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Until this year, a misreporting penalty under the income-tax law had no exit short of an appeal. The immunity scheme in section 440 of the Income-tax Act, 2025, as first enacted, expressly shut out every case listed in section 439(11). The Finance Act, 2026 rewrote section 440 with effect from 1 April 2026, and on 8 October 2026 CBDT notified the form that goes with it: Notification No. 134/2026 (G.S.R. 871(E)) substitutes Form No. 161, now titled “Application for seeking waiver of penalty under section 440(2) of the Income-tax Act, 2025”. The rules came into force on publication in the Official Gazette.

If your company has an assessment order with a penalty attached, this changes the question you should be asking. It is no longer only “can we win the appeal?” but also “is it cheaper to pay and close?”

The numbers: 200% penalty against 100% or 120% additional tax

Section 439 levies a penalty of 50% of the tax payable on under-reported income (section 439(9)), and 200% where the under-reported income is in consequence of misreporting (section 439(10)). The misreporting list in section 439(11) is wider than many founders expect. It includes a claim of expenditure not substantiated by any evidence, failure to record a receipt in the books, and failure to report an international transaction, a deemed international transaction or a specified domestic transaction to which Chapter X applies. That last limb matters for any Indian company that deals with an overseas parent, subsidiary or group entity.

Put simply: for every Rs 100 of tax on income treated as misreported, the penalty is Rs 200, while the waiver route costs Rs 100 of additional income-tax (Rs 120 for income under section 195(1)(b)), on top of the tax and interest you owe either way.

The four conditions, and what you give up

Under section 440(1), you may apply to the Assessing Officer for waiver of the penalty and immunity from initiation of proceedings under section 478 or 479 if:

1. the tax and interest payable under the assessment order under section 270(10) or reassessment under section 279 are paid within the period specified in the notice of demand;
2. the additional income-tax of 100% (cases (a) to (f)) or 120% (case (g)) is paid within that same period, in lieu of the penalty; and
3. no appeal has been filed against the order of assessment or reassessment and the levy of penalty.

No waiver or immunity is granted if any proceeding has been initiated under Chapter XXII (section 440(4)). If the application is accepted, no appeal under section 356 or 357 and no revision under section 378 lies against the assessment or reassessment order (section 440(8)). In other words, the waiver closes the dispute on the addition itself, not only on the penalty. Take it where the addition is hard to defend; appeal where it is not.

The clock: one month from the end of the month

The application is due within one month from the end of the month in which the order is received (section 440(2)). An order received on 20 November 2026 gives you until 31 December 2026. All the money has to be paid within the period in the notice of demand, and Note 3 to Form No. 161 repeats that. The Assessing Officer grants the waiver after the thirty-day appeal period in section 358(3)(a) has run, and passes an order within three months from the end of the month in which the application is received; a rejection needs a hearing first (section 440(3), (5) and (6)). If the application is rejected, the time it was pending is excluded from your appeal period (section 358(4)), so you do not lose the appeal by trying.

Which Act governs your order?

Check the tax year of the order first. Section 536(2)(c) and (d) of the Income-tax Act, 2025 keep the Income-tax Act, 1961 in force for assessment and penalty proceedings for any tax year beginning before 1 April 2026. For FY 2025-26 and earlier, the provision is section 270AA of the Income-tax Act, 1961, substituted by the Finance Act, 2026 with effect from 1 March 2026. It allows immunity from imposition or waiver of a penalty under section 270A, with additional income-tax of 100% of the tax on under-reported income in the misreporting cases in section 270A(9), on the same no-appeal footing. Rule 129 of the Income-tax Rules, 1962 provides for the application in Form No. 68. The 1961 Act has no counterpart to the 120% rate. Section 440 and Form No. 161 apply from tax year 2026-27.

Your checklist when an order arrives

1. Identify the Act (1961 or 2025) from the tax year of the order.
2. Read which limb of the penalty provision the order invokes: under-reporting, misreporting, or income under section 195(1)(b).
3. Compare the waiver cost with the merits of an appeal on the addition itself.
4. If you choose the waiver, pay everything within the notice of demand period and do not file an appeal.
5. Diarise the application date: one month from the end of the month of receipt.

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Source: Central Board of Direct Taxes, Notification No. 134/2026, G.S.R. 871(E), dated 8 October 2026, Income-tax (Sixth Amendment) Rules, 2026, incometaxindia.gov.in
Source: Income-tax Act, 2025 as amended by the Finance Act, 2026, sections 195, 358, 439, 440 and 536, incometaxindia.gov.in
Source: Income-tax Act, 1961 as amended by the Finance Act, 2026, section 270AA, incometaxindia.gov.in
Source: Income-tax Rules, 2026, rule 231, and Income-tax Rules, 1962, rule 129, incometaxindia.gov.in

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A S Banka Advisors Private Limited. This article is for general information and is not legal or tax advice.