Faceless Penalty Scheme: Section 274 & 275 Explained
Key Takeaways
- A penalty cannot be imposed without following Section 274, which guarantees a reasonable opportunity of being heard and, for some penalties, prior approval of a senior officer.
- Section 275 sets the limitation period. A penalty order must be passed within strict time limits or it becomes time-barred and unenforceable.
- The Faceless Penalty Scheme was notified on 12 January 2021 and later amended by the Faceless Penalty (Amendment) Scheme, 2022. Penalties now run through the National Faceless Penalty Centre with no physical interface and dynamic jurisdiction.
- Most penalty show-cause notices give a response window stated in the notice, commonly 7 to 30 days. Missing it usually leads to an ex-parte penalty order.
- Section 270AA immunity is available only for under-reporting, not for misreporting. Other relief routes include Section 273A (waiver by PCIT/CIT), Section 273AA (immunity application), and reasonable cause under Section 273B.
- Responses are filed through the e-Proceedings tab on the income tax e-filing portal. Save every acknowledgement number.
What is the Faceless Penalty Scheme? The Faceless Penalty Scheme is a system, notified on 12 January 2021, under which penalty proceedings are conducted electronically through the National Faceless Penalty Centre. There is no physical contact with an officer, jurisdiction is allotted dynamically, and the taxpayer responds to a show-cause notice online before a final penalty order is passed.
A penalty order is not a routine tax demand. It is a finding that you defaulted, and it carries a financial cost on top of the tax itself. The good news for taxpayers is that the law builds in procedural safeguards. Sections 274 and 275 of the Income Tax Act, 1961 govern how and when a penalty can be imposed, and the Faceless Penalty Scheme governs the channel through which the proceeding runs. Understanding all three is the difference between paying a penalty you cannot challenge and getting it reduced or dropped on solid grounds.
Section 274: How a Penalty Must Be Imposed
Section 274 is the procedural backbone. It provides that no order imposing a penalty shall be made unless the taxpayer has been given a reasonable opportunity of being heard. This is why every penalty starts with a show-cause notice (SCN), not a direct order. If the department skips the hearing stage, the penalty is open to challenge for breach of natural justice.
Section 274 also builds in a check on the lower officers. Where the penalty exceeds prescribed monetary limits, the Assessing Officer cannot pass the order alone and must obtain the prior approval of the Joint Commissioner or a higher authority. The reason behind this is simple: penalties are punitive, so the law wants a second, senior set of eyes before the money leaves your pocket.
Sub-sections 274(2A) and 274(2B) are the enabling provisions for going faceless. They empower the Central Government to notify a scheme for imposing penalties through a faceless, jurisdiction-free process with dynamic allocation of cases. The Faceless Penalty Scheme draws its authority from these clauses.
Section 275: The Limitation Clock
Section 275 is your most underrated defence. It bars the department from imposing a penalty after a fixed period. If the order is passed late, it is time-barred and unenforceable, regardless of the merits.
The headline rule for penalties connected to an assessment or appeal is this: the order must be passed by the later of two dates:
- the end of the financial year in which the relevant assessment or other proceedings are completed, or
- six months from the end of the month in which the penalty action was initiated.
Where an assessment is the subject of an appeal to the Commissioner (Appeals) or the Tribunal, Section 275 extends the window to account for the appellate order, again calculated from the end of the relevant month. For penalties not tied to assessment proceedings, the limit is generally the end of the financial year in which the action was initiated, or six months from the end of the month of initiation, whichever is later. Always check the SCN date and the assessment completion date against these limits. A genuinely time-barred order can be set aside on this ground alone.
The Faceless Penalty Scheme: How the Channel Works
Notified on 12 January 2021 and amended by the Faceless Penalty (Amendment) Scheme, 2022, the scheme routes penalty proceedings through the National Faceless Penalty Centre (NFPC). Its defining features are:
- No physical interface. All communication is electronic, through the e-filing portal and registered email.
- Dynamic jurisdiction. Your case is allotted to penalty units by an automated system, not to a local officer, which reduces discretion and contact.
