Faceless penalty amendment scheme

Faceless Penalty (Amendment) Scheme: A Practical Guide for AY 2027-28

The Faceless Penalty (Amendment) Scheme routes all income-tax penalty proceedings under Chapter XXI of the Income Tax Act, 1961 through the National Faceless Assessment Centre (NaFAC), replacing physical interactions with a fully digital workflow. Every show-cause notice now carries a mandatory Document Identification Number (DIN); every hearing is conducted by video conferencing; every final order is passed by a central authority rather than the jurisdictional Assessing Officer. If you receive a penalty notice in FY 2026-27, this guide tells you exactly what to expect, what to file, and which rights to exercise before any adverse order is passed.

Why the Original Scheme Needed an Amendment

The original Faceless Penalty Scheme, notified under Section 274(2A) of the Income Tax Act, 1961, built a three-tier structure: Regional Penalty Centres, Penalty Units and Penalty Review Units, all coordinated through the National Faceless Penalty Centre. On paper, it was clean. In practice, two recurring problems surfaced.

The double-review bottleneck. Every case of any significance was routed through a Penalty Unit and then mandatorily through a separate Penalty Review Unit before finalisation. This added weeks — sometimes months — to proceedings without a corresponding gain in quality or consistency.

Allocation fragmentation. By FY 2023-24, the Faceless Assessment Scheme under Sections 143(3A) and 143(3B) had matured as a separate digital ecosystem at NaFAC. But penalty proceedings triggered during a faceless assessment were sometimes routed back to the jurisdictional officer, creating a dissonant situation where the same taxpayer received one set of notices digitally (for assessment) and another set physically (for penalty). Representatives reported duplicate appearances, conflicting timelines and — critically — notices that bypassed the e-Proceedings portal and therefore went unnoticed.

The amendment resolved these issues by:

• Anchoring all penalty proceedings within NaFAC so that cases originating from a faceless assessment remain in the same digital workflow end-to-end
• Streamlining review by merging the verification function into the regular NaFAC hierarchy rather than maintaining a perpetual second-tier review for every case
• Codifying the video-conference right explicitly and unconditionally — the phrase "only through video conferencing" removes any residual ambiguity about in-person hearings

For you as a taxpayer or authorised representative, the practical result is a single portal — www.incometax.gov.in — where the entire penalty lifecycle lives.

Which Penalties Are Covered Under the Faceless Scheme

The scheme applies to proceedings initiated under Chapter XXI of the Income Tax Act, 1961. The sections you are most likely to encounter in practice:

A note on Section 271(1)(c). The older concealment penalty has been substantially superseded by Section 270A for Assessment Year 2017-18 onwards. Cases for earlier years that are still pending remain subject to Section 271(1)(c), but they too flow through the NaFAC digital process for the notice-and-hearing stage.

Search penalties under Section 271AAB (where undisclosed income is admitted during a search or where it is not admitted but is found) are handled initially through search assessment channels. Once the penalty proceeding is formally initiated, however, the show-cause notice, response and hearing stages follow the faceless framework.

How a Faceless Penalty Proceeding Works: Step by Step

Knowing the exact sequence is what protects you from missing a deadline or responding to the wrong channel.

Step 1 — Initiation and Automated Allocation

A penalty proceeding begins in one of two ways. Either the Penalty Unit initiates it suo motu after reviewing the assessment order and identifying an addition that warrants penalty consideration, or the Assessment Unit itself records in its assessment order that penalty proceedings under a specific section are being initiated. Either way, NaFAC's automated allocation system assigns the case to a Penalty Unit that is typically located in a city different from the taxpayer's city — the deliberate geographic separation that eliminates familiarity bias.

Step 2 — Show-Cause Notice With a DIN

The Penalty Unit issues the show-cause notice (SCN) under Section 274 read with the applicable penalty section — for example, "Section 274 read with Section 270A." The notice must carry a Document Identification Number (DIN), a 20-character alphanumeric identifier. Per CBDT Circular No. 19/2019 and subsequent instructions, any communication that does not bear a valid DIN is treated as invalid and is not to be acted upon, unless a specific exception applies.

