Income-tax Prosecution Under the Income-tax Act, 2025 (Chapter XXII)

Last Updated: 15 April 2026  |  Applicable From: Tax Year 2026-27 (1 April 2026 onwards)  |  Reference: Income-tax Act, 2025 (30 of 2025), as amended by Finance Act, 2026

Prosecution is the most severe consequence the income-tax machinery can impose. It is no longer a monetary penalty — it is a criminal proceeding before a magistrate, with the possibility of imprisonment, permanent criminal record, disqualifications, and reputational fallout. Under the Income-tax Act, 2025, Chapter XXII (“Offences and Prosecution”) carries forward the penal architecture of Chapter XXII of the repealed Income-tax Act, 1961, with only linguistic simplification. Every practitioner advising individuals, directors, or closely held companies needs to understand exactly which conduct attracts prosecution from 1 April 2026, how the Rs 25 lakh threshold operates, when compounding is available, and how the updated-return and immunity routes can prevent prosecution in the first place. This guide walks through Chapter XXII in depth — wilful evasion, false statement, abetment, director liability, presumption of culpable mental state, compounding guidelines, and a five-stage defence blueprint — all calibrated to the 2025 Act and the first tax year 2026-27.

Table of Contents

1. Chapter XXII of the Income-tax Act, 2025 — structure
2. Wilful attempt to evade tax — the core offence
3. False statement in verification
4. Abetment and third-party liability
5. Failure to deposit TDS
6. The Rs 25 lakh prosecution threshold
7. Prior sanction — the jurisdictional gate
8. Compounding of offences
9. Immunity and the updated-return route
10. Presumption of culpable mental state
11. Company and director liability
12. Five-stage defence blueprint
13. Expert Insight
14. Key Takeaways
15. Frequently Asked Questions

1. Chapter XXII of the Income-tax Act, 2025 — structure

Chapter XXII of the Income-tax Act, 2025 sits between Chapter XXI (Penalties) and Chapter XXIII (Miscellaneous). It occupies pages 552 to 561 of the bare Act and contains ten sections dealing with specific offences, prior sanction, compounding, presumption of mental state, liability of companies and officers, and ancillary procedural matters. The chapter retains the architecture of the repealed 1961 Act with two important changes: the language has been simplified (shorter sentences, plain English, fewer cross-references) and the terminology is calibrated to the new “tax year” concept introduced across the Act.

The primary offences under Chapter XXII of the 2025 Act correspond to the following sections of the repealed 1961 Act:

Offence	1961 Act provision	2025 Act — Chapter XXII equivalent	Maximum punishment
Wilful attempt to evade tax assessment	Sec 276C(1)	Retained — same language	7 years RI + fine (above Rs 25 lakh)
Wilful attempt to evade payment	Sec 276C(2)	Retained	3 years + fine
False statement in verification / return	Sec 277	Retained	7 years RI + fine (above Rs 25 lakh)
Falsification of books / documents by second party	Sec 277A	Retained	2 years + fine
Abetment of false return	Sec 278	Retained	Same as principal offence
Failure to furnish return	Sec 276CC	Retained	7 years RI (above Rs 25 lakh)
Failure to pay TDS to Central Government	Sec 276B	Retained	7 years RI + fine
Failure to pay TCS collected	Sec 276BB	Retained	7 years RI + fine
Obstruction of officer / refusal to answer	Sec 275A–275B	Retained	2 years + fine
Prior sanction of Commissioner	Sec 279(1)	Retained — mandatory	—
Compounding power	Sec 279(2)	Retained	—
Presumption of culpable mental state	Sec 278E	Retained	—
Offences by companies / directors	Sec 278B	Retained	—

In this article, references to the “repealed section” point to the 1961 Act numbering (which practitioners still use as shorthand), while references to the 2025 Act describe the provisions as they apply from tax year 2026-27. The substantive law is virtually unchanged — but every prosecution launched for conduct on or after 1 April 2026 will formally be under Chapter XXII of the 2025 Act.

2. Wilful attempt to evade tax — the core offence

The centrepiece of Chapter XXII is the wilful-evasion provision (the 2025 Act equivalent of section 276C of the 1961 Act). It has two limbs:

• Limb 1 — evasion of assessment: Wilful attempt in any manner whatsoever to evade any tax, penalty or interest chargeable or imposable under the Act. This captures conduct before or during assessment — non-filing, understatement of income, claiming bogus deductions, routing income through shell entities, siphoning of cash receipts, and so on.
• Limb 2 — evasion of payment: Wilful attempt to evade payment of any tax, penalty or interest already assessed. This captures conduct after assessment — transferring assets to frustrate recovery, false statements of means, absconding, layering transactions through relatives, and so on.

