Income Tax

Prosecution Provisions Under Income-tax Act 2025 Explained: Rules, Limits and Worked Examples

By CA Nikhil GuptaP1 — High PullUpdated June 2026New Act

✅ Verified: Income-tax Act 2025 Chapter XVII (Sections 430–455) | CBDT Prosecution Guidelines 2019 | incometax.gov.in

Penalty is a civil remedy — prosecution is a criminal one. Under the Income-tax Act 2025, prosecution can result in imprisonment and fine, not just a monetary penalty. While prosecutions are relatively rare in practice, the risk is real for serious defaults — failure to pay deducted TDS, wilful evasion, fraudulent returns, and fabrication of accounts. This guide explains every prosecution section in the new Act, the threshold for prosecution versus penalty, compounding options, and what proactive steps eliminate prosecution risk entirely.

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Prosecution vs Penalty — The Critical Distinction

The income tax system uses both penalty and prosecution for different levels of default:

Parameter	Penalty	Prosecution
Nature	Civil — monetary	Criminal — imprisonment + fine
Who decides	Assessing Officer / CIT(A)	Court of Magistrate
Standard of proof	Balance of probabilities	Beyond reasonable doubt
Can both apply?	Yes — both can be imposed on same default	Yes — prosecution + penalty simultaneously
Compounding	Not applicable	Available — pay fee to close case
Bail	Not applicable	Available for most IT offences

Key Prosecution Sections — Old to New Act Mapping

Offence	Old Section	New Section	Punishment
Wilful failure to furnish return	276CC	Section 437	3 months–2 years imprisonment + fine
Wilful failure to pay TDS to government	276B	Section 430	3 months–7 years imprisonment + fine
Wilful attempt to evade tax	276C(1)	Section 436	6 months–7 years + fine (if tax >₹25L); else 3 months–3 years
Wilful attempt to evade — false statement	277	Section 441	6 months–7 years imprisonment
Fabrication of accounts	277A	Section 442	3 months–3 years imprisonment
Abetment of false return	278	Section 443	Same as principal offender
Failure to pay advance tax (>25% of liability)	276C(2)	Section 436(2)	3 months–2 years imprisonment

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TDS Non-deposit is the Most Prosecuted Offence: Section 430 (old Section 276B) — failure to deposit TDS deducted from employees or vendors within the prescribed time — has the highest prosecution rate. Directors and CFOs of companies have been prosecuted personally. If TDS is deducted but not deposited, prosecution can proceed even if the company later pays.

Case Study: Director Prosecution for TDS Default — Section 430

Manufacturing SME, Pune — FY 2022-23 TDS Default

Rajan Sharma was the Director (Finance) of a ₹12-crore turnover manufacturing company. During a cash-crunch period, the company deducted ₹8.4 lakh in employee salary TDS (Section 192) but deposited only ₹2.1 lakh. The balance ₹6.3 lakh remained unpaid for 14 months. A complaint under Section 276B (old Act) was filed against the company and Rajan personally.

TDS Not Deposited

₹6.3 lakh

Risk

Up to 7 years imprisonment

Rajan and the company applied for compounding of offence — paid the TDS amount + 24% p.a. interest + compounding fee of ₹1.89 lakh (3% of TDS per month of delay). The prosecution complaint was withdrawn after compounding was accepted by the Principal CCIT.

Lesson: Always deposit TDS on time — even if you can't pay other dues. TDS collected from employees is a trust money of the government, not the company's working capital.

Compounding of Offences — The Escape Route

Most income tax prosecutions can be "compounded" — settled by paying a compounding fee, which results in the criminal complaint being withdrawn. Key rules under Section 455 of the new Act (old Section 279):

Application must be made to the Principal Commissioner / Principal CCIT within specified time
Compounding fee: ranges from 100% to 300% of tax evaded, depending on the offence and number of prior compounding applications
For TDS non-deposit: typically 3% of TDS per month of delay + full TDS + interest
First-time compounding is generally granted for most offences except serious fraud or habitual offenders
Compounding does not bar the penalty proceedings — penalty can still be levied

When Prosecution Is NOT Launched — CBDT Guidelines

The CBDT Prosecution Guidelines 2019 (still applicable under the new Act) prescribe thresholds below which prosecution is generally not initiated:

Tax evasion below ₹25 lakh — generally compounding only, not prosecution
First-time default by a taxpayer with clean history
Default arising from genuine business difficulties, not wilful evasion
Taxpayer has paid all dues before the prosecution complaint is filed

Prevention Is Better Than Compounding

Deposit TDS by 7th of following month — no exceptions, even in cash crunch
File ITR by due date — late filing after notice triggers prosecution risk
Never fabricate or misrepresent books — Section 442 (fabrication) has no good-faith defence
If you've missed TDS deposit: pay immediately, file correction statement, and keep evidence
If prosecution notice received: engage a tax advocate immediately and apply for compounding
Directors can be personally liable — ensure company-level TDS compliance is tracked monthly

Frequently Asked Questions

Yes. Under Section 430 read with Section 449 of the new Act (old Section 278B), every person who was in charge of and responsible for the conduct of the company's business at the time of the offence can be prosecuted personally, along with the company. This includes Managing Directors, Finance Directors, and CFOs. The individual can escape liability only if they prove that the default occurred without their knowledge or despite reasonable due diligence.

For prosecution under Section 430 (TDS not deposited), the compounding fee is typically 3% of the TDS amount per month of delay (subject to minimum and maximum caps per CBDT guidelines), plus the full TDS amount with interest at 18% p.a. The application is made to the Principal CCIT, and the prosecution complaint is withdrawn after the compounding fee is paid and accepted.