Income-tax Act, 1961 | Chapter XXI

Section 274: Procedure for Imposing Income Tax Penalties

Section 274 of the Income-tax Act, 1961 prescribes procedural safeguards before a penalty is imposed under Chapter XXI. It addresses the taxpayer's opportunity of hearing, approval of specified higher-value penalties, administration of faceless penalty proceedings and communication of penalty orders.

Legal position in 2026: The Income-tax Act, 2025 took effect on 1 April 2026. Under its section 536, proceedings for tax years beginning before that date, including penalty proceedings, continue under the applicable provisions of the Income-tax Act, 1961. The section number 274 in the new Act should not be assumed to refer to the same subject.

Meaning and provisions of Section 274

Section 274(1): Opportunity of being heard

A penalty order cannot be made under Chapter XXI without hearing the assessee or giving a reasonable opportunity of being heard. The taxpayer should examine the alleged default, relevant penalty provision and time allowed to respond to the notice. A notice and an effective opportunity to respond are essential procedural safeguards.

Section 274(2): Prior approval for specified penalties

An Income-tax Officer cannot impose a penalty exceeding Rs. 10,000, and an Assistant Commissioner or Deputy Commissioner cannot impose a penalty exceeding Rs. 20,000, without prior approval of the Joint Commissioner. These are approval thresholds, not general maximum penalty amounts or exemptions from penalty.

Section 274(2A): Faceless penalty scheme

This provision enables the Central Government to notify a scheme to improve efficiency, transparency and accountability, including reduced physical interface, scale-based use of resources and dynamic jurisdiction. Applicability depends on the governing notifications and exclusions for the particular case.

Section 274(3): Copy of penalty order

Where an income-tax authority other than the Assessing Officer makes a penalty order under Chapter XXI, a copy must be sent promptly to the Assessing Officer.

How to respond to a penalty notice

Read the notice carefully and identify the exact penalty provision, alleged default and relevant assessment year.
Check whether the authority is competent and whether prior approval is required under section 274(2).
Prepare a point-by-point reply with returns, accounts, challans, correspondence and other supporting records.
Explain any statutory defence, including reasonable cause under section 273B where that provision covers the alleged failure.
Submit the response within the prescribed period and preserve the acknowledgement; seek a hearing or extension when justified.
On receipt of an adverse order, check the applicable appeal provisions and limitation period, including section 275 where relevant.

Faceless penalty proceedings

The Income Tax Department's faceless scheme guidance explains the framework and categories excluded from the scheme. Notices and replies may be handled electronically through the official income-tax e-filing portal, subject to the procedure applicable to the case.

Income-tax Act, 2025: Transitional application

Section 536 of the Income-tax Act, 2025 contains repeal and savings rules. The Income Tax Department explains that pending proceedings, and proceedings initiated after 1 April 2026 for earlier tax years, are governed by the 1961 Act. Thus section 274 remains important for qualifying legacy penalty matters; proceedings for later tax years must be examined under the corresponding provisions of the new legislation.

Historical statutory context

The original webpage reproduced subsections (1), (2) and (3), together with amendment notes. Subsection (2A), concerning the faceless penalty framework, was added subsequently and is included in this revised explanation. The earlier amendments recorded on the page include the Direct Tax Laws (Amendment) Act, 1987 and Finance (No. 2) Act, 1998, which shaped the approval and order-communication provisions. Historical wording must always be checked against the version applicable to the relevant assessment year.

Frequently asked questions

Can a penalty be imposed without hearing the taxpayer?

Section 274(1) requires a hearing or reasonable opportunity of hearing before a penalty order under Chapter XXI is made.

Does every penalty require Joint Commissioner approval?

No. Section 274(2) prescribes approval requirements based on the rank of the officer and the penalty amount.

Does section 274 itself cancel a penalty for reasonable cause?

No. Section 274 deals with procedure. Section 273B separately provides reasonable-cause protection for the defaults expressly covered by that section.

Official legislation and guidance

Updated 28 October 2026. This article provides general statutory information. The law and procedural requirements applicable to a specific assessment year and notice should be checked independently.