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From Rigour to Reason - Decriminalisation of Tax Offences under the Income-Tax Act, 2025 through Finance Bill, 2026 - Part I
CA Raj Jaggi & Kirti Jaggi
A Shift from Fear to Fairness in Tax Prosecution
Tax prosecution provisions are among the strictest parts of tax law. They are intended to deter serious non-compliance by imposing criminal penalties. However, tax systems worldwide are gradually changing. Lawmakers now recognise that excessive criminal punishment for procedural or technical mistakes may discourage honest taxpayers. It may also increase unnecessary litigation. The Income-tax Act, 2025, reflects this changing approach. It introduces a balanced prosecution framework. The objective is to maintain compliance discipline while ensuring that punishment is fair and proportionate.
The Finance Bill, 2026, proposes significant amendments to the prosecution framework contained in Sections 473 to 485 and Section 494 of the Income-tax Act, 2025, as part of the continuing legislative exercise aimed at rationalising criminal liability under tax law. These amendments seek to replace rigid punishment structures with graded and proportionate sentencing provisions, aligning the nature and extent of punishment with the seriousness of the offence while maintaining strong deterrence against deliberate non-compliance.
Insofar as Sections 473 to 476 are concerned, the proposed amendments have been introduced through Clauses 93 to 96 of the Finance Bill, 2026 and form the subject matter of discussion in this Part. These amendments are proposed to take effect on 1 April 2026.
Since the provisions of the Income-tax Act, 2025, have yet to be operationalised, this article examines the prosecution framework as proposed to operate after incorporating the amendments introduced by the Finance Bill, 2026, to facilitate a clear understanding of the evolving compliance and enforcement landscape.
Unless otherwise indicated, references to the Memorandum in the following discussion relate to the Memorandum explaining the provisions of the Finance Bill, 2026.
Overview of Prosecution Offences under Chapter XXII
The provisions of the Income-tax Act, 2025, relating to prosecution are contained in Chapter XXII. Sections 473 to 485 deal with different types of offences committed by taxpayers or other persons. These include offences during search proceedings, failure to deposit TDS or TCS, wilful attempt to evade tax, failure to file returns, false statements, falsification of books of account, and repeat offences. The Finance Bill, 2026, proposes important changes in these provisions. The nature and duration of punishment have been rationalised. In some cases, offences have been fully decriminalised. The following discussion examines these amended provisions section by section, beginning with Section 473.
Section 473, as proposed to operate after the amendment by the Finance Bill, 2026, reads as follows:
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473.
Contravention of order made during search action. |
Section 473 addresses contravention of orders issued during search proceedings and forms the opening prosecution provision relating to search-related enforcement under Chapter XXII. Section 247(4) empowers authorised officers conducting search actions to issue restraint or prohibitory orders in respect of books of account, documents, money, bullion, jewellery, or other valuable assets where immediate seizure may not be feasible or necessary. Such restraint orders operate as legally binding directions requiring the person concerned to preserve and not deal with the specified assets or records without prior permission of the authorised officer.
The offence under Section 473 arises where a person deliberately disobeys or violates such restraint or prohibitory orders. Contravention of these directions may include removal, transfer, destruction, concealment, or tampering with assets or documents placed under restraint. Such conduct directly undermines the integrity of search proceedings and may obstruct the collection and preservation of evidence relevant to tax administration. The provision, therefore, treats violations of restraint orders as prosecutable offences intended to safeguard the effectiveness of search and seizure operations.
Under the unamended provisions of the Income-tax Act, 2025, contravention of restraint orders during search proceedings was punishable with rigorous imprisonment for a term of not less than three months, extendable to two years, along with a fine. The Finance Bill, 2026, proposes to rationalise the punishment structure by replacing rigorous imprisonment with simple imprisonment and by removing the mandatory minimum imprisonment requirement. The amended provision prescribes simple imprisonment for up to two years, together with a fine, thereby providing greater sentencing flexibility while retaining adequate deterrence against obstruction of search proceedings.
