Income Tax Prosecution Under Income Tax Act 2025: Chapter XXII Guide

Wilful tax evasion under Section 470 of ITA 2025 — involving concealment of income, submission of false accounts, or deliberate misrepresentation — carries rigorous imprisonment of 6 months to 7 years, plus a fine. The 7-year maximum is one of the most serious criminal penalties in tax law. For offences where the tax evaded is below Rs 25 lakh, the imprisonment may be 3 months to 2 years.

Income tax penalties under Chapter XXI are civil in nature — they result in monetary payments only (50% for under-reporting, 200% for misreporting, etc.). Prosecution under Chapter XXII is criminal — it leads to court proceedings, potential imprisonment, and a criminal record. Penalties require proof on a balance of probabilities; prosecution requires proof beyond reasonable doubt and willfulness. Both can apply simultaneously for the same offence.

Not automatically. Paying taxes, penalties, and interest after detection does not automatically withdraw prosecution — prosecution for wilful evasion can proceed independently. However, most offences under Chapter XXII can be compounded — settled before or during trial by paying compounding charges approved by the Principal Commissioner. Compounding is not a right but is granted in appropriate cases. Voluntary disclosure and cooperation with the investigation are factors considered in compounding applications.

Under Section 475 of ITA 2025, wilful failure to deduct TDS or to deposit TDS after deduction within the prescribed time attracts prosecution with imprisonment of 3 months to 7 years plus fine. This is one of the most commonly initiated prosecutions. Employers who deduct TDS from employee salaries but fail to deposit it with the government are particularly at risk. The offence is strict — the government treats non-deposit of deducted TDS (which is effectively government money held in trust) very seriously.