Section 274 of Income Tax Act – The Rulebook for Issuing Penalty Notices

When it comes to the Indian Income Tax Act, one of the most important provisions related to penalties is Section 274 of the Income Tax Act. While most people focus on filing their returns on time, very few understand how penalty proceedings actually work. This section explains the procedure for imposing penalties & ensures taxpayers get a fair chance before any penalty is finalized.

In simple terms, No order imposing a penalty under this Chapter shall be made unless the taxpayer is given an opportunity to be heard. This means that even if the Income Tax Department believes you have violated certain provisions, they can’t directly impose a penalty without giving you a chance to explain.

What is Section 274 of the Income Tax Act?

Section 274 of the Income Tax Act lays down the process that tax authorities must follow before imposing any penalty on a taxpayer. It acts as a safeguard to ensure fairness in penalty proceedings. Whether the penalty is for late filing, concealment of income, under-reporting, or other defaults, this section ensures that the taxpayer gets a formal notice & a reasonable opportunity to defend themselves.

For example, if you fail to report certain income or wrongly claim deductions, the Assessing Officer may consider imposing a penalty. However, under Section 274, they first need to issue a notice to you. This notice will mention the nature of the default, the penalty provisions applicable, and give you a chance to present your explanation.

When Does Section 274 Apply?

Section 274 applies in cases where penalties are being considered under Chapter XXI of the Income Tax Act. This includes penalties for:

• Concealment of income or furnishing inaccurate particulars
• Failure to comply with notices under Section 142(1) or 143(2)
• Late filing or non-filing of Income Tax Returns
• Failure to deduct or deposit TDS on time
• Under-reporting or misreporting of income

Before finalizing any such penalty, the officer must comply with the procedure in Section 274.

The Importance of the ‘Opportunity to be Heard’ Clause

The most crucial part of this section is the protection it provides to taxpayers — No order imposing a penalty under this Chapter shall be made without giving the assessee a chance to present their case. This means:

• You will get a notice under Section 274 of the Income Tax Act specifying the default & the penalty being considered.
• You can respond with your explanation, evidence, or reasonable cause for the default.
• The tax officer will consider your response before deciding whether to impose a penalty or drop the proceedings.

This provision ensures that penalties are not imposed arbitrarily and that taxpayers are treated fairly.

Also Read: Penalty Cancelled After Voluntary Correction: A Real-Life Guide to Escaping Section 271(1)(c) Trouble

Notice Under Section 274 of the Income Tax Act

A notice under Section 274 is an official communication from the Income Tax Department indicating that penalty proceedings are being initiated against you. It generally includes:

1. The section under which penalty is proposed (e.g., Section 271(1)(c) for concealment, Section 271A for failure to maintain accounts, etc.)
2. The reason for initiating penalty proceedings
3. Time limit within which you must respond
4. Details of any hearing scheduled, either in person or via video conferencing

Types of Notices and Combinations

Section 274 notices can sometimes be issued read with other sections. For example:

• Section 274 read with Section 270A – for under-reporting or misreporting of income
• Section 274 read with Section 271(1)(c) – for concealment or furnishing inaccurate particulars
• Section 274 read with Section 271F – for failure to file ITR before the due date
• Section 274 read with Section 275 – for limitation period on imposing penalties

These combinations specify the exact nature of the default and help taxpayers understand the context of the penalty."

How to Respond to a Section 274 Notice?

If you receive a notice under Section 274, here’s what you should do:

1. Read the notice carefully – Understand which section the penalty is being initiated under and why.
2. Gather documents – Collect all relevant proofs such as bank statements, receipts, invoices, or any communication with the tax department.
3. Draft your reply – Explain your side clearly, mentioning genuine reasons for the default (if any).
4. Submit on time – Respond within the time frame mentioned in the notice to avoid adverse action.
5. Seek professional help – If the matter is complex, consult a Chartered Accountant or tax professional.

E-Filing and Section 274 Notices

In many cases, notices under Section 274 are now issued online through the Income Tax e-filing portal. You can e-file income tax return on your income from salary, business, or capital gains, and also respond to penalty notices through the portal. This makes the process transparent and traceable.

Penalty Orders Under Section 274

After reviewing your reply, the tax officer can either:

• Drop the penalty proceedings if your explanation is satisfactory, or
• Pass an order imposing the penalty if your reply is found insufficient

The penalty order will be communicated to you in writing and will mention the amount, the reason, and the section under which it is levied."

Practical Examples

1. Late Filing of ITR – You filed your ITR after the due date. The officer may issue a notice under Section 274 read with Section 271F. If you have a genuine reason like hospitalization, you can explain and possibly get relief.
2. TDS Non-Compliance – Your company deducted TDS but failed to deposit it on time. A penalty under Section 271C may be initiated, but under Section 274, you get a chance to explain before it is imposed.

Also Read: Section 271F of the Income Tax Act: Penalty for Late Filing You Can’t Ignore

Key Takeaways for Taxpayers

• Always read the notice carefully and understand the applicable sections.
• Respond promptly with clear, documented explanations.
• Keep proof of submission for future reference.
• If in doubt, consult a professional to avoid unnecessary penalties.

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