The amendment reflects the broader legislative policy of introducing proportionate punishment within the provisions governing prosecution. While violation of search orders continues to be treated as a serious interference with statutory enforcement powers, the revised sentencing structure recognises that rigid minimum imprisonment may not be appropriate in every case. The amendment, therefore, balances enforcement effectiveness with judicial discretion and proportionality.
The Memorandum provides that Sections 473 to 485 prescribe various offences on the part of the assessee and the form and manner of punishment and the conditions therein, including time limitation, exceptions, threshold for amount of tax evaded and its punishment, punishment for subsequent offences, etc. Section 473 deals with the contravention of order made under section 247(Search & Seizure) by the assessee in an attempt to derail the search proceedings and tamper with the evidence. Further, it is proposed to amend Sections 473 to 485 & 494 of the Act in light of the continued exercise of decriminalisation and to make the punishment for the offences mentioned in these sections proportionate to the crimes. The principles that are followed in the proposed decriminalization exercise are as follows:
(a) The nature of punishment is changed from rigorous imprisonment to simple imprisonment wherever prescribed in the sections mentioned above.
(b) Maximum punishment is proposed to be limited to 2 years from its current 7 year and for the subsequent offences, it is reduced to 3 years from its current 7 years.
(c) Wherever punishment of offences is prescribed based on certain grading of amount of tax evaded, new grading of offences and its corresponding punishment is prescribed.
(d) For amount of tax evaded does not exceeds ten lakh rupees, punishment of only fine is prescribed.
(e) Imposition of fine is introduced in lieu of or in addition of imprisonment.
(f) Certain offences are fully decriminalized.
The Memorandum further highlights that in section 473, punishment for the offences mentioned under section 473 is proposed to be changed from its current “rigorous imprisonment for a term which may extend to two years and shall also be liable to fine” to “simple imprisonment upto two years and fine.
Illustrative disclaimer:
Illustrative examples used in this discussion are hypothetical in nature and are designed only to explain statutory provisions. They do not refer to any real person, entity, or transaction.
Illustration 1:
During a search action conducted at the business premises of Anish Ltd., the authorised officer issued a restraint order under section 247(4) prohibiting the removal of certain accounting records and electronic storage devices pending further verification. Despite the restraint order, the company’s finance head removes certain digital storage devices and deletes financial data relevant to the search proceedings.
Such conduct constitutes a contravention of an order issued during a search action. Under the amended Section 473, the responsible person may be punishable with simple imprisonment for a term of up to two years and with fine.
Section 474 — Failure to Afford Facility for Inspection of Books of Account during Search
Section 474, as proposed to operate after the amendment by the Finance Bill, 2026, reads as follows:
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474. Failure to afford facility for inspection of books of account during search. If a person, who is required to afford the authorised officer with the necessary facility to inspect the books of account or other documents under section 247(1)(ii), fails to do so, he shall be punishable with simple imprisonment for a term up to six months, or with fine, or with both. |
Section 474 addresses failure to provide necessary facilities to authorised officers for inspection of books of account or documents during search proceedings. Section 247(1)(ii) empowers authorised officers conducting search operations to require the person in control of premises, records, or electronic systems to provide reasonable assistance, including access to books of account, electronic data, storage systems, passwords, or other supporting documentation necessary for effective examination. The offence under this provision arises where a person deliberately refuses, obstructs, or fails to provide such facilities. Since search proceedings rely heavily on timely access to financial records and digital data for verifying disclosures, detecting undisclosed income, and preserving evidentiary material, denial of inspection facilities may significantly frustrate statutory enforcement powers and therefore constitutes a prosecutable obstruction of search proceedings.
Under the unamended provisions of the Income-tax Act, 2025, failure to afford inspection facilities during search proceedings attracted rigorous imprisonment for a term of up to two years, along with a fine. The Finance Bill, 2026, proposes to rationalise punishment by replacing rigorous imprisonment with simple imprisonment and by reducing the maximum term of imprisonment to six months. The amended provision also permits the court to impose a fine alone, imprisonment alone, or both, depending upon the seriousness of the default and the surrounding factual circumstances.