- Team-based review. A draft penalty order can be sent to a review unit before it is finalised, adding an internal quality check.
The 2022 amendment streamlined the structure by aligning penalty work more closely with the faceless assessment machinery, but the core principle stayed the same: the taxpayer deals with a centre, not a person.
Common Penalties and Their Sections
The faceless route is only the channel. The penalty itself flows from a specific section. The most common ones are below.
| Section | Default | Penalty / Amount |
|---|---|---|
| 270A | Under-reporting of income | 50% of tax payable on under-reported income |
| 270A | Misreporting of income | 200% of tax payable on misreported income |
| 271H | Failure to file TDS/TCS return or filing incorrect particulars | Rs 10,000 to Rs 1,00,000 |
| 234E | Late filing of TDS/TCS return | Rs 200 per day (a fee, not a penalty), capped at the TDS amount |
| 271B | Failure to get accounts audited (tax audit) | 0.5% of turnover, up to Rs 1,50,000 |
| 271(1)(b) | Failure to comply with a notice under Section 142(1)/143(2) | Rs 10,000 for each failure |
| 272A | Failure to answer questions, sign statements, or comply with notices | Rs 10,000 per default (varies by clause) |
| 271AAC | Income taxed under Sections 68 to 69D (unexplained credits/investments) | 10% of tax payable under Section 115BBE |
A practical note on Section 234E: it is a fee, not a penalty, so it is automatic, runs through CPC, and is not subject to the faceless penalty hearing process or to reasonable-cause relief in the way a penalty is. Section 271H, by contrast, is a penalty and can be dropped for reasonable cause if the TDS, interest, and fee are paid and the return is filed within one year of the due date. For the underlying TDS obligations, our TDS rate chart for FY 2026-27 sets out the deduction rates that, if missed, often trigger these defaults.
How the Faceless Penalty System Works, Step by Step
| Stage | What Happens |
|---|---|
| 1. Referral | The Assessing Officer or the faceless assessment unit refers the penalty to the National Faceless Penalty Centre, which assigns it to a penalty unit. |
| 2. Show-cause notice (SCN) | An electronic SCN is issued asking why a penalty should not be imposed, citing the relevant section and a response date. |
| 3. Taxpayer response | You file a written reply with supporting evidence through the portal within the stated window. |
| 4. Draft penalty order | The penalty unit prepares a draft order, levying or dropping the penalty. |
| 5. Review | The draft may be routed to a review unit for a quality check before finalisation. |
| 6. Final order | The NFPC passes and serves the final penalty order electronically, with demand notice if a penalty is levied. |
Do not let the SCN deadline pass. If you do not respond within the window stated in the notice, the penalty unit can pass an ex-parte order based only on the department's view. You then have to fight a penalty that is already on the record, instead of preventing it. Diarise the response date the day the notice arrives.
Timelines: The SCN Window and the Section 275 Limit
Two clocks run at once. The first is the response window in the SCN, commonly 7 to 30 days; the exact date is stated in the notice, so always read the notice rather than assuming a standard period. If you need more time, file a request for adjournment through the portal before the date lapses, with reasons.
The second is the Section 275 limitation on the department, explained above. Even where you have missed a response, a time-barred final order remains challengeable. These deadlines are easy to confuse with the broader notice timelines covered in our guide to income tax notices in India, so treat penalty SCNs as a separate, stricter track.
How to Respond to a Faceless Penalty SCN on the Portal
- Log in to the e-filing portal at incometax.gov.in.
- Open the e-Proceedings (or Pending Actions, then e-Proceedings) tab and locate the penalty notice.
- Read the SCN carefully: note the section invoked, the default alleged, the amount at stake, and the response due date.
- Draft a point-by-point reply. Address the specific default, set out the facts, and attach evidence such as challans, ledgers, audit reports, bank statements, or correspondence.
- Raise procedural defences where they apply: breach of the Section 274 hearing requirement, absence of required prior approval, or expiry of the Section 275 limitation.
- Upload the reply and supporting documents in the accepted formats, submit, and save the acknowledgement number.
- If you need more time, file an adjournment request before the deadline.
