Section 275 of the Income-tax Act sets out the bar of limitation for completion of penalty proceedings with respect to penalties under Chapter XXI of the Act, including penalties under section 270A (under-reporting or misreporting of income) and section 271C (failure to deduct taxes at source). The Finance Bill 2025, in Clause 83, seeks to substitute section 275 of the Act with effect from 1 April 2025.

Against this backdrop, Ms. Shaily Gupta (Partner, Khaitan & Co.) and Mr. Himanshu Goel (Principal Associate) present a comparative analysis of the existing provisions vis-à-vis the proposed section. Highlighting that there was considerable debate and litigation regarding the limitation of penalties in cases particularly when it could be said that ‘action for imposition of penalty is initiated’, the authors conclude by stating that “The substituted section seeks to simplify such cases by providing that the limitation would be computed from the ‘date of issue of penalty notice’. However, the absence of any specific timeline under the Act to issue a notice could lead to a fresh round of litigation on reasonability of timelines within which notice can be issued.”

“Budget 2025: Proposed Amendments to Section 275 - Lifting the Bar?

Section 275 of the Income-tax Act, 1961 (“the Act”) sets out the bar of limitation for completion of penalty proceedings with respect to penalties under Chapter XXI of the Act, including penalties under section 270A (under-reporting or misreporting of income) and section 271C (failure to deduct taxes at source).

The Finance Bill 2025, in Clause 83, seeks to substitute section 275 of the Act with effect from 1 April 2025. Below is a comparative analysis of the existing provisions vis-à-vis the proposed section:

Conclusion/ takeaways:

The proposed amendment, apart from rationalizing the time limits, has also prescribed separate timelines for passing orders in cases where an appeal is not filed, as opposed to ‘any other case’. For instance, penalty under section 271C may be imposed for non-deduction of tax at source on expenses identified during a scrutiny assessment under section 143(3) of the Act. There was considerable debate and litigation regarding the limitation of penalties in such cases, particularly when it could be said that ‘action for imposition of penalty is initiated’.

While taxpayers argued for the initiation point to be the earliest event, such as ‘remarks / proposal by the assessing officer in the assessment order’[2], or the ‘reference by the assessing officer to the Joint commissioner’[3], the Revenue argued for the initiation point to be at a later date, generally on the ‘issue of notice by the Joint commissioner’[4].

The substituted section seeks to simplify such cases by providing that the limitation would be computed from the ‘date of issue of penalty notice’. However, the absence of any specific timeline under the Act to issue a notice could lead to a fresh round of litigation on reasonability of timelines within which notice can be issued.

Notably, the powers to impose penalties under sections 271C, 271CA, 271D, 271DA, 271DB, and 271E of the Act, which currently lie with the Joint Commissioner, are now proposed to be assigned to the assessing officers. With respect to penalty proceedings to be initiated in the coming months, it will be important to evaluate the relevant timelines that would be applicable in cases of orders passed before March 2025 and pursuant to substituted section 275, coming into effect from 01 April 2025.

For ongoing penalty proceedings, the arguments of “initiation” and reference to the date of remark/initiation in the assessment order or the date of reference to the Joint Commissioner would continue to be available.

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(The views expressed are personal.)