The Finance Bill, 2026 proposes a significant procedural reform by mandating that penalties for under-reporting or misreporting of income under section 270A be imposed directly within the assessment order, instead of through separate penalty proceedings. Currently, penalties are initiated in the assessment order but imposed later through independent proceedings under section 274, leading to multiplicity of actions, prolonged uncertainty for taxpayers, and increased compliance burden. The proposed amendment aims to streamline the process, ensure certainty, and reduce litigation by issuing a single, consolidated order for assessment and penalty. Consequential changes are also proposed in section 220 to defer charging of interest on penalty-related demands until disposal of appeals by CIT(A) or ITAT, and in section 245MA to allow the Dispute Resolution Committee to waive penalties already imposed in assessment orders. Further, a new provision clarifies that income on which additional tax is paid under section 140B will not attract penalty. These amendments are effective prospectively from assessment actions initiated on or after 1 April 2027, with certain provisions applied retrospectively from 1 March 2026.
Imposition of penalty for under-reporting or misreporting of income within Assessment Order:
Under the existing provisions of the Income-tax Act, first an assessment order is passed and based on the findings or additions made in it and subject to the status of appellate proceedings, penalty is initiated in the assessment order by the Assessing Officer. Subsequently, separate penalty proceedings are initiated by giving a show cause notice and a separate penalty order is passed after giving due opportunity to the assessee.
2. Section 274 of the Income-tax Act, 1961 (herein after as “1961 Act”) prescribes the procedure for imposing penalties and mandates that no penalty shall be levied unless the assessee is given a reasonable opportunity of being heard. It requires the Assessing Officer to issue a show-cause notice for which the penalty is proposed, and in certain cases, prior approval of higher authorities is necessary before imposing the penalty. The section ensures adherence to the principles of natural justice and aims to prevent arbitrary or invalid penalty proceedings.
3. Section 220 of the 1961 Act, deals with the payment and recovery of tax demand, stating that any amount specified in a notice of demand under Section 156 must be paid within 30 days of service of the notice. If the assessee fails to pay within this period, they are deemed to be in default and become liable to interest under Section 220(2), along with possible recovery proceedings such as attachment of property. The Assessing Officer may, however, allow payment by instalments or extend the time for payment, subject to conditions, to provide relief in genuine cases.
4. Section 245MA of the 1961 Act, provides for the Dispute Resolution Committee (DRC). It prescribes for the constitution of a DRC to resolve disputes of specified small and medium taxpayers in a cost-effective and expeditious manner. The Committee is empowered to reduce or waive penalties and grant immunity from prosecution, subject to conditions, with the objective of reducing litigation. The section lays down eligibility, procedure, and binding nature of the DRC’s order, promoting voluntary compliance and speedy dispute resolution.
5. In this regard, it is considered that the above scheme leads to multiplicity of proceedings, as eventually penalty has to be imposed based on the findings of the assessment order and additions made in it and subject to the status of appellate proceedings. Further, taxpayer remains in uncertainty regarding the status of imposition of penalty as the appellate proceedings may stretch to multiple years. In this context, a common order for both assessment and penalty for under-reporting and misreporting of income will ensure avoiding multiplicity of proceedings which in turn would reduce the compliance of the tax payers apart from providing consistency in levying of penalty.
6. Accordingly, it is proposed to amend section 274, to provide that, penalty for underreporting of income under levied under section 270A to be imposed within the assessment Order. Further, section 220 is also proposed to be amended for charging of interest under section 220(2) only after passing of the order by CIT(A) or ITAT (for appeal against DRP orders ), as case maybe. Consequential amendment is also proposed in section 245MA.
The proposed amendments shall come into force in the Income-tax Act, 2025 from 1st day of April, 2026 and shall be effective from 1st day of April, 2027, where any draft of the proposed order of assessment under section 275 is made or assessment under section 270 or reassessment under section 279 is made on or after 1st of April, 2027.