The amendment reflects the principle of proportional punishment. While the law continues to treat deliberate non-cooperation during search proceedings as a prosecutable offence, the revised sentencing framework recognises that denial of inspection facilities is generally procedural in nature and should be distinguished from more serious offences, such as the destruction or falsification of records or the violation of restraint orders. By moderating punishment, the amendment seeks to encourage cooperative compliance while retaining adequate deterrence against deliberate obstruction.
The Memorandum explains that section 474 concerns the offence of failing to provide the necessary facility to inspect the books of account or other documents during search proceedings. Further, in section 474, heading of the section is changed to “Failure to afford facility for inspection of books of account during search”. In addition, in section 474, punishment for the offences mentioned under section 474 is proposed to be changed from its current “rigorous imprisonment for a term which may extend to two years and shall also be liable to fine” to “simple imprisonment upto 6 months and/or fine
Illustration 2:
During a search operation conducted at the premises of Rajni Ltd., the authorised officer requests access to accounting records maintained in a computerised enterprise resource planning (ERP) system. The company’s accounts manager refuses to provide login credentials and deliberately withholds the passwords required to access financial data relevant to the search proceedings.
Such conduct constitutes failure to provide the authorised officer with the necessary facility to inspect books of account during a search. Under the amended Section 474, the responsible person may be punishable with simple imprisonment for a term up to six months, or with fine, or with both.
Section 475 — Removal, Concealment, Transfer or Delivery of Property to Prevent Tax Recovery
Section 475, as proposed to operate after the amendment by the Finance Bill, 2026, reads as follows:
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475. Removal, concealment, transfer or delivery of property to prevent tax recovery Whoever, fraudulently removes, conceals, transfers or delivers to any person, any property or any interest therein, with the intent to prevent such property or interest therein from being taken in execution of a certificate drawn under section 413, shall be punishable with simple imprisonment for a term up to two years and with fine. |
Section 475 deals with fraudulent dealings with property undertaken with the intention of obstructing the recovery of tax dues. Section 413 provides for the issuance of a recovery certificate by the tax authority specifying the amount payable by the taxpayer towards tax, penalty, interest, or any other sum under the Act. Once such a certificate is drawn, recovery proceedings acquire statutory enforceability and the property of the defaulter becomes liable for attachment and execution in accordance with prescribed recovery mechanisms.
The offence under Section 475 arises where a person, with fraudulent intent, removes, conceals, transfers, or delivers property or any interest therein so as to prevent such property from being taken in execution of the recovery certificate. The presence of fraudulent intent is a critical ingredient of the offence. Bona fide transactions or legitimate business transfers carried out in the ordinary course without the intention of defeating recovery proceedings would ordinarily fall outside the scope of prosecution under this provision. The section, therefore, targets deliberate attempts to defeat lawful recovery actions through asset diversion, concealment, or sham transfers.
Under the unamended provisions of the Income-tax Act, 2025, such fraudulent removal or transfer of property attracted rigorous imprisonment for a term of up to two years, along with a fine. The Finance Bill, 2026, proposes to rationalise the punishment structure by replacing rigorous imprisonment with simple imprisonment while retaining a maximum term of two years and a fine. The amendment does not alter the essential ingredients of the offence but modifies the nature of punishment to align with the broader policy of proportionate sentencing.
The amendment reflects legislative recognition that while intentional obstruction of recovery proceedings remains a serious violation affecting revenue realisation, rigid punishment structures may not be necessary in every case. By replacing rigorous imprisonment with simple imprisonment, the amended provision preserves deterrence while affording courts greater discretion in sentencing, based on the gravity of the offence and the surrounding factual circumstances.
According to the Memorandum on the Finance Bill, 2026, Section 475 penalises the assessee in case of offence of removal, concealment, transfer or delivery of property to prevent tax recovery. Further, in section 475, punishment for the offences mentioned under section 475 is proposed to be changed from its current “rigorous imprisonment for a term which may extend to two years and shall also be liable to fine” to “simple imprisonment upto two years and fine
Illustration 3:
A recovery certificate is issued against Ravi Kapoor for outstanding tax and penalty dues amounting to ₹40 lakh. After initiation of recovery proceedings and with knowledge of the recovery certificate, he transfers a valuable immovable property to a close relative without adequate consideration with the intention of preventing attachment of the property by the tax authorities.
