Section 298 — Levy of interest and penalty in certain in cases. Successor to s.158BFA of the 1961 Act.
Section 298 is in Chapter XVI — Procedure for Assessment, which runs from section 268 to section 301.
Sub-section (1) charges interest where the return of undisclosed income required by a notice under section 294(1)(a) is not furnished within the period specified in that notice, or is not furnished at all. The interest is simple interest at 1.5% of the tax on the undisclosed income determined under clause (c) of that sub-section, and it is paid for every month or part of a month in the period beginning on the day immediately following the expiry of the time specified in the notice and ending on the date of completion of the assessment under that clause.
Sub-section (2) allows the Assessing Officer or the Commissioner (Appeals), in the course of any proceeding under the Part, to direct the person to pay by way of penalty a sum equal to 50% of the tax leviable in respect of the undisclosed income determined by the Assessing Officer under section 294(1)(c).
Sub-section (3) bars a penalty order under this section or under section 444(1), 450, 451 or 453 for the block period where the person has furnished a return under section 294(1)(a), the tax on that return has been paid or seized money is offered for adjustment against it, evidence of tax paid is furnished with the return, and no appeal is filed against the assessment of that part of the income shown in the return. Sub-section (4) withdraws that protection where the undisclosed income determined exceeds the income shown in the return, and the penalty is then imposed on the excess portion.
Sub-section (5) restricts the making of a penalty order under sub-section (2). It cannot be made without a reasonable opportunity of being heard; it cannot be made by a Deputy Commissioner, Assistant Commissioner, Deputy Director or Assistant Director where the penalty exceeds Rs. 200000 except with the previous approval of the Additional Commissioner, Additional Director, Joint Commissioner or Joint Director; where the assessment is the subject-matter of an appeal under section 357 or 362 it cannot be made after the later of the expiry of the financial year in which the proceedings in the course of which the penalty action was initiated are completed, or six months from the end of the financial year in which the order of the Commissioner (Appeals) or the Appellate Tribunal is received by the jurisdictional Principal Commissioner or Commissioner; where the assessment is the subject-matter of revision under section 377 it cannot be made after six months from the end of the financial year in which the revision order is passed; and in any other case it cannot be made after the later of the expiry of the financial year in which the proceedings in the course of which the penalty notice was issued are completed, or six months from the end of the financial year in which that notice is issued.
Sub-section (6) excludes from the limitation period the time taken in giving an opportunity to be re-heard under section 244(2) and the period of a court stay, ending on receipt of the certified copy of the order vacating it. Sub-section (7) extends the remaining period to sixty days where, after that exclusion, less than sixty days are left. Sub-section (8) extends a remaining period that would expire mid-month to the end of that month. Sub-section (9) requires an income-tax authority who is not himself the Assessing Officer to send a copy of the penalty order to the Assessing Officer forthwith.
Where a search-related notice calls for a return of undisclosed income, the whole assessment depends on that return being filed, so the section prices the delay at 1.5% a month and backs it with a penalty of half the tax on what is determined. Sub-section (3) is the concession that makes filing worthwhile — declare, pay, prove payment and do not appeal that part, and no penalty order is made — and sub-section (4) confines the concession to what was actually declared. The limitation rules in sub-sections (5) to (8) keep the penalty from hanging over the person indefinitely once appeals and revisions are done.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Rate of interest for failure to furnish the return of undisclosed income | Simple interest at 1.5% | Of the tax on the undisclosed income determined under section 294(1)(c), for every month or part of a month | Sub-section (1)(a) and (b) |
| Period over which that interest runs | From the day immediately following the expiry of the time specified in the notice to the date of completion of the assessment | Assessment completed under section 294(1)(c) | Sub-section (1)(b) |
| Penalty | A sum equal to 50% of the tax leviable | On the undisclosed income determined by the Assessing Officer under section 294(1)(c); directed by the Assessing Officer or the Commissioner (Appeals) in the course of any proceeding under the Part | Sub-section (2) |
| Penalty above which junior officers need approval | Rs. 200000 | An order by a Deputy Commissioner, Assistant Commissioner, Deputy Director or Assistant Director exceeding this needs the previous approval of the Additional Commissioner, Additional Director, Joint Commissioner or Joint Director | Sub-section (5)(b) |
| Limitation where the assessment is in appeal under section 357 or 362 | The later of the end of the financial year in which the proceedings are completed, or six months from the end of the financial year in which the appellate order is received | Receipt of the order of the Commissioner (Appeals) or the Appellate Tribunal by the jurisdictional Principal Commissioner or Commissioner | Sub-section (5)(c) |
| Limitation where the assessment is revised under section 377 | Six months from the end of the financial year in which the order of revision is passed | Applies where the assessment is the subject-matter of revision under section 377 | Sub-section (5)(d) |
| Limitation in any other case | The later of the end of the financial year in which the proceedings are completed, or six months from the end of the financial year in which the penalty notice is issued | Cases not falling within clauses (c) and (d) of sub-section (5) | Sub-section (5)(e) |
| Minimum period left after exclusions | Sixty days | Where, after excluding the periods in sub-section (6), the remaining period available to make an order under sub-section (2) is less than sixty days, it is extended to sixty days | Sub-section (7) |
Interest and penalty here are separate and cumulative: the 1.5% monthly interest under sub-section (1) is charged for not filing the return, and the 50% penalty under sub-section (2) is charged on the tax on the undisclosed income determined, whether or not the return was filed. The protection in sub-section (3) is not automatic and needs all four conditions — return furnished, tax paid or seized money offered, evidence of payment filed with the return, and no appeal against the assessment of the income shown — and even then sub-section (4) leaves the penalty alive on any determined income above what was declared. The limitation rules are extension rules as much as deadlines: sub-section (5) picks the later of two dates in clauses (c) and (e), sub-section (6) stops the clock for a re-hearing under section 244(2) and for a court stay, sub-section (7) restores sixty days where less remains, and sub-section (8) rolls a mid-month expiry to the end of that month. The Rs. 200000 figure is not a ceiling on the penalty; it is the point above which a junior officer needs a superior's previous approval.
A person served with a notice under section 294(1)(a) does not file the block return. The Assessing Officer determines undisclosed income on which the tax is Rs. 40 lakh, and completes the assessment eight months after the notice period expired. Interest under sub-section (1) runs at 1.5% of Rs. 40 lakh — Rs. 60000 — for each of those months or parts of months, and a penalty of Rs. 20 lakh, being 50% of that tax, may be directed under sub-section (2) after the person has been heard.
You meet this in a search-related block assessment: the interest under sub-section (1) appears in the demand raised with the assessment, and the penalty comes as a separate order under sub-section (2), which cannot be passed without a reasonable opportunity of being heard.
the assessee shall be liable to pay simple interest at the rate of 1.5% of the tax on undisclosed income determined under clause (c) of said sub-section
may direct that the person shall pay by way of penalty a sum which shall be equal to 50% of tax so leviable in respect of the undisclosed income determined by the Assessing Officer under section 294(1)(c)
The provisions of sub-section (3) shall not apply where the undisclosed income determined by the Assessing Officer is in excess of the income shown in the return and in such cases the penalty shall be imposed on that portion of undisclosed income determined, which is in excess of income shown in the return.
See the full 1961 to 2025 concordance.