Penalties and Prosecution under the Income Tax Act, 1961
The Income Tax Act, 1961 outlines penalties and prosecutions for income concealment, return defaults, false statements, and TDS/TCS non-compliance.
The Income Tax Act, 1961, is the principal legislation governing taxation in India. The Act includes a comprehensive framework for penalties and prosecutions to ensure compliance and deter tax evasion. These provisions aim to penalise taxpayers who deliberately or negligently fail to comply with the law and to prosecute willful defaulters in criminal courts. This article explores the key penalty and prosecution provisions, relevant case laws, and procedural safeguards under the Income...
The Income Tax Act, 1961, is the principal legislation governing taxation in India. The Act includes a comprehensive framework for penalties and prosecutions to ensure compliance and deter tax evasion. These provisions aim to penalise taxpayers who deliberately or negligently fail to comply with the law and to prosecute willful defaulters in criminal courts.
This article explores the key penalty and prosecution provisions, relevant case laws, and procedural safeguards under the Income Tax Act.
Legal Basis and Objective
Penalties v. Prosecution
- Penalty: A civil liability, often monetary, imposed for non-compliance (e.g., late filing).
- Prosecution: A criminal proceeding leading to imprisonment and/or fines.
Objective
The twin objectives are:
- Deterrence against evasion and defaults.
- Compliance through the enforcement of tax laws.
Penalty Provisions under the Income Tax Act
Section 234E – Fee for Late Filing of TDS Returns
A fee of ₹200 per day is levied for late filing of TDS/TCS returns.
Not a penalty, but a mandatory fee.
Section 234F – Fee for Default in Filing Return
- ₹5,000 if return is filed after the due date but before 31st December.
- ₹10,000 after 31st December (restricted to ₹1,000 if total income ≤ ₹5 lakhs).
Section 270A – Underreporting and Misreporting of Income
Introduced by Finance Act, 2016 in place of Section 271(1)(c).
Underreporting: Penalty = 50% of tax payable.
Misreporting: Penalty = 200% of tax payable.
Misreporting includes:
- Misrepresentation or suppression of facts,
- Failure to record investments,
- False entries, etc.
Section 271A – Failure to Keep Books of Account
₹25,000 penalty for not maintaining required books under Section 44AA.
Section 271B – Failure to Get Accounts Audited
The penalty for failure to get accounts audited or furnish the audit report as required under Section 44AB of the Income Tax Act, 1961 is:
Penalty = 0.5% of the total sales/turnover/gross receipts (as applicable) of the relevant previous year
OR
₹1,50,000, whichever is less.
Section 271BA - Penalty for failure to furnish report under section 92E
Penalty = ₹1,00,000
This penalty is levied if a person fails to furnish the accountant's report (Form 3CEB) as required under Section 92E.
Section 271C – Non-deduction of TDS
Penalty = equal to the amount of tax not deducted or paid.
The Joint Commissioner is authorised to impose this penalty.
Section 271CA - Penalty for failure to collect tax at source
Penalty = Amount of tax that was not collected
This applies when a person fails to collect TCS as required under Chapter XVII-BB (for example, on sale of goods, scrap, etc.).
Section 271D - Penalty for failure to comply with the provisions of section 269SS
If a person accepts any loan, deposit, or specified sum in cash (in contravention of Section 269SS, which generally requires such transactions to be done via banking channels if amount ≥ ₹20,000):
Penalty = Amount of loan/deposit/specified sum accepted in cash
Penalty for failure to comply with the provisions of section 269T
Section 271E – Violation of Section 269SS and 269T
If a person repays any loan, deposit, or specified advance in cash (in violation of Section 269T, which also bars such cash repayments over certain limits):
Penalty = Amount of loan/deposit/specified advance repaid in cash.
Section 271H - Penalty for failure to furnish statements, etc.
Applies when:
- TDS/TCS statement is not filed on time, or
- Incorrect information is furnished in the statement.
Penalty: ₹10,000 to ₹1,00,000
No penalty for late filing if:
- Tax, interest, and late fee are paid, and
- Statement is filed within 1 year from the due date.
Applies to: TDS/TCS statements due on or after July 1, 2012.
Section 272B – Failure to Quote PAN
Penalty = ₹10,000 per default.
- Failure to comply with provisions of Section 139A (e.g., not applying for or not quoting PAN where required).
- Quoting a false PAN knowingly in documents or communications.
Section 271FA – Failure to File Annual Information Return (AIR)
₹500 per day (after notice) for failure to file AIR under Section 285BA.
Section 271GB – Failure to Furnish Country-by-Country Report
This section applies to reporting entities (usually part of multinational groups) that are required to furnish reports under Section 286 (Country-by-Country Reporting).