Such conduct constitutes fraudulent transfer of property to prevent execution of a recovery certificate. Under the amended Section 475, the responsible person may be punishable with simple imprisonment for a term up to two years and with fine.
Section 476 — Failure to Pay Tax Deducted at Source
Section 476, as proposed to operate after the amendment by the Finance Bill, 2026, reads as follows:
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476. Failure to pay tax to credit of Central Government under Chapter XIX-B (1) If a person fails to— (a) pay the tax deducted at source by him to the credit of the Central Government, as required by or under the provisions of Chapter XIX-B; or (b) pay tax or ensure payment of tax to the credit of the Central Government in respect of–– (A) any income by way of winnings from online games as referred in section 393(3) [Table: Sl. No. 2], excluding such winnings which are wholly in kind, as referred to in Note 2 to the said Table; or (B) any sum by way of consideration for transfer of a virtual digital asset as referred in section 393(1) [Table: Sl. No. 8(vi)], excluding such consideration which is wholly in kind, as referred to in Note 6 to the said Table, he shall be punishable (i) with simple imprisonment for a term up to two years, or with fine, or with both, where the amount of such tax exceeds fifty lakh rupees; or (ii) with simple imprisonment for a term up to six months, or with fine, or with both, where the amount of such tax exceeds ten lakh rupees but does not exceed fifty lakh rupees; or (iii) with fine, in any other case ; or (iii) with fine, in any other case.
(2) The provisions of this section shall not apply if the payment referred to in sub-section (1)(a) has been has been made to the credit of the Central Government on or before the time prescribed for filing the statement under section 397(3)(b) in respect of such payment. |
Section 476 governs prosecution consequences arising from failure to deposit tax deducted at source or failure to discharge specified withholding obligations relating to digital economy transactions. The provision serves as a critical enforcement safeguard for the tax withholding system, ensuring the early and reliable collection of government revenue at the stage of income payment or transaction settlement.
The section recognises two distinct categories of default under sub-section (1). The first category relates to failure to deposit tax deducted at source under Chapter XIX-B. The second category addresses failure to discharge withholding obligations in respect of winnings from online gaming and transfers of virtual digital assets. Both categories operate on the principle that the person responsible for deduction or withholding functions as a statutory custodian of public revenue and is obligated to deposit the tax within the prescribed time.
Under the unamended provisions of the Income-tax Act, 2025, failure to deposit tax deducted at source was punishable with rigorous imprisonment for a term ranging from three months to seven years, along with a fine. The Finance Bill, 2026, substitutes sub-section (1) and introduces a graded punishment framework linked to the quantum of tax not deposited. The amendment replaces rigorous imprisonment with simple imprisonment and removes the mandatory minimum, thereby aligning prosecution exposure with the principle of proportionate punishment.
Offence Category 1
Failure to Deposit Tax Deducted at Source
The primary obligation under Section 476(1)(a) relates to the deposit of tax deducted at source. Once tax is deducted, the deductor holds the amount in a fiduciary capacity on behalf of the Government. The deducted tax does not constitute the deductor’s income but represents public revenue entrusted for timely remittance. Failure to deposit such tax disrupts the credit mechanism available to the deductee and undermines confidence in the withholding system.
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Punishment Structure for Failure to Deposit TDS |
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Amount of TDS Not Deposited |
Punishment |
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Exceeds ₹50 lakh |
Simple imprisonment up to 2 years, or fine, or both |
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Exceeds ₹10 lakh but does not exceed ₹50 lakh |
Simple imprisonment up to 6 months, or fine, or both |
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Does not exceed ₹10 lakh |
Fine only |
Offence Category 2
Failure to Pay or Ensure Payment of Tax in Specified Digital Economy Transactions
Clause (b) expands prosecution exposure to transactions involving online gaming winnings and virtual digital asset transfers. These provisions recognise evolving digital transaction models in which tax collection obligations arise even when the payer or intermediary is responsible for ensuring tax payment. However, prosecution exposure is excluded where winnings or consideration are wholly in kind, recognising practical compliance limitations in such cases.
