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From Rigour to Reason - Decriminalisation of Tax Offences under the Income-Tax Act, 2025 through Finance Bill, 2026 - Part II
CA Raj Jaggi & Kirti Jaggi
From Proportionate Sentencing to Structured Enforcement — Continuing the Decriminalisation Journey
In Part 1, we explored how the Finance Bill, 2026, reshaped Sections 473 to 476 of the Income-tax Act, 2025, by replacing rigid custodial mandates with a more rational system of graded punishments. The emphasis was clear: punishment must reflect the gravity of the offence, not operate mechanically.
In Part 2, we move beyond the sentencing structure and examine the offences contained in Sections 477 to 479 of Chapter XXII, all of which are proposed to take effect on 1 April 2026. These provisions may appear technical at first glance, but they reveal a deeper legislative effort to balance firmness with fairness. The message is unmistakable—wilful non-compliance will invite consequences, yet enforcement will now be guided by proportionality rather than severity alone. In doing so, the law seeks not merely to punish, but to preserve the credibility and stability of the tax administration framework.
Section 477- Failure to Pay Tax Collected at Source
Section 477, as proposed to operate after the amendment by the Finance Bill, 2026, reads as follows:
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477. Failure to pay tax collected at source. (1) If a person fails to pay the tax collected by him to the credit of the Central Government, as required under section 397(3)(a), 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. (2) The provisions of this section shall not apply if the payment of the tax collected at source 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 477 deals with the prosecution consequences arising from failure to deposit tax collected at source (TCS) with the Central Government. In essence, a person collecting TCS does not collect it as his own money; he acts as a statutory intermediary, holding the amount in a fiduciary capacity on behalf of the Government. The tax so collected is public revenue from the very moment of collection. Any retention or delayed remittance, therefore, strikes at the heart of the tax collection mechanism and is justifiably subject to prosecution.
Recognising, however, that not all defaults are equal in magnitude, the Finance Bill, 2026 substitutes sub-section (1) to introduce a graded punishment structure linked to the quantum of default. At the same time, the unamended provision of rigorous imprisonment has been substituted with simple imprisonment, signalling a calibrated shift toward proportionate enforcement. Sub-section (2) remains unchanged and continues to operate as a crucial safeguard, reinforcing the statutory obligation to ensure the timely deposit of Government dues.
Offence Category — Failure to Deposit Tax Collected at Source
Section 477(1) — Punishment for Failure to Deposit TCS
Sub-section (1), as substituted by the Finance Bill, 2026, lays down the prosecution consequences where a person fails to deposit tax collected at source as mandated under Section 397(3)(a). The unamended structure, which prescribed comparatively rigid sentencing provisions, has now been replaced with a graded framework based on monetary thresholds. In other words, the severity of punishment is now linked to the magnitude of the default, ensuring that minor lapses are not treated on par with substantial or deliberate violations.
Importantly, the amendment also replaces rigorous imprisonment with simple imprisonment, reflecting a measured shift in legislative philosophy. While the deliberate retention of tax collected on behalf of the Government remains a serious breach of statutory trust, the amended framework emphasises proportionality. The law thus recognises that enforcement must remain firm, but punishment must correspond to the scale and seriousness of the default.
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Punishment Structure for Failure to Deposit TCS |
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Amount of TCS 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 |
The revised framework clearly distinguishes between large-scale retention of Government revenue and comparatively smaller compliance lapses. Custodial consequences are effectively reserved for serious and substantial defaults, while the graded structure allows courts to exercise appropriate judicial discretion in cases involving lesser violations
Safe Harbour Provision under Section 477(2)
Section 477(2) provides an important safe harbour. Prosecution will not be initiated where the tax collected at source (TCS) is deposited on or before the due date for filing the quarterly statement under Section 397(3)(b)—that is, generally 15 July, 15 October, 15 January, and 15 May for the respective quarters. In practical terms, this means that a delay in remittance, if corrected within the prescribed reporting cycle, does not automatically escalate into a criminal proceeding.