(1) Failure to furnish report under Section 286(2):
₹5,000 per day for default up to 1 month
₹15,000 per day for default beyond 1 month
(2) Failure to furnish information/documents under Section 286(6):
₹5,000 per day of continued failure (starting after the due date expires)
(3) If failure continues even after penalty order is served:
₹50,000 per day from the date of service of the order
(4) Furnishing inaccurate information in the report:
₹5,00,000 penalty if:
- The entity knew the report was inaccurate but didn't inform authorities
- The inaccuracy was discovered later but not corrected within 15 days
- Inaccurate info was furnished in response to a notice under Section 286(6)
- Penalty between ₹5,000 and ₹5,00,000 for non-furnishing/delay.
Prosecution under the Income Tax Act
Prosecution refers to criminal action initiated by the department in cases of willful evasion or fraudulent acts.
Section 275A – Contravention of Order Made under Sub-section (3) of Section 132
If someone breaks any order given under the second proviso to sub-section (1) or sub-section (3) of Section 132 (related to search and seizure), they can be punished with rigorous imprisonment for up to two years, and may also have to pay a fine.
Section 275B – Failure to Comply with Clause (iib) of Sub-section (1) of Section 132
If a person does not allow the authorised income tax officer to check their books of account or other documents as required under clause (iib) of sub-section (1) of Section 132, they can be punished with rigorous imprisonment for up to two years, along with a fine.
Section 276 – Fraudulent Removal, Concealment, Transfer or Delivery of Property to Thwart Tax Recovery
If anyone dishonestly hides, transfers, removes, or hands over property (or any rights in it) to someone else to stop it from being taken by the tax authorities for recovering dues, they can be punished with rigorous imprisonment for up to two years and also have to pay a fine.
Section 276A – Failure to Comply with Sub-sections (1) and (3) of Section 178
If a person:
- Doesn’t give notice as required under sub-section (1) of Section 178, or
- Doesn’t keep aside the required amount under sub-section (3), or
- Gives away or uses the company’s assets in a way that goes against these rules,
they can be punished with rigorous imprisonment for up to two years.
Note: Unless there are special reasons recorded by the court, the imprisonment should be at least six months.
Section 276 B - Failure to Deposit TDS or Certain Other Taxes
Section 276B deals with the failure to deposit tax deducted at source (TDS) or certain other taxes to the credit of the Central Government. If a person deducts tax under the provisions of Chapter XVII-B and fails to deposit it, or fails to pay the tax as required under sub-section (2) of Section 115-O (pertaining to dividend distribution tax) or under the second proviso to Section 194B (relating to winnings from lotteries or similar sources), such a person shall face serious consequences.
The law mandates rigorous imprisonment for a minimum of three months, which may extend up to seven years, along with a fine. This provision ensures accountability in tax deduction and remittance obligations.
Section 276BB - Failure to Deposit TCS
Under Section 276BB, if a person collects tax at source (TCS) as required under Section 206C of the Income Tax Act but fails to deposit it to the credit of the Central Government, he shall also be subjected to penal action. This includes rigorous imprisonment for a term not less than three months, which can extend to seven years, and a fine.
The provision is intended to enforce strict compliance among persons responsible for collecting tax at source and safeguarding government revenue.
Section 276C - Wilful Attempt to Evade Tax, Penalty, or Interest
Section 276C targets individuals who deliberately try to evade tax liabilities, including tax, penalty, or interest. It consists of two sub-sections.
Sub-section (1) provides that if a person wilfully attempts, in any manner whatsoever, to evade tax, under-report income, or avoid penalty or interest under the Act, he shall be liable for prosecution. Where the amount of tax evaded or under-reported income tax exceeds ₹25,00,000, the person shall be punished with rigorous imprisonment for a term not less than six months, which may extend to seven years, along with a fine. In other cases, the imprisonment shall be not less than three months, which may extend to two years, along with a fine.
Sub-section (2) deals specifically with wilful attempts to avoid payment of tax, penalty, or interest, even if not involving concealment or under-reporting. Such acts are punishable with rigorous imprisonment of not less than three months, extendable up to two years, and may also attract a fine, at the discretion of the court.
The Explanation to this section clarifies that a wilful attempt to evade tax includes the possession or use of books of accounts or documents with false entries, making or causing false entries, willful omissions, or creating any other circumstance that facilitates tax evasion. This expansive interpretation is aimed at covering a wide range of fraudulent or deceptive conduct intended to defeat the tax laws.
Section 276CC – Failure to Furnish Return of Income
If a person wilfully fails to furnish their return of income or fringe benefits within the prescribed time under Section 139(1), Section 142(1)(i), Section 148, Section 153A, or Sections 115WD/115WH, they can be prosecuted.
If the tax evaded exceeds ₹25 lakhs, the person is punishable with rigorous imprisonment from 6 months to 7 years, along with a fine.
In other cases, imprisonment shall be not less than 3 months, which may extend to 2 years, with a fine.
