A practitioner’s guide to civil penalties (Chapter XXI) and criminal prosecution (Chapter XXII) under the new Act — old-to-new section mapping, key defences, compounding, and litigation strategy for Tax Year 2026-27.
Penalty vs Prosecution: The Core Distinction
Under both the Income Tax Act, 1961 and the Income Tax Act, 2025, a single default can trigger two entirely different consequences that are often confused with one another: a penalty and a prosecution. Understanding the distinction is fundamental to advising a client and to framing a defence.
A penalty is a civil monetary consequence, imposed by an Assessing Officer or other income-tax authority through a quasi-judicial order, appealable within the departmental hierarchy (Joint Commissioner (Appeals) / Commissioner (Appeals) and thereafter the Tribunal). Prosecution, by contrast, is a criminal consequence — a complaint filed before a Special Court, requiring proof of a culpable mental state, carrying imprisonment and/or fine, and governed by criminal procedure rather than tax procedure.
Penalty
Civil in nature. Imposed by tax authorities. Standard of proof is on preponderance of probability. Recoverable as arrears of tax. Appealable to JCIT(A)/CIT(A) and ITAT.
Prosecution
Criminal in nature. Requires sanction of a specified authority and a complaint before a Special Court. Standard of proof is beyond reasonable doubt. Can result in imprisonment.
How they interact
Many prosecution provisions presuppose an underlying penalty or default. Deletion of the penalty on merits is frequently — though not automatically — fatal to a parallel prosecution, a point that has repeatedly come up before High Courts.
Both can run simultaneously
Penalty and prosecution proceedings are legally independent and can be initiated and pursued in parallel. A client cannot assume that paying a penalty, or that a penalty being dropped in appeal, automatically closes a criminal complaint — though it is frequently a strong ground to seek quashing.
New Structure: Chapters XXI & XXII NEW
The Income Tax Act, 2025 (effective from Tax Year 2026-27) consolidates what were scattered provisions under the 1961 Act into two dedicated chapters. Under the old Act, penalty provisions were spread across Sections 270A, 271A to 271-I, 272A and 272B, while prosecution provisions ran from Section 275A to Section 280D — with no single organising chapter for either. The 2025 Act changes this.
Income Tax Act 1961
- Under-reporting/misreporting: Section 270A
- Immunity from penalty: Section 270AA
- Failure to maintain books: Section 271A
- Failure of tax audit: Section 271B
- Failure to deduct TDS: Section 271C
- Failure to pay TDS: Section 276B
- Wilful evasion: Section 276C
- Failure to file return: Section 276CC
- False verification: Section 277
- Abetment of false return: Section 278
- Prosecution sanction: Section 279
Income Tax Act 2025
- Under-reporting/misreporting: Section 439
- Immunity from penalty: Section 440
- Failure to maintain books: Section 441
- Failure of tax audit: ~Sections 448–468 band
- Failure to deduct TDS: ~Sections 448–468 band
- Failure to pay TDS: Section 476
- Wilful evasion: Section 478
- Failure to file return: Section 479
- False verification: Section 482
- Abetment of false return: Section 484
- Prosecution sanction: Section 491
Verify before you file or argue
The mapping above is indicative and drawn from the Act’s chapter structure as notified. The exact clause-level mapping for TDS/TCS defaults, cash-transaction penalties and PAN/TAN defaults within the Section 448–468 band should be confirmed against the bare Act or the Income Tax Department’s official 1961-vs-2025 section-mapping utility before it is relied on in a notice reply, appeal memo, or court filing.
Penalty Provisions — Chapter XXI Section Chart
Chapter XXI runs from Section 439 to Section 472 and groups penalty provisions by theme rather than scattering them, as the old Act did. The substantive exposure — the rates and the nature of default — remains largely unchanged; what has changed is where each provision sits.