Under Limb 1, where the tax sought to be evaded exceeds Rs 25 lakh, the punishment is rigorous imprisonment of not less than six months and up to seven years, together with fine. In other cases, the punishment is imprisonment from three months to three years with fine. Under Limb 2, the punishment is uniformly three months to three years with fine, with no enhanced threshold. The court cannot impose less than the statutory minimum unless it records special reasons in writing.

2.1 “Wilfully” — the cornerstone of the defence

The most frequently contested element of Chapter XXII prosecutions is the word “wilfully”. The Department must establish, to the criminal standard of proof, that the taxpayer’s conduct was deliberate and intended to evade tax. The following do not amount to wilful evasion: (a) inadvertent clerical errors; (b) bona fide legal claims that were ultimately disallowed; (c) differences of opinion on taxability of a receipt or deductibility of an expense; (d) reliance on written professional advice from a qualified chartered accountant; (e) failure attributable to illness, incapacity, or accounts seized by an enforcement agency. The presumption of culpable mental state (discussed in section 10 below) shifts the evidentiary burden, but the core requirement of wilfulness is a statutory ingredient the prosecution must plead and establish.

2.2 Illustrative conduct attracting prosecution under the 2025 Act

• Claiming deductions (80G donations, HRA, housing loan interest) supported by fabricated documents;
• Systematic under-invoicing of sales in a closely held business with a parallel cash-ledger;
• Routing personal income through shell entities and producing bogus agreements to justify the routing;
• Suppressing capital gains on sale of property by undervaluing consideration in the registered document;
• Using accommodation entries from shell companies to inflate purchases or suppress profits;
• Transferring immovable or liquid assets to relatives after an assessment demand, to frustrate recovery;
• Giving false information about assets in response to recovery notices under Chapter XIX of the 2025 Act.

3. False statement in verification

The 2025 Act retains the false-statement offence (the equivalent of section 277 of the 1961 Act). It targets two distinct acts:

• Making any statement in any verification under the Act or any rule that is false, which the person either knows or believes to be false or does not believe to be true; and
• Delivering any account or statement that is false, with the same state of knowledge.

Every income-tax return carries a verification clause at the foot: the taxpayer declares that the information furnished is true, correct and complete to the best of the taxpayer’s knowledge and belief. If a material item in the return is false and the taxpayer knew it was false when signing the verification, this offence is attracted. The punishment mirrors the wilful-evasion offence — up to seven years rigorous imprisonment where the tax sought to be evaded exceeds Rs 25 lakh. A defensible practice is for the taxpayer to retain a clear audit trail showing that the position taken in the return was based on books of account, third-party documentation, or professional advice — this directly attacks the “knew or believed to be false” requirement.

4. Abetment and third-party liability

Chapter XXII retains abetment (the equivalent of section 278 of the 1961 Act). Any person who abets or induces another to make or deliver a false account, statement, declaration, or return, or to commit any offence under the Act, is punishable with the same penal consequences as the principal offence. This provision has teeth against:

• Accommodation-entry providers: entities that issue bogus sale bills in return for a commission;
• Bogus donation-receipt networks: trusts that issue 80G receipts without actual donations, in return for a percentage;
• Sham share-capital providers: shell companies that subscribe to share capital as a conduit for unaccounted money;
• Tax consultants and CAs who actively participate in fabrication (not mere negligent advice). Passive or negligent advice is not abetment — active knowledge of falsity and affirmative assistance is required.

5. Failure to deposit TDS

The TDS-default offence (equivalent of section 276B of the 1961 Act) is retained in Chapter XXII. A deductor who fails to pay the tax deducted at source to the credit of the Central Government is punishable with rigorous imprisonment of three months to seven years, together with fine. This is effectively a strict-liability offence — once deduction is established and non-remittance is established, the offence is complete. The only defences are reasonable cause (cash crunch alone is not reasonable cause; disputes over the quantum of TDS may be), and payment before the launch of prosecution. CBDT circulars prescribe minimum monetary thresholds below which prosecution is not launched — typically a few lakhs of aggregated unpaid TDS — but these thresholds are administrative, not statutory, and can be overridden in repeat-default cases.

