Most taxpayers associate non-compliance with penalties and interest. Few realize that serious defaults under the Income Tax Act, 1961 can lead to criminal prosecution, rigorous imprisonment, and a permanent stain on your record. Income tax prosecution is not reserved for high-profile evaders. Even a delay in depositing TDS or failing to file your return can trigger prosecution proceedings if the circumstances suggest wilful default.
The good news is that the law also offers a way out. Compounding of offences allows taxpayers to settle criminal charges by paying a prescribed fee, avoiding a full-blown trial. Understanding prosecution proceedings, available defences, and when compounding is the smarter route can make the difference between conviction and clean resolution.
What is Income Tax Prosecution
Income tax prosecution refers to criminal proceedings initiated by the Income Tax Department against a taxpayer for specific offences defined under Chapter XXII of the Income Tax Act. Unlike penalties, which are financial in nature, prosecution carries the risk of imprisonment and a criminal record. The department must obtain prior sanction from the Principal Commissioner or Commissioner of Income Tax before filing a prosecution complaint in court.
Under Section 278E, the court presumes the existence of a culpable mental state in prosecution proceedings. The burden shifts to the accused to prove absence of wilful intent. This presumption makes tax prosecution defense challenging if the taxpayer lacks proper records or has a history of defaults. Timely and accurate income tax return filing is your first line of protection against prosecution.
Key Offences That Attract Prosecution Proceedings
The Income Tax Act prescribes prosecution for several categories of defaults. Here are the most commonly invoked sections.
Failure to Deposit TDS or TCS: Section 276B and 276BB
If you deduct tax at source but fail to deposit it with the Central Government within prescribed time, you face rigorous imprisonment from three months to seven years with a fine. This is among the most frequently prosecuted offences because the department views non-deposit as misappropriation of government revenue. Professional TDS return filing services can prevent this risk.
Wilful Attempt to Evade Tax: Section 276C(1)
This section targets taxpayers who deliberately try to evade tax, penalty, or interest. Where the tax sought to be evaded exceeds Rs. 25 lakh, the punishment is rigorous imprisonment of six months to seven years with a fine. For lower amounts, imprisonment ranges from three months to three years. Courts have consistently held that mere inadvertence or bona fide error does not constitute wilful evasion.
Failure to File Return of Income: Section 276CC
Not filing your return within the due date under Section 139(1) or in response to a notice can attract prosecution. Imprisonment ranges from three months to three years, extending up to seven years where tax payable exceeds Rs. 25 lakh. However, prosecution is not attracted if self-assessed tax payable, after TDS and advance tax, does not exceed Rs. 10,000.
False Statements and Falsification: Section 277 and 277A
Making a false statement in any verification, delivering a false account, or knowingly falsifying books of account are serious offences. The punishment mirrors Section 276C(1) depending on the tax amount involved. Section 278 separately covers abetment, meaning a person who induces someone to file a false return also faces prosecution.
Compounding of Offences: The Settlement Route
Compounding of offences allows taxpayers to settle prosecution cases by paying a compounding fee. Once compounded, the criminal case is withdrawn from court, and the accused avoids trial and potential conviction. The application can be filed at any time after the offence is committed, regardless of whether the department has already filed a complaint.
CBDT has issued detailed guidelines for compounding, most recently revised in 2019 and amended in 2022. Offences are classified into Category A (procedural defaults like failure to file TDS returns or ITR) and Category B (substantive offences like wilful evasion and false statements). Offences under Sections 275A, 275B, and 276 are not compoundable.
How to Apply for Compounding
The compounding process involves a structured application and review mechanism. Here is how it works.
- Submit an application as an affidavit on Rs. 100 stamp paper to the Principal Chief Commissioner or Chief Commissioner having jurisdiction.
- Pay a non-refundable fee of Rs. 25,000 per application or Rs. 50,000 for a consolidated application.
- Clear all outstanding tax demands. Pending dues must be paid within 30 days of notification or within the extended period granted.
- The Assessing Officer verifies factual accuracy, and the file moves to the competent authority for decision.
- Upon acceptance, pay the compounding fee. The department then withdraws the prosecution complaint from court.
Applications filed beyond 12 months from the prosecution complaint attract a 50% surcharge on compounding fees. Category A offences are generally not compounded beyond three occasions.
Compounding Charges for Common Offences
| Section | Offence | Compounding Fee |
| 276B | Failure to deposit TDS | 2% per month of TDS amount for default period |
| 276C(1) | Wilful attempt to evade tax | 100% to 150% of tax sought to be evaded |
| 276CC | Failure to file return of income | 2% per month of assessed tax for default period |
| 277/278 | False statement or abetment | Minimum Rs. 1,00,000 or linked to main offence rate |
Tax Prosecution Defense: Building Your Case
If compounding is not an option or you believe the prosecution is unjustified, mounting a strong tax prosecution defense becomes essential. Courts have recognized several grounds that can weaken or defeat a prosecution complaint.
Absence of wilful intent is the most powerful defence. For offences under Sections 276C and 276CC, the prosecution must establish deliberate failure. If you can demonstrate bona fide reasons such as genuine financial distress, reliance on professional advice, or clerical oversight, the case weakens significantly.
Reasonable cause under Section 273B provides statutory protection against penalties for many defaults. Courts have drawn parallels while evaluating the accused's mental state in prosecution cases. Documented evidence of cash flow difficulties, natural disasters, or health emergencies strengthens this argument.
Procedural defects can also be your shield. If the department did not obtain prior sanction or filed the complaint beyond reasonable time, these lapses can result in quashing of proceedings. Thorough records through professional accounting services provide the documentation backbone for any defence strategy.
Conclusion
Income tax prosecution goes beyond financial penalties. It carries criminal proceedings, potential imprisonment, and lasting reputational damage. The key to avoidance lies in consistent compliance, timely return filing, depositing TDS within deadlines, and maintaining truthful records.
If prosecution proceedings have already been initiated, compounding of offences offers a practical resolution without enduring a lengthy trial. The process demands proper documentation, timely payment of dues, and professional guidance. For support on income tax compliance, prosecution defence, or compounding matters, consult the experts at Patron Accounting to protect your interests.
