Section 446 of the Income-tax Act, 2025 allows the Assessing Officer to impose a penalty for failure to get accounts audited or furnish the audit report under section 63, equal to the lesser of 0.5% of turnover or gross receipts and ₹1,50,000.
What section 446 does
Section 446 is the tax audit penalty — the successor to section 271B of the Income-tax Act, 1961. It is short and mechanical, and the amount is capped.
The default has two limbs: failure to get accounts audited, and failure to furnish the audit report as required under section 63. Either is enough.
The penalty is the lesser of (a) 0.5% of total sales, turnover or gross receipts in business, or gross receipts in profession, for the year or years concerned, and (b) ₹1,50,000. Because it is the lesser, the ₹1,50,000 becomes an effective ceiling once turnover exceeds ₹3 crore.
The Income-tax Act, 2025 takes effect from 1 April 2026 and applies from tax year 2026-27. The Income-tax Act, 1961 continues to govern every year up to 31 March 2026, including assessments, appeals and penalties for those years, because of the repeal and savings provision in section 536. Figures quoted here are the amounts written into the Act as enacted (with the Gazette corrigenda of 3 September 2025); the annual Finance Act can change rates and thresholds.
Old Act and new Act, side by side
The table below shows what the Income-tax Act, 1961 did and where the same ground is covered in the Income-tax Act, 2025.
| Income-tax Act, 1961 | What it did | Income-tax Act, 2025 |
|---|---|---|
| 271B | Penalty for failure to get accounts audited | 446 |
| 44AB | Tax audit requirement | 63 |
| 44AA | Books of account | 62 |
| 271A | Penalty for failure to keep books | 441 |
| 273B | Reasonable cause defence | 470 |
| 275 | Limitation for penalty | 472 |
Section 446 sub-section by sub-section
Read this alongside the bare text — each heading below is a sub-section of the section as enacted.
The two defaults
If any person fails to get his accounts audited for any tax year or years, or furnish the audit report as required under section 63, the Assessing Officer may impose a penalty. Note that completing the audit but missing the filing of the report is itself a default.
The amount — the lesser of two figures
The penalty is the lesser of: (a) 0.5% of the total sales, turnover or gross receipts in business, or the gross receipts in profession, for such tax year or years; or (b) ₹1,50,000. At turnover of ₹3 crore, 0.5% is exactly ₹1,50,000; above that, the cap governs.
The timing that triggers it
Section 63(1) requires the audit to be completed before the specified date, and section 63(3) requires the report to be furnished by that date. Section 63(5)(a) defines the specified date as one month prior to the due date for furnishing the return under section 263(1). Missing that date is what exposes a taxpayer to section 446.
The word 'may' and the reasonable cause defence
The Assessing Officer may impose the penalty — it is not automatic. And section 470, the successor to section 273B, provides that a penalty is not to be imposed where the person proves there was reasonable cause for the failure. Genuine, documented reasons — illness, seizure of records, a first-year misunderstanding of applicability — are argued here.
Related penalties
Section 441 penalises failure to keep, maintain or retain books under section 62. Section 447 penalises failure to furnish the report under section 172 — the transfer pricing accountant's report. Section 472 carries the limitation bar for imposing penalties.
Worked example
Three businesses fail to file the tax audit report for tax year 2026-27 by the specified date.
| Business | Turnover | 0.5% of turnover | Penalty under section 446 |
|---|---|---|---|
| A | ₹1,80,00,000 | ₹90,000 | ₹90,000 — the lesser figure |
| B | ₹3,00,00,000 | ₹1,50,000 | ₹1,50,000 — the two are equal |
| C | ₹14,00,00,000 | ₹7,00,000 | ₹1,50,000 — capped |
Business C illustrates the cap: however large the turnover, the penalty does not exceed ₹1,50,000. That makes section 446 one of the more predictable penalties in the Act — but it is not the only consequence of a late audit, because the return will also be late, bringing in the section 428 fee, section 423 interest and, critically, the loss of Part C deductions under section 122(5).
In each case the taxpayer may argue reasonable cause under section 470 before the penalty is imposed.
Compliance checklist and due dates
- Diarise the specified date — one month before the section 263(1) due date — for both completing the audit and furnishing the report.
- Remember both limbs: getting the audit done is not enough if the report is not furnished.
- Compute exposure as the lesser of 0.5% of turnover and ₹1,50,000.
- Where another law requires an audit, comply with section 63(4) — complete it before the specified date and file both reports.
- Prepare a documented reasonable cause case under section 470 where the delay was genuinely unavoidable.
- Do not overlook the larger cost of the consequent late return: section 428 fee, section 423 interest and section 122(5) denial of deductions.
Common mistakes
- Treating completion of the audit as compliance without furnishing the report.
- Computing the penalty as 0.5% of turnover without applying the ₹1,50,000 cap.
- Confusing the specified date with the return due date; the audit date falls a month earlier.
- Assuming the penalty is automatic — the section says 'may' and section 470 provides a defence.
- Focusing on the ₹1,50,000 while overlooking the far larger loss of Part C deductions.
This is an explanatory guide, not tax advice, and it does not reproduce the section in full. Read the bare text of the section before you rely on it, and check for later amendments, the Income-tax Rules made under the new Act, and CBDT circulars and notifications.