6. The Rs 25 lakh prosecution threshold

The Rs 25 lakh threshold is a defining feature of Chapter XXII. Where the aggregate amount of tax sought to be evaded (under the wilful evasion and false-statement offences) exceeds Rs 25 lakh in a tax year, the court is obliged to impose a minimum of six months rigorous imprisonment and may extend up to seven years. Below Rs 25 lakh, the range is three months to three years. The threshold is computed on the tax sought to be evaded — not on the income concealed — so a high-slab taxpayer crosses the threshold at a lower level of understatement than a low-slab taxpayer. Interest and penalty are excluded from the computation.

In parallel, CBDT has issued administrative instructions fixing higher monetary thresholds below which prosecution is not to be launched in ordinary course. These administrative thresholds are revised periodically and typically sit above the statutory Rs 25 lakh. A taxpayer whose tax-evaded amount is below the administrative threshold is rarely prosecuted — but can still be prosecuted if the Department concludes the case is egregious.

7. Prior sanction — the jurisdictional gate

The 2025 Act retains the mandatory prior-sanction requirement (equivalent of section 279(1) of the 1961 Act). No prosecution for any offence under the Act can be instituted except with the previous written sanction of the Principal Commissioner or Commissioner having jurisdiction. This is not a mere formality — it is a jurisdictional pre-condition. A prosecution launched without valid sanction is void ab initio and liable to be quashed.

The sanction must satisfy three tests: (a) it must be granted by the correct authority with territorial and subject-matter jurisdiction; (b) the sanctioning authority must have applied its mind — a rubber-stamp sanction that merely parrots the complaint is invalid; and (c) it must be in writing and specify the offence being sanctioned. In prosecution defence, the first action is invariably to obtain a certified copy of the sanction and audit it against these three tests. Many prosecutions collapse at this stage alone.

8. Compounding of offences

The 2025 Act retains the compounding power (equivalent of section 279(2)). The Principal Chief Commissioner, Chief Commissioner, Principal Commissioner or Commissioner may compound any offence under the Act either before or after institution of proceedings, subject to guidelines issued by CBDT. Compounding is effectively a statutory settlement — on payment of the compounding charge, the prosecution is dropped and no conviction is recorded.

The compounding framework operates on the following principles under CBDT guidelines:

• Eligibility: Most offences under Chapter XXII can be compounded. Certain serious offences (repeat offenders, cases involving enforcement-agency action, offences where conviction has been recorded) are either excluded or permitted only with the approval of the Board.
• Compounding charges: Typically a percentage of the tax sought to be evaded, escalating by stage — lowest if the application is before the complaint is filed, higher after the complaint, and highest after conviction. Charges often range from 100 per cent to 300 per cent of the tax evaded.
• Full payment precondition: The taxpayer must pay the tax, interest and penalty in full before compounding.
• Timeline: CBDT guidelines prescribe a 180-day disposal target for compounding applications, though practice varies.

Compounding is usually the right outcome where the prosecution case is strong, the tax has been quantified, and the cost of a full trial (time, reputational, professional fees, and the tail risk of conviction) exceeds the compounding charge.

9. Immunity and the updated-return route

There are two principal immunity routes under the 2025 Act.

Acceptance-based immunity (section 270AA equivalent): A taxpayer who pays the tax and interest demanded, does not file an appeal against the assessment order, and applies in the prescribed form within one month from the end of the month in which the order is received, is entitled to immunity from both the penalty for under-reporting and prosecution under the wilful-evasion and false-statement offences. This immunity is not available for misreporting cases (because misreporting involves the type of conduct the statute refuses to absolve). For taxpayers who decide the assessment is substantially correct and want finality, this is the cleanest route.

Updated return route (ITR-U equivalent): The 2025 Act (as amended by Finance Act, 2026) permits updated returns for up to 48 months from the end of the relevant tax year, with escalating additional tax — 25 per cent within 12 months, 50 per cent in months 13 to 24, 60 per cent in months 25 to 36, and 70 per cent in months 37 to 48. Filing an updated return is not a statutory bar to prosecution, but CBDT’s compounding guidelines explicitly treat voluntary pre-detection disclosure favourably. Where the updated return is filed before any notice or enforcement action, and the additional tax is paid, prosecution is typically not launched. See our guide on filing an updated return under the 2025 Act for the procedure and computation.

10. Presumption of culpable mental state

The 2025 Act retains the presumption equivalent to section 278E of the 1961 Act. In any prosecution for an offence under the Act that requires a culpable mental state, the court shall presume the existence of such mental state. It is open to the accused to prove the absence of mental state, but the standard of proof is on a preponderance of probabilities — the civil standard — not beyond reasonable doubt. This reverses the usual criminal-law presumption of innocence for the limited purpose of mental-state proof.

