Chapter XXI - Penalties
Section 445
Section 445: penalty for benefits to related persons
Section 445 targets a registered non-profit organisation that channels its income, directly or indirectly, to the benefit of a "related person" - a violation that also makes that income chargeable to tax under section 337. The penalty escalates sharply if the same organisation repeats the violation in a later tax year.
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This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
If during any proceedings under this Act, it is found that a person being a registered non-profit organisation has any specified income which is chargeable to tax as per section 337 (Table: Sl. No. 2), the Assessing Officer may impose on such person, a penalty of— (a) a sum equal to the aggregate amount of income applied, directly or indirectly, by such person, for the benefit of any related person referred to in section 355(h), if the violation is noticed for the first time during any tax year; and (b) a sum equal to 200% of the aggregate amount of income of such person applied, directly or indirectly, by that person for the benefit of any person referred to in section 355(h), if the violation is noticed again in any subsequent tax year.
Introduction
Section 445 penalises a registered non-profit organisation when proceedings find specified income chargeable under section 337 for benefits to a related person. Its rate increases if the violation is noticed again in a later tax year.
Key takeaways
First violation
The possible penalty equals the aggregate income applied directly or indirectly for the related person’s benefit.
Later violation
If the violation is noticed again in a subsequent tax year, the possible penalty is 200% of that aggregate income.
Related-person test
The beneficiary is a person referred to in section 355(h).
What Section 445 says
"If during any proceedings under this Act, it is found that a person being a registered non-profit organisation has any specified income which is chargeable to tax as per section 337 (Table: Sl. No. 2), the Assessing Officer may impose on such person, a penalty of-- (a) a sum equal to the aggregate amount of income applied, directly or indirectly, by such person, for the benefit of any related person referred to in section 355(h), if the violation is noticed for the first time during any tax year; and (b) a sum equal to 200% of the aggregate amount of income of such person applied, directly or indirectly, by that person for the benefit of any person referred to in section 355(h), if the violation is noticed again in any subsequent tax year."
How the penalty escalates
| When the violation is noticed | Penalty |
|---|---|
| First time, in any tax year | A sum equal to the aggregate amount of income applied, directly or indirectly, for the benefit of a related person under section 355(h) |
| Again, in any subsequent tax year | 200% of the aggregate amount of income so applied for the benefit of the related person |
The related-person test comes first
The chargeable specified income must arise from applying the registered non-profit organisation’s income directly or indirectly for the benefit of a person covered by section 355(h). Identify the person and payment or benefit before applying either penalty tier.
Step-by-step flow for applying Section 445
- 1
Is the person a registered non-profit organisation?
Section 445 applies only to a registered non-profit organisation found, during any proceedings under the Act, to have specified income.
- No: Section 445 does not apply.
- Yes: Go to the next step.
- 2
Is the specified income chargeable to tax under section 337 (Table: Sl. No. 2)?
This is the case where income is applied, directly or indirectly, for the benefit of a related person referred to in section 355(h).
- No: Section 445 does not apply.
- Yes: Go to the next step.
- 3
Work out the aggregate amount of income so applied
Add up all income applied, directly or indirectly, for the benefit of persons referred to in section 355(h). This aggregate is the measure of the penalty.
- 4
Is this the first time the violation is noticed?
The Assessing Officer "may" impose the penalty; the amount depends on whether the violation is new or repeated.
- First time in any tax year: Penalty of a sum equal to the aggregate amount applied (Section 445(a)).
- Noticed again in a subsequent tax year: Penalty of 200% of the aggregate amount applied (Section 445(b)).
Practical checklist
Do
- Identify the benefit, related person and amount of income applied.
- Check whether a prior tax year already recorded such a violation.
Avoid
- Do not apply the repeat-violation rate without the later-year condition.
Illustrative example
Worked example: a first and a repeat violation
Hypothetical facts (illustration only, not a real taxpayer): A registered trust is found, in proceedings for one tax year, to have paid ₹6,00,000 of its income as excess rent to a person referred to in section 355(h). In a later tax year, it is found to have applied ₹4,00,000 of its income for the benefit of another person referred to in section 355(h). All amounts are assumed for illustration.
Coverage
In both years the income applied for such persons is specified income chargeable under section 337 (Table: Sl. No. 2), so Section 445 can apply.
First violation
It is noticed for the first time, so Section 445(a) applies. The penalty is a sum equal to the aggregate amount applied: ₹6,00,000.
Repeat violation
It is noticed again in a subsequent tax year, so Section 445(b) applies. The penalty is 200% of ₹4,00,000 = ₹8,00,000.
Discretion
The Act says the Assessing Officer "may" impose the penalty. The figures above are the amounts Section 445 provides, not an automatic charge.
Outcome
- First year: penalty up to ₹6,00,000. Later year: penalty up to ₹8,00,000.
- The penalty is separate from the tax on the specified income under section 337.
Frequently asked questions
Who does Section 445 apply to?
A registered non-profit organisation that has specified income chargeable to tax under section 337 (Table Sl. No. 2) because it applied income, directly or indirectly, for the benefit of a related person referred to in section 355(h).
What is the penalty the first time this happens?
A sum equal to the aggregate amount of income applied for the related person's benefit, under section 445(a).
What if the same organisation does it again in a later year?
The penalty jumps to 200% of the aggregate amount of income applied for the related person's benefit, under section 445(b).
Need help applying this provision to your situation?
Get help responding to a non-profit compliance noticeLast updated 9 October 2026