Tax compliance is a crucial responsibility of every citizen and business entity in India. The Income Tax Act, 1961 outlines not only how income should be reported and tax paid, but also enforces strict penalties for non-compliance. Two common defaults are:
a) Failure to furnish income tax returns under Section 271, and
b) Failure to pay advance tax as required under the Act.
In this comprehensive and SEO-friendly article, we will explore both issues in detail, discuss the relevant legal provisions, consequences of default, and ways to avoid penalties. A mnemonic is also included at the end for quick recall of the key concepts.
Part A: Failure to Furnish Returns under Section 271(1)(a) of the Income Tax Act
What is Section 271(1)(a)?
Section 271(1)(a) of the Income Tax Act, 1961 empowers the Assessing Officer to levy a penalty on any person who fails to furnish a return of income within the prescribed time under:
- Section 139(1) (mandatory return filing)
- Section 142(1) (notice to furnish return)
- Section 148 (reassessment)
- Section 153A (search assessment)
Who Must File Returns?
According to Section 139(1), the following persons are required to file an income tax return:
- Individuals with total income exceeding the basic exemption limit
- Companies and firms irrespective of income
- Persons holding foreign assets or foreign income
- Those claiming tax refunds or deductions under Chapter VI-A
Penalty for Non-Filing
If a person required to file a return fails to do so, the following penalties may apply under Section 271(1)(a):
- ₹5,000 per month of default
- Subject to a maximum of ₹1,00,000
- For individuals with income below taxable limit, penalty may be waived
- In addition, interest under Section 234A is levied at 1% per month
Example:
If an individual with taxable income fails to file returns for 5 months after the due date, they may be liable to pay:
- ₹5,000 × 5 = ₹25,000 as penalty under Section 271(1)(a)
- Plus 1% interest on unpaid tax for each month of delay under Section 234A
Exceptions and Relief:
- If the return is filed within the extended due date with reasonable cause, the Assessing Officer may waive the penalty.
- Also, Section 273B provides that no penalty shall be imposed if the person proves reasonable cause for failure.
Part B: Failure to Pay Advance Tax
What is Advance Tax?
Advance Tax is the income tax that is paid as you earn. It is applicable when the total tax liability for a financial year exceeds ₹10,000. It is governed by Sections 208 to 219 of the Income Tax Act, 1961.
Who Needs to Pay Advance Tax?
- Salaried individuals with additional income (rent, capital gains, interest)
- Self-employed professionals and freelancers
- Businesses
- Companies
- NRIs with income accrued in India
Senior citizens not having income from business or profession are exempt from advance tax.
Due Dates for Advance Tax Payments
| Quarter | Due Date | Amount Payable |
|---|---|---|
| 1st Installment | 15th June | 15% of total tax |
| 2nd Installment | 15th September | 45% of total tax (cumulative) |
| 3rd Installment | 15th December | 75% of total tax (cumulative) |
| 4th Installment | 15th March | 100% of total tax |
Penalty and Interest for Non-Payment
Failure to pay advance tax or short payment of installments leads to interest liability under:
- Section 234B:
- Applies if advance tax paid is less than 90% of total tax liability.
- Interest at 1% per month from 1st April till the date of actual payment.
- Section 234C:
- Applies if installments are not paid on time.
- Interest at 1% per month on shortfall in each installment.
Example:
A business owner with tax liability of ₹1,00,000 pays only ₹50,000 by March. He will:
- Pay Section 234B interest = 1% per month on ₹50,000 from April till actual payment.
- Pay Section 234C interest on each quarterly shortfall.
Differences Between the Two Defaults
| Aspect | Failure to File Return | Failure to Pay Advance Tax |
|---|---|---|
| Relevant Section | Section 271(1)(a) | Sections 234B and 234C |
| Nature of Default | Procedural (filing) | Monetary (payment) |
| Penalty | ₹5,000/month (max ₹1,00,000) | Interest at 1% per month |
| Affects Refund Claim | Yes | Yes |
| Can be Waived? | Yes (if reasonable cause is proven) | No (interest is mandatory) |
Practical Consequences of Defaults
1. Legal Notices and Scrutiny
Failure to file return or pay advance tax may trigger notices under:
- Section 142(1): Inquiry before assessment
- Section 148: Reassessment
- Section 143(2): Scrutiny assessment
2. Disallowance of Deductions
Certain exemptions and deductions (e.g., under Section 10A, 80C) are allowed only if return is filed on or before due date.
3. Ineligibility for Carry Forward of Losses
Losses under:
- Capital Gains
- Business Income
- House Property (beyond ₹2 lakh)
Cannot be carried forward unless return is filed within due date.
How to Avoid These Penalties
- File ITR before the due date (usually 31st July or 31st October)
- Calculate advance tax properly using Form 26AS and income estimates
- Set reminders for quarterly advance tax payments
- Use online tax calculators or consult a tax expert
- Keep accurate records of income and expenses
Mnemonic to Remember – “FINE-TAX”
Here’s a mnemonic to help you remember key consequences of these defaults:
- F – Failure to file return leads to penalties under Section 271
- I – Interest under Sections 234A/B/C for non-payment or late payment
- N – No carry forward of losses if return not filed on time
- E – Exemptions disallowed if deadlines are missed
- T – Tax refund delayed or denied due to non-filing
- A – Advance tax must be paid in four installments
- X – eXtra burden of penalties and scrutiny if defaults occur