This safeguard performs a crucial function. It clearly distinguishes between a temporary lapse in compliance and wilful retention of Government revenue. By allowing rectification within the statutory timeline, the law encourages corrective behaviour rather than immediate penal action. The objective is not to criminalise delay per se, but to address deliberate and persistent non-compliance.
The Memorandum to the Finance Bill, 2026, further clarifies the legislative intent. The original provision prescribing mandatory rigorous imprisonment ranging from three months to seven years has now been replaced with a proportionate sentencing structure linked to objective financial thresholds. The shift reinforces the broader theme of calibrated enforcement—firm where necessary, but rational and measured in its application.
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 5:
Summit Metal Traders collects TCS of ₹56 lakh but fails to deposit it within the prescribed time. Since the amount exceeds ₹50 lakh, prosecution may be initiated under Section 477, which provides for simple imprisonment for up to two years, a fine, or both.
Section 478 — Wilful Attempt to Evade Tax, Penalty or Interest
Section 478, as proposed to operate after the amendment by the Finance Bill, 2026, reads as follows:
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478. Wilful attempt to evade tax, etc (1) If a person wilfully attempts in any manner to evade any tax, penalty or interest chargeable or imposable, or under-reports his income, under this Act, he shall be punishable— (a) with simple imprisonment for a term up to two years, or with fine, or with both, where the amount sought to be evaded or tax on under reported income exceeds fifty lakh rupees; or (b) with simple imprisonment for a term up to six months, or with fine, or with both, where the amount sought to be evaded or tax on under reported income exceeds ten lakh rupees but does not exceed fifty lakh rupees; or (c) with fine, in any other case. (2) If a person wilfully attempts in any manner to evade payment of any tax, penalty or interest under this Act, he shall be punishable — (a) with simple imprisonment for a term up to two years, or with fine, or with both, where the amount sought to be evaded exceeds fifty lakh rupees; or (b) with simple imprisonment for a term up to six months, or with fine, or with both, where the amount sought to be evaded exceeds ten lakh rupees but does not exceed fifty lakh rupees; or (c) with fine, in any other case. (3) The punishment referred to in this section, shall be without prejudice to any penalty that may be imposable under any other provision of this Act. (4) For the purposes of this section, a wilful attempt to evade any tax, penalty or interest chargeable or imposable under this Act, or the payment thereof, shall include a case where any person— (a) has in his possession or control any books of account or other documents (being books of account or other documents relevant to any proceeding under this Act) containing a false entry or statement; or (b) makes or causes to be made any false entry or statement in such books of account or other documents; or (c) wilfully omits or causes to be omitted any relevant entry or statement in such books of account or other documents; or (d) causes any other circumstance to exist which will have the effect of enabling such person to evade any tax, penalty or interest chargeable or imposable under this Act or the payment thereof |
Section 478 deals with wilful attempts to evade tax liability or the payment thereof. It continues to operate as one of the principal anti-evasion safeguards under Chapter XXII, targeting deliberate and conscious conduct designed to defeat the lawful collection of tax. Unlike procedural lapses, this provision addresses intentional acts—where the objective is not merely to delay but to avoid tax obligations altogether.
The Finance Bill, 2026, rationalises the punishment framework under sub-sections (1) and (2) by introducing a graded sentencing structure aligned with the quantum involved. The original uniform severity has been replaced with a more calibrated approach, ensuring that punishment corresponds to the scale of evasion. However, sub-sections (3) and (4) remain unchanged. Sub-section (3) preserves the independent operation of penalty provisions, while sub-section (4) clarifies the scope of conduct that amounts to a wilful attempt to evade. Together, they maintain the structural strength of the enforcement framework even as sentencing has been rationalised.
The amendment, therefore, moderates sentencing without diluting the seriousness of wilful evasion, reinforcing the principle that intentional tax avoidance remains firmly within the ambit of criminal liability.
Section 478(1) — Prosecution for Wilful Attempt to Evade Tax, Penalty or Interest
The expression “wilful attempt” is central to the operation of Section 478. It implies a deliberate and conscious intent to evade tax—something far more serious than an inadvertent mistake, computational error, or a bona fide interpretational dispute. Mere difference of opinion on taxability or classification cannot, by itself, amount to wilful evasion. The law requires intent to defeat the statutory obligation.