Practically, this means defence strategy cannot rely on silence. The accused must positively lead evidence of bona fide conduct — correspondence with the chartered accountant, board minutes recording the position taken, professional opinions on law, explanations of why a particular receipt was (or was not) treated as taxable, and so on. In every Chapter XXII defence we handle, building this affirmative record is the single highest-leverage activity.

11. Company and director liability

The 2025 Act retains the equivalent of section 278B. Where an offence under the Act is committed by a company:

• The company itself is guilty (liable to fine, not imprisonment, though officers can be imprisoned);
• Every person who at the time of the offence was in charge of, and responsible to the company for, the conduct of its business is deemed guilty of the offence and liable to be proceeded against;
• Any director, manager, secretary or other officer with whose consent or connivance, or attributable to whose neglect, the offence was committed is also individually liable.

The statutory defence for a director is to prove that the offence was committed without the director’s knowledge or that the director exercised all due diligence to prevent it. This puts a premium on board-level governance — a director who can show regular review of tax compliance, independent professional advice, and active oversight has a real defence. A nominal or sleeping director with no involvement typically succeeds in defending personal prosecution, provided the record supports non-involvement. For a detailed look at the interaction with penalty proceedings, see our article on under-reporting versus misreporting under the 2025 Act.

12. Five-stage defence blueprint

Stage 1 — Pre-complaint: response to the show-cause notice

Treat the show-cause as the last realistic opportunity to prevent prosecution. File a substantive response addressing absence of wilful intent, bona fide nature of the position taken, professional advice relied upon, and actual payment of tax, interest and penalty. Offer compounding. A well-drafted pre-launch response can save a client from criminal proceedings altogether.

Stage 2 — Audit of sanction under prior-sanction rules

Once a complaint is filed, obtain the sanction order and audit it for competence of authority, application of mind and specificity. A defective sanction is an independent ground to quash the complaint, independent of the merits of the offence.

Stage 3 — Quashing petition before the High Court

Where the complaint, on its face, does not disclose the ingredients of the offence, or the sanction is defective, or the complaint is time-barred, file a quashing petition before the jurisdictional High Court under section 528 of the Bharatiya Nagarik Suraksha Sanhita, 2023 (the successor to section 482 of the Code of Criminal Procedure, 1973). This route is faster and cheaper than contesting the matter through a full trial.

Stage 4 — Trial defence on merits

If the complaint survives, the trial defence focuses on negating the “wilful” element, rebutting the presumption of culpable mental state, establishing reliance on professional advice, and raising de minimis or reasonable-cause defences. Lead affirmative documentary and oral evidence; do not rely on silence.

Stage 5 — Compounding at any stage

Compounding remains available even during trial and, in some cases, after conviction. The cost escalates at every stage, so the calculus should be revisited at every inflection point. We have closed cases successfully at pre-trial, mid-trial, and post-conviction stages through compounding — the earlier the better.

13. Related articles in the 2025 Act series

For connected topics in the /learn/ series:

• Section 270A equivalent — under-reporting vs misreporting of income under the 2025 Act
• Updated return (ITR-U) under the 2025 Act — 48-month window and additional tax
• Settlement Commission abolition and current dispute-resolution options
• Vivad se Vishwas 2.0 — direct tax dispute resolution scheme
• Interest under the 2025 Act (234A/234B/234C equivalents)
• TDS default and section 276B equivalent prosecution risk

Expert Insight

Key Takeaways

• Chapter XXII of the Income-tax Act, 2025 (sections 552 to 561) governs offences and prosecution from tax year 2026-27 onwards, carrying forward the 1961 Act framework with linguistic simplification.
• Wilful attempt to evade tax is punishable with up to seven years rigorous imprisonment where the tax evaded exceeds Rs 25 lakh; below that, three months to three years.
• False statement in verification and abetment mirror the same penal structure; TDS default can attract up to seven years rigorous imprisonment.
• Prior written sanction of the Principal Commissioner or Commissioner is a jurisdictional pre-condition — defective sanction is an independent ground to quash.
• Compounding under the 2025 Act equivalent of section 279(2) is available at any stage on payment of tax, interest, penalty and compounding charges, subject to CBDT guidelines.
• Acceptance-based immunity (270AA equivalent) and updated-return-based mitigation (ITR-U, now 48 months) are the two principal preventive routes.
• The presumption of culpable mental state (278E equivalent) shifts the burden to the accused on the civil standard — build an affirmative documentary record.
• Director liability under the 278B equivalent is personal; a due-diligence defence requires documented board-level oversight of tax compliance.
• Speak to Virtual Auditor at +91 99622 60333 at the first sign of any Chapter XXII notice — speed materially changes the outcome.

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