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Punishment Structure for Digital Transaction Withholding Defaults |
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Amount of Tax Not Paid or Ensured |
Punishment |
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Exceeds ₹50 lakh |
Simple imprisonment up to 2 years, or fine, or both |
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Exceeds ₹10 lakh but does not exceed ₹50 lakh |
Simple imprisonment up to 6 months, or fine, or both |
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Does not exceed ₹10 lakh |
Fine only |
The substitution of sub-section (1) reflects a calibrated legislative approach towards the enforcement of withholding obligations in both traditional and digital transaction environments. While deliberate retention of deducted or collectible tax continues to be treated as a serious compliance violation, the graded punishment framework recognises varying levels of default and ensures that prosecution exposure remains proportionate to the amount involved.
Safe Harbour under Section 476(2)
Sub-section (2) provides an important mechanism for compliance relief. The provision clarifies that prosecution shall not be initiated where tax deducted at source has been deposited with the Central Government on or before the due date prescribed for filing the relevant TDS statement under section 397(3)(b). This safe harbour recognises that procedural delays in deposit may occur without wilful intent to evade revenue. The provision therefore distinguishes between technical delay and deliberate default and encourages voluntary compliance by allowing taxpayers to regularise payment before the statutory reporting deadline.
The safe harbour is limited to failures covered under clause (a) of sub-section (1) and does not extend to withholding failures relating to specified digital transaction obligations. The distinction reflects legislative intent to preserve the strictness of enforcement in newer compliance areas while providing relief in traditional withholding scenarios, where reconciliation through statement filing is administratively feasible.
The Memorandum explaining the provisions of the Finance Bill, 2026, clarifies that Section 476 seeks to rationalise prosecution consequences relating to failure to deposit tax deducted at source and failure to discharge specified withholding obligations in emerging digital transaction environments. The amendment forms part of the broader decriminalisation initiative aimed at introducing proportionate punishment and graded sentencing linked to the quantum of default.
The Memorandum further notes that certain earlier prosecution exposures relating to specified withholding obligations have been rationalised, and that transactions involving winnings from online games and consideration for transfer of virtual digital assets, where such amounts are wholly in kind, are proposed to be excluded from criminal prosecution in recognition of practical compliance limitations. The revised punishment structure accordingly replaces rigorous imprisonment with simple imprisonment and introduces monetary-only penalties for comparatively smaller defaults, thereby strengthening voluntary compliance while retaining deterrence against deliberate retention of public revenue.
Illustration 4:
Sangeeta Gaming Platform deducts ₹54 lakh in tax from players' winnings but fails to remit the deducted tax to the Central Government within the prescribed time.
Since the amount of tax not deposited exceeds ₹50 lakh, the responsible person of Sangeeta Gaming Platform may be punishable under the amended Section 476 with simple imprisonment for a term up to two years, or with fine, or with both.
Law May Soften, But Compliance Must Strengthen
While the Government has taken a commendable step by proposing to replace provisions relating to rigorous imprisonment with simple imprisonment and by removing mandatory minimum imprisonment requirements in several prosecution offences, the broader compliance message remains unchanged. In Indian society, imprisonment arising from tax offences, whether rigorous or simple, invariably carries social stigma and professional disrepute, irrespective of the person's social, economic, or professional standing. Therefore, these amendments should not be viewed as a dilution of compliance responsibility but rather as an opportunity to strengthen voluntary and ethical tax behaviour. Every taxpayer must make sincere efforts to comply with the provisions of the Income-tax Act, 2025, in both letter and spirit. Tax professionals have a vital responsibility to guide their clients toward lawful compliance and responsible tax conduct. The evolving prosecution framework thus serves not merely as an enforcement mechanism but as a reminder that integrity and transparency remain the strongest safeguards against tax litigation and criminal exposure.
The remaining provisions of the prosecution, which further develop this balanced compliance philosophy, will be examined in the remainder of this discussion.
[Date: 24/02/2026]
(The views expressed in this article are strictly personal.)