The substituted provision under the Finance Bill, 2026, substitutes the unamended rigid sentencing framework with a proportionate structure linked to the quantum of evasion. By aligning punishment with the financial magnitude of the default, the amendment reinforces accountability while ensuring that enforcement remains fair and measured.
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Punishment Structure for Wilful Attempt to Evade Tax, Penalty or Interest |
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Amount of Tax Sought to be Evaded |
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 introduction of monetary thresholds provides clarity and uniformity in prosecution standards while ensuring that criminal liability corresponds with the seriousness of the evasion.
Illustration 6:
Prem Infrastructure Ltd. suppresses receipts resulting in tax evasion exceeding ₹50 lakh. This conduct attracts prosecution under Section 478(1) with imprisonment up to two years, or fine, or both.
Section 478(2) — Punishment for Wilful Attempt to Evade Payment of Tax, Penalty or Interest
Section 478(2) addresses situations in which a person deliberately attempts to defeat the recovery of tax that has already been assessed and lawfully determined. In other words, the assessment stage may be complete, but intentional steps are taken thereafter to obstruct or impede the recovery process. Such conduct directly undermines the enforceability of tax administration and therefore attracts prosecutorial consequences.
The punishment prescribed mirrors that under sub-section (1), thereby ensuring consistency in the treatment of evasion—whether it occurs at the stage of liability determination or at the stage of recovery. This uniformity reinforces the legislative intent that deliberate obstruction of tax collection at any stage will invite proportionate yet firm consequences.
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Punishment Structure for Wilful Attempt to Evade Payment of Tax, Penalty or Interest |
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Amount of Tax Sought to be Evaded or Payment Avoided |
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 |
By linking punishment to objective financial thresholds, the provision promotes fairness, transparency, and predictability in prosecution proceedings.
Illustration 7 —
Jyoti Arora Traders, after an assessment demand of ₹ 19.65 lakh is raised, diverts funds to avoid payment. The conduct constitutes an offence under Section 478(2) and is punishable with imprisonment for up to six months, a fine, or both.
Section 478(3) — Prosecution Without Prejudice to Penalty
Section 478(3) clarifies that the punishment prescribed under this section shall operate without prejudice to any penalty that may be imposed under any other provision of the Act. The prosecution mechanism, therefore, does not substitute civil consequences; it supplements them.
This ensures that criminal liability and monetary penalty may coexist where the facts so warrant. Even if graded sentencing has replaced the original rigid custodial structures, the legislature has consciously preserved the dual framework of enforcement—penalty on the civil side and prosecution on the criminal side. The moderation of punishment does not dilute overall accountability.
Illustration 8:
Abhishek Arora Exports suppresses taxable income through falsified entries. In addition to prosecution under Section 478, penalty proceedings under other relevant provisions may be initiated independently.
Section 478(4) — Scope of “Wilful Attempt to Evade”
Section 478(4) expands the meaning of “wilful attempt to evade” by specifying certain categories of conduct that fall within its ambit. The provision makes it clear that evasion is not confined to direct non-payment of tax. It includes situations where a person:
o possesses books containing false entries,
o makes or causes false entries to be made,
o wilfully omits relevant entries, or
o causes any other circumstance to exist which will have the effect of enabling such person to evade any tax, penalty or interest chargeable or imposable under this Act or the payment thereof
The emphasis throughout is on wilful conduct—that is, conscious and deliberate manipulation. The sub-section serves a clarificatory function by identifying typical modes through which evasion may be attempted. While specific acts are enumerated, the concluding clause— “causes any other circumstance to exist”—indicates legislative intent to cover varied and evolving methods of evasion.
Illustration 9:
Varsha Ltd. records fabricated purchase invoices to reduce taxable income. Such deliberate falsification of books would fall within the scope of Section 478(4)(b).
