Wilful attempt to evade tax, etc.

478(1)

If a person wilfully attempts in any manner to evade payment of any tax, penalty or interest chargeable or imposable, or under-reports his income, under this Act, he shall be punishable,—

• (a) in a case, where the amount sought to be evaded or tax on under-reported income exceeds twenty-five lakh rupees, with rigorous imprisonment for a term which shall not be less than six months but which may extend to seven years and shall also be liable to fine;
• (b) in any other case, with rigorous imprisonment for a term which shall not be less than three months but which may extend to two years and shall also be liable to fine, and shall also be liable for penalty that may be imposable on him under any other provision of this Act.

478(2)

If a person wilfully attempts in any manner to evade the payment of any tax, penalty or interest under this Act, he shall be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to two years and shall, in the discretion of the court, also be liable to fine.

478(3)

In addition to the punishment referred to in sub-section (2), the person referred to in the said sub-section shall also be liable for penalty that may be imposable on him under any other provision of this Act.

478(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 may have the effect of enabling such person to evade any tax, penalty or interest chargeable or imposable under this Act or the payment thereof.

Explanation

Section Summary:

Section 478 of the new income tax law addresses wilful attempts to evade tax, penalty, or interest under the Income Tax Act. It outlines the penalties, including imprisonment and fines, for individuals or entities who intentionally under-report income, falsify records, or take other actions to evade tax obligations. The section also clarifies what constitutes a "wilful attempt" to evade tax, such as maintaining false records or omitting relevant entries.

Key Changes:

1. Stricter Penalties for Higher Evasion Amounts: If the amount sought to be evaded or the tax on under-reported income exceeds ₹25 lakh, the punishment is more severe—rigorous imprisonment for a minimum of six months, extendable up to seven years, along with a fine. For amounts below ₹25 lakh, the imprisonment term is shorter (minimum three months, extendable up to two years).
2. Clarification of "Wilful Attempt": The section explicitly defines actions that qualify as wilful evasion, such as maintaining false books of account, making false entries, or omitting relevant entries.
3. Additional Penalties: In addition to imprisonment and fines, the person may also face penalties under other provisions of the Income Tax Act.

Practical Implications:

• Taxpayers: Individuals or businesses found guilty of wilful tax evasion face severe consequences, including imprisonment and fines. The law is particularly harsh for high-value evasion cases (above ₹25 lakh).
• Compliance Burden: Taxpayers must ensure accurate reporting of income and maintain proper records to avoid allegations of wilful evasion.
• Audit and Investigation Risks: Tax authorities may scrutinize records more closely, especially if discrepancies or false entries are suspected.

Critical Concepts:

• Wilful Attempt to Evade: This includes deliberate actions like falsifying records, omitting income, or creating circumstances to evade tax. It does not cover unintentional errors or mistakes.
• Under-Reported Income: Income that is not fully disclosed or is inaccurately reported in tax filings.
• Rigorous Imprisonment: A form of imprisonment involving hard labor, as opposed to simple imprisonment.

Compliance Steps:

1. Accurate Record-Keeping: Maintain proper books of account and ensure all entries are truthful and complete.
2. Timely Reporting: File tax returns accurately and on time, disclosing all sources of income.
3. Avoid False Entries: Do not make false entries or omit relevant information in financial records.
4. Internal Audits: Conduct regular internal audits to identify and correct discrepancies before they attract scrutiny.

Examples:

1. High-Value Evasion: A business owner under-reports income by ₹30 lakh in a financial year. If caught, they could face rigorous imprisonment for six months to seven years, along with a fine and additional penalties.
2. False Records: An individual maintains duplicate books of account with false entries to show lower income. This qualifies as a wilful attempt to evade tax, leading to imprisonment and fines.
3. Omission of Income: A taxpayer omits rental income from their tax return. If proven intentional, this could result in imprisonment for three months to two years, along with penalties.

This section emphasizes the importance of transparency and accuracy in tax reporting, with severe consequences for intentional non-compliance.