 270A is to be imposed in respect of the income covered by section 271AAC(1). This prevents application of the general under-reporting penalty to that same income.
Section 271AAC(3): Sections 274 and 275
The procedural provisions of sections 274 and 275 apply, as far as may be, to this penalty. They concern matters including an opportunity of being heard and statutory time limits. The facts, notices and applicable law should be reviewed before concluding that a particular penalty order is valid.
Section 271AAB: Search-related cases
Section 271AAC is expressly subject to section 271AAB. In relevant search cases, the special search-penalty rules and their date-specific conditions must be examined before applying section 271AAC.
6. Effective date and the Income-tax Act, 2025
Section 271AAC was inserted by the Taxation Laws (Second Amendment) Act, 2016, with effect from 1 April 2017. It remains important for assessments, proceedings and liabilities governed by the Income-tax Act, 1961. The Income-tax Act, 2025 introduces a new legislative framework effective from 1 April 2026; the applicable law for a particular tax year and any savings or transitional rules must be checked before applying a penalty provision.
This page explains the text and operation of section 271AAC of the 1961 Act. It should not be read as asserting that the same section number applies under the 2025 Act.
7. Frequently asked questions
Is the Section 271AAC penalty 10% of unexplained income?
No. It is 10% of the tax payable under section 115BBE(1)(i), ordinarily equivalent to 6% of the relevant unexplained income at the 60% special tax rate.
Can Section 270A penalty also be charged on the same income?
Section 271AAC(2) bars a section 270A penalty in respect of income referred to in section 271AAC(1).
Does declaring unexplained income in a return automatically avoid penalty?
No. The statutory proviso also requires payment of the specified section 115BBE tax by the end of the relevant previous year.
Does Section 271AAC apply to every cash deposit?
No. The legal conditions of sections 68 to 69D and the assessed facts must first be established. A cash deposit alone does not automatically determine liability under section 271AAC.
8. Official legislation and reference materials
- Income-tax Act, 1961 - Income Tax Department (consult sections 68 to 69D, 115BBE, 270A, 271AAB, 271AAC, 274 and 275).
- India Code - Government of India (official central legislation database).
- Income Tax Department e-Filing Portal (returns, notices and compliance).
Original statutory extract and amendment note
Section 271AAC(1). Where income determined includes income referred to in section 68, 69, 69A, 69B, 69C or 69D, the Assessing Officer may, subject to section 271AAB, direct a penalty equal to ten per cent of tax payable under section 115BBE(1)(i).
Proviso. No penalty is levied to the extent the income was included in the return under section 139 and the required tax was paid on or before the end of the relevant previous year.
Subsections (2) and (3). Section 270A penalty does not apply to the same income; sections 274 and 275 apply as far as may be.
Legislative history: Inserted by Act 48 of 2016, section 4, with effect from 1 April 2017.
This article is general legal information, not advice for any specific assessment. Check the statute and relevant amendments applicable to the tax year and proceedings concerned.