Section 479 — Failure to Furnish Returns of Income
Section 479, as proposed to operate after the amendment by the Finance Bill, 2026, reads as follows:
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479. (1) If a person wilfully fails to furnish in due time the return of income, which is required to be furnished under section 263(1), or by notice given under sections 268(1) or 280, he shall be punishable, — (a) with simple imprisonment for a term up to two years, or with fine, or with both, where the amount of tax, which would have been evaded if the failure had not been discovered, exceeds fifty lakh rupees; or (b) with simple imprisonment for a term up to six months, or with fine, or with both, where the amount of tax, which would have been evaded if the failure had not been discovered, exceeds ten lakh rupees but does not exceed fifty lakh rupees; or (c) with fine, in any other case. |
Section 479 provides for prosecution in cases of wilful failure to furnish a return of income within the prescribed time under Section 263(1), or in response to a notice issued under Sections 268(1) or 280. Section 263(1) lays down the general statutory obligation to furnish a return of income within the prescribed due date where total income exceeds the basic exemption limit or where filing is otherwise mandated under the Act. It forms the foundation of the self-assessment system. Further, Section 268(1) empowers the tax authority to issue a notice requiring a person to furnish a return of income or produce relevant particulars where such return has not been filed or where further verification is considered necessary. In addition, Section 280 contemplates situations where income is believed to have escaped assessment. In such cases, a statutory notice is issued requiring the person to furnish a return of income for the relevant tax year.
Thus, Section 479 covers three categories of wilful default:
Filing of return is not a mere procedural formality; it is the primary mechanism through which income is disclosed and assessment is initiated. Wilful non-filing strikes at the root of the self-assessment framework and therefore attracts prosecution.
Where a person deliberately abstains from filing a return, despite a statutory obligation or specific notice, the consequences go beyond technical default. Such conduct obstructs the assessment process and frustrates lawful tax administration. However, criminal liability arises only when the failure is accompanied by wilful intent—mere oversight, genuine hardship, or bona fide misunderstanding would not automatically attract prosecution.
The Finance Bill, 2026, introduces a graded punishment structure linked to the amount of tax that would have been evaded had the non-filing remained undetected. This approach aligns punishment with potential revenue impact, reinforcing accountability while ensuring proportionality. The amendment thus continues the broader legislative movement toward calibrated enforcement—firm in cases of deliberate concealment, yet measured in its response.
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Punishment Structure for Wilful Failure to Furnish Return of Income |
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Amount of Tax Which Would Have Been Evaded |
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 expression “wilfully fails” requires conscious disregard of filing obligations. Mere delay or bona fide hardship does not automatically attract prosecution.
Illustration 10:
Raman Real Estates Pvt. Ltd. deliberately fails to file a return, resulting in tax exposure of ₹ 53.36 lakh. Prosecution may be initiated under Section 479 with imprisonment up to two years, or fine, or both.
Towards a Culture of Conscious Compliance
The amendments to Sections 477 to 479 signify more than a technical restructuring of prosecution provisions—they reflect a conscious legislative movement away from mechanical criminalisation toward calibrated enforcement. By aligning punishment with both intent and magnitude, the law reinforces accountability while embedding fairness within the enforcement architecture. Severity is no longer automatic; it is proportionate and reasoned.
The Finance Bill, 2026, does not dilute deterrence—it refines it. Wilful and substantial defaults continue to attract prosecution, ensuring that deliberate abuse of the system does not go unchecked. At the same time, the revised framework recognises that genuine compliance errors, interpretational differences, or minor lapses should not be subjected to disproportionate penal consequences. This balanced approach strengthens the credibility of enforcement rather than weakening it.
For professionals and taxpayers alike, the message is clear. Timely disclosure, disciplined record-keeping, and ethical conduct remain the cornerstones of modern tax governance. Compliance today is not merely about avoiding penalties; it is about sustaining trust in the system's integrity.
The remaining provisions under Sections 480 to 485 and Section 494 will be examined in the next part of this discussion. Together, they complete the broader compliance framework—reinforcing responsibility, transparency, and ethical disclosure. As these provisions unfold, the evolving legislative narrative points toward a more mature, trust-based tax administration in which accountability and fairness coexist in a structured balance.
[Date: 25/02/2026]
(The views expressed in this article are strictly personal.)