| New Section | Old Section (1961) | Nature of Default | Quantum |
|---|---|---|---|
| 439 | 270A | Under-reporting of income | 50% of tax on under-reported income |
| 439 | 270A | Misreporting of income (bright-line tests) | 200% of tax on misreported income |
| 440 | 270AA | Immunity from penalty on payment of tax & interest, no appeal filed | NIL, subject to conditions |
| 441 | 271A | Failure to keep, maintain or retain books of account | Up to ₹25,000/₹1,50,000 (case-specific) |
| 442 | 271AA | Failure to maintain transfer-pricing documentation | 2% of transaction value |
| 443–446 | 271AAB / 271AAC / 271AAD / 271D–271E | Search-related undisclosed income, false entries, cash loan/deposit contraventions | 10%–60% band, or amount of loan/deposit |
| 448–468 | 271B, 271C, 271DA, 271FA, 271FAA, 271GB, 271H, 271-I, 271J, 271K, 272A, 272B | Tax-audit failure, TDS/TCS default, cash-receipt violations, SFT/reporting defaults, PAN/TAN non-compliance, incorrect professional certification | Fixed sums / % of default, case-specific |
| 472 | 275 | Bar of limitation for imposing penalties | Time-bound (typically within 1 year of relevant order) |
Prosecution Provisions — Chapter XXII Section Chart
Chapter XXII (Sections 473–498) is the criminal counterpart. It reproduces the substance of the old Sections 275A–280D almost clause-for-clause, but under a single, sequentially numbered chapter — useful for anyone drafting a quashing petition or compounding application who needs to move fluently between the old and new numbering.
| New Section | Old Section (1961) | Offence | Punishment (indicative) |
|---|---|---|---|
| 473 | 275A | Contravention of order restraining assets under search | Up to 2 years + fine |
| 474 | 275B | Failure to afford inspection facility during search | Up to 2 years + fine |
| 475 | 276 | Removal, concealment, transfer or delivery of property to thwart tax recovery | Up to 2 years + fine |
| 476 | 276B | Failure to pay tax deducted at source to the credit of Central Government | Rigorous, 3 months to 7 years + fine |
| 477 | 276BB | Failure to pay tax collected at source | Rigorous, 3 months to 7 years + fine |
| 478 | 276C | Wilful attempt to evade tax, penalty or interest | 6 months to 7 years (>₹25L evaded); 3 months to 2 years (other cases) |
| 479 | 276CC | Wilful failure to furnish return of income | 6 months to 7 years (>₹25L tax evaded); 3 months to 2 years (other cases) |
| 480 | 276CCC | Failure to furnish return of income in search cases | Rigorous imprisonment + fine |
| 481 | 276D | Wilful failure to produce accounts and documents | Up to 1 year + fine |
| 482 | 277 | False statement in verification / delivering false accounts | 6 months to 7 years (>₹25L); 3 months to 2 years (other) |
| 483 | 277A | Falsification of books of account or documents to enable evasion | 3 months to 2 years + fine |
| 484 | 278 | Abetment of false return, account, statement or declaration | 6 months to 7 years (>₹25L); 3 months to 2 years (other) |
| 485 | 278A | Punishment for second and subsequent offences | Enhanced — 6 months to 7 years |
| 486 | 278AA | Punishment not to be imposed where reasonable cause is shown | Defence provision — no punishment |
| 487–488 | 278B / 278C | Offences by companies / Hindu Undivided Families — vicarious liability of persons in charge | Attribution provision |
| 489–490 | 278D / 278E | Presumptions as to assets/books, and as to culpable mental state | Rebuttable presumption — burden-shifting |
| 491 | 279 | Prosecution to be at the instance of Pr. CCIT/CCIT/Pr. CIT/CIT (sanction requirement) | Procedural safeguard |
| 492 | 279A | Certain offences to be non-cognizable | Procedural — CrPC/BNSS applicability |
| 495–498 | 280A–280D / 292 | Constitution of Special Courts, offences triable by Special Court, summons-case trial, application of BNSS | Procedural framework |
The ₹25 lakh threshold still matters
Under both the old and new Act, several prosecution provisions (evasion, false verification, abetment) carry a materially higher minimum sentence — rigorous imprisonment starting at 6 months instead of 3 months — once the tax sought to be evaded crosses ₹25 lakh. Quantifying the evaded tax accurately at the earliest stage of a case is often decisive to sentencing exposure.
Immunity, Compounding & Second Offences
Three mechanisms sit at the intersection of penalty and prosecution and deserve particular attention in a litigation practice.
Immunity from penalty — Section 440 (old 270AA)
Where an assessee pays the tax and interest on under-reported income within the prescribed time and does not file an appeal against the relevant assessment order, an application can be made for immunity from the Section 439 penalty and from prosecution under Section 478. This remains one of the most under-used relief provisions in practice — the trade-off (foregoing the right to appeal on merits) needs to be weighed carefully with the client, especially where the addition itself is contestable.
Compounding of offences
Offences under Chapter XXII can be compounded, either before or after a complaint is filed, by the competent authority under CBDT’s compounding guidelines. Compounding is discretionary, categorised (broadly, Category A technical/procedural defaults compound more readily than Category B evasion-type offences), and subject to eligibility conditions — repeat offenders and cases involving certain scheduled predicate offences are typically excluded.
