Budget 2026 has proposed to amend the section 440 so as to extend the scope of immunity to cases where penalty is initiated for under-reporting of income in consequence of misreporting.
Section 440 of the Act, provides, inter-alia, procedure of granting immunity by the Assessing Officer from imposition of penalty or prosecution, if assessee fulfils the following conditions, namely: – the tax and interest payable as per Assessment order, has been paid within the period specified in notice of demand; no appeal against the such assessment order has been filed.Further, sub-section (2) provides that assessee shall file an application within one month from the end of the month in which said assessment order has been received by him. Furthermore, sub-section (3) provides that assessing officer shall, subject to the fulfilment of the aforementioned conditions, and after the expiry of the period of filing the appeal, grant the immunity from imposition of penalty under section 439 and initiation of prosecution proceedings under section 478 or section 479.
Further, sub-section (4) provides that Assessing Officer shall pass an order accepting or rejecting the application, within a period of three months from the end of the month in which the application for requesting immunity is received.
Presently, immunity under section 440 can only be granted in the cases of underreporting of income and not in the case of under-reporting of income in consequence of misreporting.
In this regard, it has been considered that provision of immunity should also be extended to such cases where under-reporting of income is in consequence of misreporting. However, the taxpayer is required to pay an additional income-tax to the extent of 100% of the amount of tax payable on such income in lieu of the penalty.
Additionally, as the separate penalty (existing penalty under section 443 of the Act) for income determined by AO, which is in the nature of income referred to in section 102 to 106 (unexplained credits, unexplained investment, unexplained asset etc ) of the IT Act, 2025 is proposed to be omitted and subsumed in cases of misreporting of income under section 439(11), therefore immunity provision for the same is also proposed in section 440, to provide opportunity to the taxpayers to settle the disputes at an early stage on payment of additional-tax and reduce the burden of litigation and compliance. However, the taxpayer is required to pay an additional income-tax to the extent of 120% of the amount of tax payable on such income in lieu of penalty.
In view of the same, it is proposed to amend the section 440 of the Act so as to extend the scope of immunity to such cases where penalty is initiated for under-reporting of income in consequence of misreporting.
This amendment will take effect from the 1st day of April, 2026 for tax year 2026-27 and subsequent tax years.
Raj Ramachandran, Partner, JSA, says: “New Income Tax Act, 2025 will come into effect from April 1, 2026. The rules and forms are to be notified shortly. Steps like de-criminalization of offences, retrospective immunity from prosecution for non-disclosure of non-immovable foreign assets, is certainly welcome. Much like various provisions in the Companies Act, 2013 were decriminalized, this move will provide the necessary comfort and boost investments.”
