Penalty for unexplained income — Section 271AAC

What this section is

Section 271AAC levies a penalty of 10% of the tax payable on income determined under Sections 68, 69, 69A, 69B, 69C or 69D — i.e. unexplained credits, investments, money, expenditure. Note that the underlying tax under 115BBE is already 60% (plus surcharge and cess), making the effective burden very high.

When it is issued

Through a separate penalty SCN after the assessment that has invoked Sections 68 to 69D.

What you should do

1. 1Re-test the underlying addition. If the addition under 68/69 is not sustained, 271AAC falls automatically.
2. 2Evaluate whether the assessee has 'included such income in the return and paid tax on or before the end of the relevant PY' — if so, 271AAC does not apply.
3. 3Consider settling the quantum first; the penalty defence is often weak once 68/69 is sustained.

Documents typically needed

• Quantum order with addition under 68/69/69A etc.
• Penalty SCN
• Return and computation showing inclusion of disputed income (if relying on the exemption)

Common mistakes

• Not appealing the quantum order — without that, the penalty defence is severely limited.
• Confusing 271AAC with 271AAB (which applies in search cases).