Second and subsequent offences — Section 485 (old 278A)
A second conviction under specified sections attracts an enhanced minimum sentence of 6 months (up to 7 years), regardless of the amount involved in the second instance. This makes a client’s prior prosecution history — even a settled or compounded one, depending on how it was resolved — a material fact to establish early.
Key Defences in Litigation
Recent judicial trends — carried forward conceptually into the new Act’s Section 486 “reasonable cause” provision and Section 490 presumption clause — give practitioners several well-established lines of defence.
Wilfulness is not automatic
Courts have consistently distinguished a deliberate, conscious attempt to evade tax from a bona fide error or an arguable interpretational position. Mere delay in payment, without mens rea, has been held insufficient to sustain a Section 276C(2)/478-type prosecution.
Penalty deletion as a ground
Where the underlying penalty for concealment or misreporting has been deleted on merits by the appellate authority, continuation of a parallel prosecution built on the same facts has been treated as unsustainable in several High Court rulings — though this is fact-specific and not an automatic bar.
Reasonable cause — Section 486
Carrying forward old Section 278AA, this is a statutory “no punishment” defence where the assessee can demonstrate reasonable cause for the default — a provision worth pleading explicitly and early, rather than as an afterthought.
Circular and settlement conflicts
Continuation of prosecution in defiance of a binding CBDT circular, or after an assessee has been granted immunity or has settled the underlying dispute, has been quashed by courts as an abuse of process — a recurring and useful fact pattern to check for in every prosecution brief.
The Decriminalisation Debate WATCH
This is a live policy conversation practitioners should track. NITI Aayog’s Tax Policy Working Paper has proposed a further round of reform on top of the 2025 Act, arguing that criminal liability should attach only to conduct involving fraudulent or mala fide intent. It has flagged that the new Act still criminalises 35 actions across 13 provisions — most carrying mandatory imprisonment — and has recommended that 12 of these, largely administrative and technical defaults, be moved entirely to civil/monetary penalties, with the remaining offences retaining criminal liability only where fraud or mala fide intent is shown.
The paper has also floated shifting the burden of proving fraudulent intent onto the tax authorities rather than the assessee — a change that, if adopted, would materially strengthen the defence position in prosecution matters. None of this is enacted law yet, but it signals the direction of travel and is worth flagging to clients facing borderline procedural-default prosecutions, since a compounding or settlement strategy today should account for the possibility of legislative relief tomorrow.
Practical Strategy for Practitioners
Classify the year, then classify the default
First confirm whether the tax year in question falls under the 1961 Act or the 2025 Act — pending proceedings for years before Tax Year 2026-27 continue under the old law. Only then map the specific default to the correct chapter and section.
Separate the penalty track from the prosecution track
Build the appellate strategy on the penalty order independently of the criminal defence — but ensure findings favourable in the penalty appeal are placed on record in the prosecution proceeding at the earliest opportunity.
Evaluate immunity and compounding early
Section 440 immunity and Chapter XXII compounding both have procedural windows and conditions. Assess eligibility at the first client meeting, not after a complaint has already been filed.
Quantify the evaded tax precisely
Given the ₹25 lakh sentencing threshold under Sections 478, 479, 482 and 484, an early and defensible computation of the actual tax sought to be evaded can materially affect exposure.
Document reasonable cause contemporaneously
Section 486 defences are strongest when supported by contemporaneous records — illness, force majeure, professional advice relied upon in good faith, or system/portal failures — rather than reconstructed after a notice is received.
Common Questions
Does payment of the disputed tax stop a prosecution already filed?
Not automatically. Payment can support an immunity application (if made before the complaint is filed and conditions under Section 440 are met) or strengthen a quashing petition on the ground that continuation would be an abuse of process, but a complaint already before a Special Court requires either compounding, a quashing order, or trial to conclude.
Can a company be prosecuted, or only its directors?
Both. Section 487 (old Section 278B) fixes vicarious liability on every person who was in charge of, and responsible for, the conduct of the company’s business at the relevant time, in addition to the company itself, unless that person proves the offence occurred without their knowledge and despite due diligence.
Is there a limitation period for launching prosecution?
Unlike penalty proceedings (which carry an explicit bar of limitation under Section 472), prosecution under Chapter XXII does not carry a fixed statutory limitation in the same way — though inordinate and unexplained delay in launching prosecution has itself been raised, with mixed success, as a ground for quashing.
Are prosecution offences under the Act cognizable or non-cognizable?
Section 492 (old Section 279A) makes certain offences under the Act non-cognizable, meaning police cannot arrest or investigate without a warrant/court direction — but note this applies only to the offences specifically listed, not to every provision in Chapter XXII.