Section 446: Penalty For Failure To Get Accounts Audited

Section 446: Penalty for Failure to Get Accounts Audited

Auditing Your Accounts Is Not Optional

Section 446 of the Income-tax Act 2025 is about the penalty for businesses and professionals who do not get their accounts audited. This is something that businesses and professionals have had to do for a time. They have to do it if they cross thresholds. The old Income-tax Act 1961 had a rule under Section 271B. The new rule under Section 446 of the Income-tax Act 2025 is very similar, to the one. It has the penalty structure. The only change is that it now refers to the Section 63 instead of the old Section 44AB.

Who Is Required to Get Audited

Section 63 of the new Act requires specified categories of taxpayers, those crossing prescribed turnover or gross receipt thresholds in business or profession, to get their accounts audited by a Chartered Accountant and furnish the audit report by the prescribed due date, typically one month before the income tax return filing deadline. This obligation mirrors what businesses and professionals were already required to do under the old Section 44AB, so the practical compliance calendar remains familiar.

The Two Ways This Provision Gets Triggered

Section 446 applies in two distinct situations: first, when a person fails to get their accounts audited at all for a tax year or years as required under Section 63, and second, when the accounts are audited but the audit report itself is not furnished on time. Both failures, whether it's skipping the audit entirely or simply missing the filing deadline for the report, attract the same penalty consequence under this section.

How the Penalty Is Calculated

The penalty under Section 446 is the lesser of two amounts: 0.5% of the total sales, turnover, or gross receipts in business, or the gross receipts in profession, for the relevant tax year or years, or a flat sum of ?1,50,000. This "whichever is lower" formula, carried forward directly from the old Section 271B, ensures that smaller businesses aren't penalised disproportionately relative to their scale, while larger entities still face a meaningful financial consequence capped at ?1,50,000.

Reasonable Cause Can Still Provide Relief

Just as under the old Act, taxpayers facing a penalty under Section 446 can seek relief if they're able to demonstrate a reasonable cause for the delay or failure. Courts have historically taken a lenient view where the default was a technical or venial breach rather than a wilful attempt to avoid audit compliance, and this judicial approach is expected to continue guiding how Section 446 gets applied in practice, even though the provision itself doesn't explicitly detail every possible reasonable cause.

Who Has the Power to Impose This Penalty

The Assessing Officer holds the authority to direct that a defaulting taxpayer pay this penalty, following the same structure that existed under Section 271B of the old Act. As with other penalty provisions, the taxpayer is generally entitled to an opportunity to explain the circumstances behind the failure before the penalty is finalised, giving room for genuine hardship cases, such as unavoidable delays by the auditor, to be considered.

 

A Known Weak Spot in the Provision

Tax professionals have pointed out a structural criticism that applies to both the old and new versions of this provision: the penalty operates on an all-or-nothing basis, meaning a business with a minor, unintentional delay of a few days can face the same maximum exposure as one that deliberately avoided the audit altogether for months. Comparisons have been drawn to other tax laws like the GST Act, where late fees scale with the number of days of delay, and there have been calls to introduce a similarly graded structure under Section 446 in future amendments.

What This Means for Businesses Going Forward

For businesses and professionals falling within the audit threshold, Section 446 is a reminder that timely engagement with a Chartered Accountant and adherence to the audit filing calendar remains essential. Since the financial exposure under this section can reach up to ?1,50,000, and applies in addition to any related penalty under Section 441 for failing to maintain books in the first place, staying ahead of the audit deadline continues to be far more cost-effective than dealing with the consequences of non-compliance after the fact.