Check the DIN first. If a notice arrives without one, file a written objection through the portal immediately.

The SCN reaches you via:

• A notification on the e-Proceedings tab under your login at www.incometax.gov.in
• An SMS and email to the registered mobile number and email ID on your e-filing profile

Do not rely solely on email — government communications frequently land in spam filters. Log in and check e-Proceedings at least once every week during any active assessment or penalty period.

Step 3 — Filing Your Response Online

Navigate to e-Proceedings → Pending Actions → Respond to Notice. Upload your response as a PDF. No physical reply to the ward office carries any legal weight in this scheme.

Structure your submission in four layers:

1. Covering letter — quote the DIN from the SCN, identify the relevant section, and state your position in one crisp paragraph
2. Substantive submissions — legal arguments, factual narrative, and relevant judicial precedents
3. Evidence annexures — bank statements, invoices, audit reports, agreements — each bookmarked and indexed with a table of contents
4. Alternative computation — if you dispute the quantum, provide your own calculation showing the maximum sustainable penalty, even if your primary position is that no penalty arises

Step 4 — Requesting a Video-Conference Hearing

You are entitled to a personal hearing — but only by video conferencing, and only on a written request. The mechanism is built into the e-Proceedings tab alongside the SCN. Submit this request at the same time as your written response. Once a penalty order is passed without a hearing, the right lapses and becomes an appeal ground rather than a preventive tool.

The VC session is scheduled by the Penalty Unit. Your authorised representative — a chartered accountant, advocate, or tax consultant holding a valid power of attorney — can appear on your behalf. The VC infrastructure is accessible from the e-filing portal itself; you need a webcam, a stable internet connection and the VC link issued by the Penalty Unit.

Step 5 — Draft Order, Internal Review and Final Order

After reviewing your response (or after the deadline lapses without one), the Penalty Unit drafts a penalty order. Where the proposed penalty exceeds a threshold or involves a complex legal question, a Penalty Review Unit within NaFAC checks the draft before it is finalised. You are not notified of this internal review step — it is administrative, not adversarial.

The National Faceless Assessment Centre then passes the final order, which is served digitally through the e-Proceedings tab with its own DIN. Save a PDF of the order immediately and note the date of receipt — it starts two critical clocks: the 30-day window for a Section 246A appeal and the one-month window for a Section 270AA immunity application.

Worked Examples: Calculating Penalty Exposure Before the First Response

Before you decide whether to contest or settle, you need to know the rupee stakes.

Example 1 — Section 270A Under-Reporting (Private Company, AY 2027-28)

Facts. A domestic private limited company (turnover Rs. 180 crore — tax rate 25%) files its return for AY 2027-28 declaring total income of Rs. 50,00,000. During faceless assessment, the Penalty Unit finds that cash sales of Rs. 12,00,000 were deposited in the company's bank account but not included in the profit and loss account. The Assessment Unit makes an addition of Rs. 12,00,000 and initiates penalty under Section 270A.

Under-reporting scenario (50%):

• Tax attributable to under-reported income (25% + 4% cess = 26%): Rs. 12,00,000 × 26% = Rs. 3,12,000
• Penalty: Rs. 3,12,000 × 50% = Rs. 1,56,000

Misreporting scenario (200%) — if the AO characterises the omission as deliberate falsification of books:

• Same base tax: Rs. 3,12,000
• Penalty: Rs. 3,12,000 × 200% = Rs. 6,24,000

The Section 270AA option. If the company accepts the addition, pays the assessed tax plus interest under Sections 234B and 234C in full, and does not file an appeal against the assessment order, it may apply in Form 68 for immunity from the penalty within one month from the end of the month in which the assessment order is received. If the Assessing Officer accepts the application, the Rs. 1,56,000 penalty is waived entirely — and so is any prosecution risk under Sections 276C and 276CC. The trade-off is that you give up the right to contest the Rs. 12,00,000 addition in appeal.

