Clause 85 of the Finance Bill, 2026 proposes a substantive amendment to section 440 of the Income-tax Act, 2025, which governs the grant of immunity from imposition of penalty and initiation of prosecution.
Under the existing law, immunity under section 440 was available only in cases of under-reporting of income, and was expressly denied where under-reporting arose due to misreporting of income. Clause 85 seeks to extend the scope of immunity to cover:
- cases of misreporting of income, and
- cases involving unexplained income referred to in sections 102 to 106,
subject to enhanced additional tax payments and strict procedural compliance.
The amendment applies from 1 April 2026 and is applicable from tax year 2026-27 onwards.
1. Existing Framework of Section 440 (Before Amendment)
Section 440 provides a procedure under which an assessee may seek immunity from:
- penalty under section 439, and
- prosecution under sections 478 and 479,
provided the assessee:
- pays tax and interest as per the assessment or reassessment order within the stipulated time;
- does not file an appeal against such order; and
- files an application for immunity within one month from the end of the month in which the assessment order is received.
Immunity could be granted only after the expiry of the appeal period, and the Assessing Officer was required to pass an order within three months of receiving the application.
Crucially, immunity was restricted to cases of under-reporting of income and excluded misreporting cases entirely.
2. What Clause 85 of Finance Bill, 2026 Changes
Clause 85 substitutes sub-sections (1) to (4) of section 440, thereby expanding immunity to the following additional categories:
A. Misreporting of Income (Section 439(11)(a) to (f))
Immunity is now available even where penalty is initiated for misreporting of income, subject to:
- payment of tax and interest as per assessment or reassessment order;
- additional income-tax equal to 100% of the tax payable on the under-reported income, in lieu of penalty; and
- non-filing of appeal.
B. Unexplained Income under Sections 102 to 106 (Section 439(11)(g))
Clause 85 also extends immunity to cases involving income referred to in:
- section 102 (unexplained cash credits),
- section 103 (unexplained investments),
- section 104 (unexplained money),
- section 105 (unexplained bullion, jewellery, etc.), and
- section 106 (other unexplained income).
This extension is consequential to the proposal to omit the separate penalty provision earlier applicable to such income and to subsume these cases within the misreporting framework.
For these cases, immunity is available only upon payment of:
- tax and interest payable; and
- additional income-tax equal to 120% of the tax payable on such income, in lieu of penalty.
3. Conditions Common to All Immunity Cases
Across all categories covered under the amended section 440:
- No appeal must be filed against the assessment or reassessment order.
- Application for immunity must be filed within one month from the end of the month in which the order is received.
- Immunity is granted only after the appeal period expires.
- The Assessing Officer must pass an order accepting or rejecting the application within three months from the end of the month in which the application is received.
Immunity remains conditional and discretionary, subject to statutory verification.
4. Policy Rationale and Legislative Intent
The amendment reflects a calibrated policy shift aimed at:
- encouraging early dispute resolution,
- reducing penalty and prosecution-related litigation, and
- providing a settlement-like exit mechanism, even in serious cases, without weakening deterrence.
The differentiated additional tax rates (100% and 120%) ensure that graver cases attract higher fiscal cost, preserving proportionality.
5. Practical Implications
Who May Consider Seeking Immunity
- Taxpayers facing penalty exposure for misreporting;
- Cases involving unexplained income where litigation risk is significant;
- Assessees prioritising certainty and finality over prolonged disputes.
Key Cautions
- Waiver of appellate remedies is mandatory.
- Additional income-tax paid is non-refundable.
- Once immunity is granted, the matter attains finality.
Conclusion
Clause 85 of the Finance Bill, 2026 introduces a significant expansion of section 440, extending immunity from penalty and prosecution to misreporting and unexplained income cases, subject to substantially higher additional tax payments.
The amendment strikes a careful balance between deterrence and dispute resolution, offering taxpayers a structured route to closure while maintaining the integrity of the enforcement framework under the Income-tax Act, 2025.
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