Grounds to Seek Waiver or Reduction
A penalty SCN is not the end of the road. Several provisions allow relief.
- Section 270AA (immunity from penalty and prosecution). If you pay the tax and interest in the assessment order and do not file an appeal against that order, you can apply within one month from the end of the month in which the order is received. Crucially, this immunity is available for under-reporting only, not for misreporting. If the SCN alleges misreporting at 200%, the 270AA door is shut.
- Section 273A (waiver by PCIT/CIT). The Principal Commissioner or Commissioner has the power to reduce or waive certain penalties where conditions such as voluntary, good-faith disclosure and cooperation are met.
- Section 273AA (immunity application). Where you have made an application for settlement that has abated, you may apply to the PCIT/CIT for immunity from penalty.
- Section 273B (reasonable cause). For a wide list of penalties, including 271B and 271H, no penalty shall be imposed if you prove there was a reasonable cause for the failure. This is often the strongest and most practical defence in a faceless reply.
Match the relief to the default. Section 270AA immunity covers under-reporting but never misreporting, and it requires that you do not appeal the assessment. Choosing the 270AA route therefore means giving up the appeal, so weigh the strength of your case before deciding. Picking the wrong relief route can cost you the chance to use the right one.
Mapping to the Income Tax Act, 2025
The Income Tax Act, 2025 re-numbers these provisions while retaining the substance. The penalty procedure and limitation provisions that today sit in Sections 274 and 275, the under-reporting and misreporting penalty in Section 270A, the immunity in Section 270AA, and the waiver and reasonable-cause reliefs in Sections 273A, 273AA, and 273B carry forward into the corresponding penalty chapter of the new Act. The faceless framework also continues. As the new law comes into force, confirm the exact renumbered section before quoting it in a reply, because the operative wording and timelines remain materially the same even where the section number changes.
Frequently Asked Questions
Is the faceless penalty scheme mandatory for all penalties?
It applies to penalty proceedings routed through the National Faceless Penalty Centre under the scheme notified on 12 January 2021 and amended in 2022. The process is electronic with dynamic jurisdiction and no physical interface, though certain categories may be handled outside it as the law and notifications specify.
How long do I get to respond to a faceless penalty show-cause notice?
The window is stated in the notice itself and is commonly between 7 and 30 days. Always read the notice for the exact date and file an adjournment request through the portal before the deadline if you need more time.
What happens if I miss the SCN response deadline?
The penalty unit can pass an ex-parte order based only on the department's view, levying the penalty without your input. You would then have to challenge an order already on the record, so respond within the window.
Can I get immunity from a misreporting penalty under Section 270AA?
No. Section 270AA immunity is available only for under-reporting of income, not for misreporting. For a misreporting penalty at 200%, you must rely on other defences such as the facts on record, procedural lapses, or appeal.
What is the Section 275 time limit for a penalty order?
For penalties linked to assessment, the order must be passed by the end of the financial year in which the proceedings are completed, or six months from the end of the month in which the penalty action was initiated, whichever is later. A late order is time-barred.
Is the Section 234E late fee the same as a penalty?
No. Section 234E is a fee of Rs 200 per day for late filing of TDS or TCS returns, capped at the TDS amount. It is automatic through CPC and is distinct from a penalty under Section 271H, which can be dropped for reasonable cause.
A faceless penalty notice is best treated as what it is: a structured, time-bound proceeding with clear procedural rights on your side. Read the SCN the day it arrives, identify the exact section and default, and build a reply that combines the facts with the procedural protections of Sections 274 and 275 and the relief routes that fit your situation. Where the numbers are large or misreporting is alleged, get the response professionally drafted before the window closes. If you are also tracking money owed back to you, our guide on how to check your income tax refund status online is a useful companion once the penalty position is settled.
This article is based on Sections 274, 275, 270A, 270AA, 273A, 273AA, and 273B of the Income Tax Act, 1961, and the Faceless Penalty Scheme, 2021 (notified 12 January 2021) as amended by the Faceless Penalty (Amendment) Scheme, 2022. Section numbers under the Income Tax Act, 2025 differ and should be confirmed against the enacted text before use.