However, no prosecution shall be initiated if:
- The return is filed before the end of the assessment year, or
- The unpaid tax (after adjusting advance tax/TDS) is not more than ₹3,000 (for non-companies), or
- The failure relates to assessment years before 1 April 1975.
Section 277 – False Statement in Verification or Accounts
- If a person makes a false statement in any verification or delivers an account or statement which they know or believe to be false, they can be prosecuted.
- If the tax evaded exceeds ₹25 lakhs, the punishment is rigorous imprisonment of 6 months to 7 years, and a fine.
In other cases, the imprisonment ranges from 3 months to 2 years, along with a fine.
Section 278 – Abetment of False Return or Fraudulent Statement
- If a person abets or induces someone to file a false return or declaration, or to commit an offence under Section 276C(1), they shall be liable for prosecution.
- If the tax, interest, or penalty evaded exceeds ₹25 lakhs, the punishment is rigorous imprisonment of 6 months to 7 years, plus fine.
In other cases, the imprisonment shall be 3 months to 2 years, plus fine.
Section 279 – Sanction for Prosecution
No person can be prosecuted under Sections 275A to 278 (and related sections) without the previous sanction of the Principal Commissioner, Commissioner (Appeals), or other prescribed authorities.
- However, Principal Chief Commissioner or Principal Director General may issue directions to initiate prosecution.
- Further, no prosecution under Section 276C or 277 shall be initiated if the penalty has been waived or reduced under Section 273A.
Section 280 – Disclosure of Information by Public Servants
If a public servant discloses confidential information or documents in violation of Section 138(2), they shall be punished with imprisonment up to 6 months and fine.
Prosecution under this section requires prior sanction of the Central Government.
Defenses Available to Assessees
- Reasonable cause under Section 273B: Penalty may not be imposed if the assessee proves a valid cause (e.g., illness, disaster).
- Absence of mens rea: Particularly in Sections 276C, 277.
- Order set aside in appeal: If income addition or default is reversed, prosecution may become infructuous.
Important Cases
K.C. Trunk and Bucket Factory v. CIT (1975)
Karti P. Chidambaram & Anr. v. Deputy Director of Income Tax (2020)
The petitioners challenged their prosecution under Sections 276C, 277, and 278 of the Income Tax Act for allegedly concealing cash payments received in property transactions. The prosecution was based on materials seized from third-party entities during search operations, but no direct incriminating evidence or statement was recorded from the petitioners themselves.
The Court held that the Deputy Director of Income Tax was not competent to launch the prosecution without a prior finding of wilful concealment or false verification by the Assessing Officer, as required under law. It concluded that the complaint was premature and procedurally flawed, quashing the criminal proceedings while clarifying that fresh action could be taken following proper assessment.
Finance Act 2025
Recent Amendments to Penalty Provisions under the Income-tax Act
Section 270AA
- The time limit for applying for immunity from penalty has been extended from one month to three months.
Section 271AAB
- A new provision specifies that certain provisions apply only to cases before 1st September 2024, effective retrospectively.
Section 271BB
- This section has been completely removed (omitted).
Amendments of Sections 271C, 271CA, 271D, 271DA, 271DB, and 271E
- A new proviso has been added stating that from 1st April 2025, the Assessing Officer shall have the power to impose penalties under these sections.
Section 275 (Penalty Time Limit)
- The entire section is replaced.
- Now, penalty orders must be passed within six months from the end of the quarter in which:
the assessment proceedings are completed, or
appeal/revision orders are received by the Commissioner or Assessing Officer, or
penalty notices are issued (in other cases).
Section 276BB
- A new proviso says no prosecution will apply if the tax collected at source (TCS) is deposited before the due date for filing the TCS return.
Conclusion
The framework of penalties and prosecution under the Income Tax Act, 1961, plays a crucial role in enforcing compliance. However, with evolving taxpayer rights and digitisation, the emphasis is shifting towards a balanced approach—stringent against evasion yet accommodating genuine hardships. Courts have repeatedly underscored the importance of intention, proportionality, and procedural fairness in penal and criminal proceedings under tax laws.
As India moves toward a more transparent and efficient tax system, these provisions must be enforced judiciously to promote voluntary compliance, safeguard public revenue, and avoid undue harassment of honest taxpayers.
References
[1] Income Tax Act, 1961
[2] K.C. Trunk and Bucket Factory v. CIT [1975] 99 ITR 67 (Gauhati) [FB]
[3] Karti P. Chidambaram & Anr. v. Deputy Director of Income Tax, Crl.R.C.Nos.510 & 511 of 2020
[4] Penalty u/s. 271(1)(c): Initiation, Satisfaction & Levy – The Unwritten Mandates, Available Here
[5] Finance Act, 2025
Neha Bhatia
Neha Bhatia is an alumna of Panjab University with deep expertise in taxation and financial regulations. She specializes in optimizing tax strategies for businesses and individuals. A passionate writer and researcher, she enjoys exploring evolving trends in finance and law.