On these numbers, the immunity route saves Rs. 1,56,000 at the cost of forgoing an appeal on the addition. Whether that trade-off is worth it depends on the strength of your factual defence — but you must evaluate it before any appeal is filed, because filing extinguishes the immunity option permanently.

Example 2 — Section 271B Audit Default (Proprietor, AY 2027-28)

Facts. A proprietor running a medical equipment distribution business records gross turnover of Rs. 2,80,00,000 for FY 2026-27. His aggregate cash receipts exceed 5% of total receipts, so the Section 44AB audit threshold is Rs. 1 crore — which his turnover far exceeds. He did not get his accounts audited. The Penalty Unit initiates proceedings under Section 271B.

Penalty calculation:

• 0.5% of turnover: 0.5% × Rs. 2,80,00,000 = Rs. 1,40,000
• Statutory cap: Rs. 1,50,000
• Penalty levied: Rs. 1,40,000 (below the cap, so the formula governs)

Mitigation argument. Section 271B contains a "reasonable cause" exception. If the auditor was hospitalised and could not sign, or if a partnership dispute locked access to books, documentary evidence of the genuine reason can eliminate or substantially reduce the penalty. File this under your SCN response with medical certificates, hospital discharge summaries, or court orders — not as an afterthought at the appeal stage.

Section 270AA Immunity — Your Best Defence Against a Section 270A Penalty

Section 270AA is the most underused tool in a taxpayer's arsenal. Here is a precise eligibility checklist for AY 2027-28:

All four conditions must be satisfied simultaneously:

• [ ] The penalty is under Section 270A only — Section 270AA does not cover penalties under 271B, 271DA, 272A or other sections
• [ ] Tax and interest specified in the assessment or reassessment order (Section 143(3) or 147) are paid in full
• [ ] No appeal has been filed against the assessment order under Section 246A or 253
• [ ] Form 68 is filed within one month from the end of the month in which the assessment order is received

Timing example. Assessment order received on 14 March 2027 → end of that month = 31 March 2027 → Form 68 deadline = 30 April 2027. Miss this date by even one day and immunity is gone.

What immunity covers: Penalty under Section 270A and prosecution under Sections 276C (wilful attempt to evade tax) and 276CC (wilful failure to furnish return).

What it does not cover: Any co-existing penalty under a different section (Section 271B or 271DA, for instance) that was levied in the same proceedings. Those must be contested separately.

The Assessing Officer must pass an order accepting or rejecting the Form 68 application within one month of receipt. If accepted, the penalty proceedings under Section 270A are dropped. If rejected, you may challenge the rejection in appeal.

Taxpayer Rights Under the Scheme — and How to Exercise Them

Knowing your rights is useful. Knowing how to exercise them procedurally is what actually protects you.

Right to a DIN-stamped notice. No valid proceeding can begin without a valid DIN on the SCN. If a communication lacks a DIN, file a written objection through the portal citing CBDT Circular No. 19/2019. A penalty order issued on the back of an invalid notice is vulnerable to challenge on procedural grounds.

Right to seek adjournment. You may request an extension of the response deadline online. The Penalty Unit has discretion, but genuine reasons — illness, portal technical failure, a natural disaster — are ordinarily accepted. Always document the reason and submit the adjournment request before the deadline, not after.

Right to a VC hearing. Unconditional on written request, as described in Step 4 above. This is not merely an opportunity to speak — it is your chance to gauge the officer's concerns and pre-empt adverse findings before they crystallise in a draft order.

Right to a reasoned order. The penalty order must record the charge, your response (or note that none was filed), the Penalty Unit's findings and the legal basis. A perfunctory one-line order is challengeable before the Commissioner (Appeals) on procedural grounds independent of the substantive merits.

Right to appeal under Section 246A. File Form 35 online at the e-filing portal within 30 days of receiving the penalty order. If you have also filed a quantum appeal on the underlying addition, the two appeals can be heard together or in tandem — raise this consolidation request before the Commissioner (Appeals) at the outset.

