The Finance Act 2026 cut the punishment for a false statement in a verification under Section 277 (and Section 482 of the 2025 Act): simple imprisonment up to 2 years, no minimum term, and fine only up to ₹10 lakh of tax. What the prosecution must prove, Section 278E, and compounding under the October 2024 guidelines.
CA Rahul Dang
Founder & Practice Lead
An error in an income-tax return usually costs tax, interest and perhaps a penalty. A statement that the person knows to be false is different: it can be prosecuted. Section 277 of the Income-tax Act, 1961 makes it an offence to:
The person must know or believe it to be false, or not believe it to be true. Its counterpart in the Income-tax Act, 2025 is Section 482.
The Finance Act, 2026 substantially reduced the punishment under both provisions. Much published material still quotes a seven-year exposure. That is no longer the text of either Act.
Section 27 of the Finance Act, 2026 substituted the punishment clauses of Section 277. The new clauses are deemed to have been substituted with effect from 1 March 2026. The Finance Act made the same substitution in Section 482 of the 2025 Act with effect from 1 April 2026.
The punishment turns on the tax that would have been evaded if the statement or account had been accepted as true. It is the same under both Acts:
| Tax that would have been evaded | Punishment |
|---|---|
| Exceeds ₹50 lakh | Simple imprisonment up to 2 years, or fine, or both |
| Exceeds ₹10 lakh but not ₹50 lakh | Simple imprisonment up to 6 months, or fine, or both |
| ₹10 lakh or less | Fine |
What it replaced. Before the amendment, the provision carried rigorous imprisonment with a minimum term, and a mandatory fine:
Three things changed at once:
The same Finance Act reduced the punishment for two neighbouring offences: Section 277A (falsification of books) and Section 278 (abetment of false returns).
A false verification of a return can fall within Section 277. Not every incorrect reply or submission will. The legal character of the document and the precise falsity alleged must be examined.
A disputed interpretation, a valuation difference, an estimate or an accounting error is not, by itself, a knowingly false statement. If a taxpayer claims an exemption on a reasonable reading of the law and the Assessing Officer rejects it, the rejection alone does not show that the verification was knowingly false.
In Prem Dass v. ITO, (1999) 236 ITR 683 (SC), the Supreme Court held that a statement in a verification “can be an offence under section 277 if the person making the same either knew or believed the same to be false or does not believe to be true”. It added that “necessary mens rea, therefore, is required to be established by the prosecution”. The presumption under Section 132(4A) could not supply the ingredients of the offence. That case concerned AY 1980-81, and the judgment does not discuss Section 278E.
For offences that require a culpable mental state, Section 278E requires the court to presume that it exists. The accused may prove the contrary. In Sasi Enterprises v. ACIT, (2014) 361 ITR 163 (SC), a prosecution under Section 276CC, the Supreme Court held that the court “has to presume the existence of mens rea and it is for the accused to prove the contrary and that too beyond reasonable doubt”.
Read together, the position is this. Knowledge of falsity remains an ingredient of Section 277, but where Section 278E applies the accused carries the burden of disproving the mental state. The presumption does not relieve the prosecution of proving the other ingredients: a statement within the section, and its falsity.
In K.C. Builders v. ACIT, (2004) 265 ITR 562 (SC), the complaints were filed under Sections 276C(1), 277 and 278B. The Tribunal found no concealment and the penalties under Section 271(1)(c) were cancelled. The Supreme Court held that “once the penalties are cancelled on the ground that there is no concealment, the quashing of prosecution under section 276C is automatic”. In view of the Tribunal’s conclusive finding, the prosecution “becomes devoid of jurisdiction”.
That holding rests on a finding of no concealment. A penalty cancelled on a technical or limitation ground may not carry the same consequence, so read the appellate findings and the complaint together.
A prosecution under Section 279(1) of the 1961 Act needs the previous sanction of the specified income-tax authority. The sanction order, and the material before the sanctioning authority, are worth examining in any challenge.
Section 279(2) allows an offence under Chapter XXII to be compounded, before or after proceedings are instituted. Two CBDT documents now govern this:
The circular lists four simplifications:
Points relevant to Section 277:
Compounding is not automatic on application, and it is not an acquittal.
The 1961 Act was repealed from 1 April 2026. Section 536(2)(c) of the 2025 Act continues the repealed Act for proceedings pending on that date. It also continues it for proceedings initiated afterwards “in respect of any tax year beginning before the 1st April, 2026”. A matter about an earlier year’s return does not move to Section 482 merely because the complaint is filed later.
The provision’s own list of proceedings does not name prosecution in terms. How the saving clause applies to a criminal complaint turns on the facts and the full text of Section 536. In practice the gap is now narrow, since both sections carry the same reduced structure.
RDA Tax Advisory Services reviews the facts behind an alleged false statement. That covers the assessment and penalty orders, the transition rules, and the procedural points relevant to a prosecution or a compounding application. See our tax litigation support.
General information only. Criminal liability, compounding and the applicable punishment depend on the facts, the statute and the transition rules. This is not a case-specific legal opinion.
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