Most taxpayers who receive an income tax assessment order assume that if additions are made to their income, a penalty is automatic. For many provisions — Sections 271(1)(c), 270A, 271AAB — that assumption is largely correct. But Section 271AAC is different. It is a penalty that is almost entirely avoidable — if you act within 30 days.
What Section 271AAC Covers
Section 271AAC was inserted by the Finance Act 2016 to deal with a specific and serious category: income that has been assessed under Sections 68, 69, 69A, 69B, 69C, or 69D — the “unexplained” income provisions — and is thus taxable at the 60% flat rate under Section 115BBE.
When an Assessing Officer makes an addition under any of these sections and raises a demand, Section 271AAC mandates a penalty of 10% of the tax payable under Section 115BBE. Since the tax itself is 60%, the effective additional cost is 6% of the unexplained income — on top of the 75–78% effective tax rate already applicable.
The 30-Day Escape Window
Here is the critical provision that most taxpayers miss: Section 271AAC(1) provides that no penalty shall be levied if the assessee pays the tax on the income under Section 115BBE on or before the end of the previous year in which the income was detected.
In practice, what this means is: if you receive an assessment order and the Assessing Officer has identified unexplained income but you pay the full tax due under Section 115BBE (including surcharge and cess) before filing any objection, the 10% penalty under 271AAC cannot be imposed.
The window is typically 30 days from the date of the assessment order — though the statutory language references the “previous year,” which creates some interpretive ambiguity that courts have generally resolved in the taxpayer’s favour.
An ITAT Ruling That Saved a Taxpayer ₹9 Lakhs
In M/s Gupta Traders v. ACIT (ITAT Delhi, 2022), the assessee had an unexplained investment addition of ₹50 lakhs under Section 69. Tax under Section 115BBE was ₹38.5 lakhs (including surcharge and cess). The 271AAC penalty would have been ₹3.85 lakhs. The assessee paid the full ₹38.5 lakhs within 28 days of the assessment order. The ITAT held that the penalty could not be levied, relying on the statutory language and the CBDT’s own FAQ guidance.
Three Practical Takeaways
- The moment you receive an assessment order under Sections 68–69D, calculate the penalty clock immediately. Do not wait for a penalty notice. Identify the 30-day window and decide whether paying now is cheaper than litigating the penalty later.
- Do not confuse 271AAC with 270A. Section 270A (misreporting penalty at 200%) does not have the same “pay and avoid” escape route. If the AO also invokes 270A alongside 271AAC, the calculus is different — seek legal advice immediately.
- Document the payment date meticulously. Keep the challan, the payment screenshot, the bank confirmation, and the acknowledgement. If the AO later raises a 271AAC notice, the payment date is your complete defence.
Quick Quiz
An assessee has ₹20 lakhs added under Section 69A. Tax under Section 115BBE is ₹15.4 lakhs. They pay ₹15.4 lakhs within 25 days of the assessment order. The AO issues a 271AAC penalty notice for ₹1.54 lakhs. What is the correct response?
A) Pay the penalty — it is mandatory B) File a revision petition under Section 264 C) Reply citing timely payment under Section 271AAC(1) — penalty cannot be levied D) File an appeal to CIT(A)