Common Mistakes That Create Avoidable Penalties and Lost Appeals

1. Expecting a Physical Notice by Post

Under the faceless scheme, registered post is not the primary mode. A notice posted on your e-Proceedings tab but never checked can result in an ex-parte penalty order — fully valid and fully enforceable — passed without your response. Fix: Activate email and SMS alerts under Profile → My Profile → Notifications on the e-filing portal and appoint a responsible person to check the portal weekly.

2. Submitting an Incomplete Response Without Evidence

Saying "the addition is under appeal, therefore no penalty" is legally sound but procedurally toothless if unaccompanied by the appeal filing acknowledgement (Form 35 receipt), the grounds of appeal and supporting judicial precedents. The Penalty Unit does not pause proceedings automatically because an appeal exists. Fix: Attach the appeal acknowledgement and cite the well-established principle that penalty proceedings on a disputed addition should be held in abeyance pending the quantum appeal outcome.

3. Delaying the VC Hearing Request

Many practitioners respond to the SCN in writing and then wait for the order, intending to raise hearing-related grievances only in appeal. This is the wrong sequence. Once the final order is passed, the right to be heard before that order is gone. Fix: Treat the written response and the VC hearing request as a single filing event — submit both on the same day.

4. Filing a Section 246A Appeal Before Evaluating Section 270AA

Once a Section 246A appeal is filed against the assessment order, the Section 270AA immunity option is extinguished — not suspended, extinguished. On a misreporting penalty of Rs. 6,24,000 (as in Example 1 above), the immunity may be worth far more than a contested appeal. Fix: Before instructing your representative to file the appeal, have a deliberate written conversation — even a short email chain — about the immunity trade-off.

5. Uploading Unindexed Documents

The Penalty Unit works entirely from the digital record. A 200-page PDF dump of bank statements and invoices without an index, bookmarks or a covering note is functionally invisible — reviewers cannot locate the page that supports your argument without spending time they do not have. Fix: Create a PDF with a table of contents on page 1, named bookmarks for each exhibit ("Exhibit A — Bank Statement April 2026") and a covering submission that maps each legal argument to the evidence by exhibit reference.

Coordinating Penalty Proceedings With Pending Appeals

Two issues arise regularly in practice and deserve explicit guidance.

Staying a penalty while a quantum appeal is pending. You can apply to the Commissioner (Appeals) for a stay of recovery under Section 220(6) once the penalty order is passed and the demand is raised. Alternatively, you may request the Penalty Unit itself to defer finalising the penalty order until the quantum appeal is decided — while there is no statutory right to this deferral, CBDT instructions and tribunal precedent support the view that penalty proceedings on a contested addition should ordinarily wait for the quantum appeal outcome.

Scope of the Penalty Unit's jurisdiction. The Penalty Unit can levy penalty only on additions made by the Assessment Unit or the jurisdictional AO in the same assessment. It cannot travel beyond the scope of the SCN and cannot reopen issues that were not part of the original assessment. If the SCN purports to raise a penalty on a matter outside the assessment order, challenge this squarely in your response — and again in appeal if it is not resolved.

Key Takeaways

• Every penalty notice now arrives digitally through the e-Proceedings tab at www.incometax.gov.in — activate email and SMS alerts so you never miss one.
• Check the DIN on every notice before doing anything else; a notice without a valid DIN is legally challengeable under CBDT Circular No. 19/2019.
• Section 270A penalty ranges from 50% to 200% of the tax attributable to the disputed income — on a Rs. 12 lakh addition at 26% company tax, that is Rs. 1,56,000 to Rs. 6,24,000 in real rupees.
• Section 270AA immunity can eliminate the Section 270A penalty entirely, but Form 68 must be filed within one month from the end of the month of the assessment order — and no appeal can have been filed against the order.
• Request your video-conference hearing at the same time as your written response, not as an afterthought; once the final order is passed, the pre-order hearing right is gone.
• Upload indexed, bookmarked PDFs — unstructured document dumps are effectively invisible to the Penalty Unit reviewing your case on-screen.
• Evaluate the immunity-vs.-appeal trade-off in writing before instructing your representative — filing a Section 246A appeal and filing Form 68 are mutually exclusive choices you cannot reverse.