7. Further, similar amendments are also proposed in Income-tax Act, 1961 in section 274, 220, 234MA. It is further proposed that these proposed amendments shall come into force in the Income-tax Act, 1961 from the 1st day of March, 2026 and shall be effective from 1st day of April, 2027, where any draft of the proposed order of assessment under section 144C is made or assessment under section 143 or reassessment under section 147 is made on or after 1st of April, 2027.
[Clause 11, 13, 14]
Extract of Relevant Clauses of Finance Bill, 2026
Clause 11 of the Bill seeks to amend section 220 of the Income-tax Act, 1961 relating to when tax payable and when assessee deemed in default.
The said section provides the payment and recovery of tax demand, stating that any amount specified in a notice of demand under section 156 must be paid within thirty days of service of the notice. If the assessee fails to pay within this period, they are deemed to be in default and become liable to interest under sub-section (2) of section 220, along with possible recovery proceedings such as attachment of property. The Assessing Officer may, however, allow payment by instalments or extend the time for payment, subject to conditions, to provide relief in genuine cases.
In section 274, it is proposed to provide that, penalty for under-reporting of income under leviable under section 270A shall be imposed in the assessment order.
It is proposed to make consequential amendment in sub-section (2) of section 220 for charging of interest under the said sub-section in respect of any demand raised on account of penalty levied under section 270A only after passing of the order by the Commissioner of Income-tax (Appeals) or the Income-tax Appellate Tribunal (for appeal against the order passed in pursuance of directions issued by the Dispute Resolution Panel order), as the case may be.
Clause 13 of the Bill seeks to amend section 245MA of the Income-tax Act, 1961 relating to Dispute Resolution Committee.
The said section provides for the constitution of a Dispute Resolution Committee to resolve disputes of specified small and medium taxpayers in a cost-effective and expeditious manner. The said Committee is empowered to reduce or waive penalties and grant immunity from prosecution, subject to conditions, with the objective of reducing litigation. The section lays down eligibility, procedure, and binding nature of the Dispute Resolution Committee order, promoting voluntary compliance and speedy dispute resolution.
It is proposed to amend the said section so as to provide that penalty for under-reporting of income leviable under section 270A imposed in the assessment order may be waived by the Dispute Resolution Committee.
This amendment will take effect retrospectively from 1st March, 2026.
Clause 14 of the Bill seeks to amend section 270A of the Income-tax Act, 1961 relating to penalty for under reporting and misreporting of income.
It is proposed to insert a new sub-section (11A) in the said section so as to provide that where additional income-tax is paid in accordance with sub-section (3A) of section 140B, the income on which such additional income-tax is paid shall not form the basis of imposition of penalty.
This amendment will take effect retrospectively from 1st March, 2026.
Extract of Relevant Amendment Proposed by Finance Bill, 2026
11. Amendment of section 220.
In section 220 of the Income-tax Act, 1961, in sub-section (2), after the third proviso, the following proviso shall be inserted and shall be deemed to have been inserted with effect from the 1st day of March, 2026, namely:– –
“Provided also that no interest shall be charged under this sub-section in respect of any demand raised on account of penalty levied under section 270A––
(a) up to the date of passing of the order under section 250;
(b) up to the date of passing of the order under section 254, where the assessment or reassessment has been made in pursuance to directions issued by the Dispute Resolution Panel under section 144C.”.
13. Amendment of section 245MA.
In section 245MA of the Income-tax Act, in sub-section (2), for the words “waive any penalty imposable”, the words “waive any penalty imposed or imposable” shall be substituted and shall be deemed to have been substituted with effect from the 1st day of March, 2026.
14. Amendment of section 270A.
In section 270A of the Income-tax Act, after sub-section (11), the following sub-section shall be inserted and shall be deemed to have been inserted with effect from the 1st day of March, 2026, namely:––
“(11A) Where additional income-tax is paid in accordance with subsection (3A) of section 140B, the income on which such additional income-tax is paid shall not form the basis of imposition of penalty under this section.”.
