Clause 15 of the Finance Bill, 2026 proposes a focused amendment to section 270AA of the Income-tax Act, 1961, which governs the grant of immunity from penalty and prosecution.
Under the existing law, immunity is available only in cases of under-reporting of income, and is explicitly denied where under-reporting arises in consequence of misreporting. Clause 15 seeks to extend the scope of immunity to misreporting cases, subject to enhanced payment conditions.
The amendment is proposed to take effect retrospectively from 1 March 2026, and applies to Assessment Year 2026-27 and earlier assessment years.
1. Existing Legal Framework of Section 270AA
Purpose of Section 270AA
Section 270AA provides a statutory mechanism whereby an assessee may seek immunity from:
- penalty under section 270A, and
- prosecution under sections 276C and 276CC,
after completion of assessment or reassessment, subject to fulfilment of prescribed conditions.
Conditions for Grant of Immunity
Under section 270AA (prior to amendment), immunity may be granted where:
- Tax and interest payable as per the assessment order under section 143(3) or reassessment order under section 147 are paid within the time specified in the notice of demand;
- No appeal is filed against such assessment or reassessment order; and
- An application for immunity is filed within one month from the end of the month in which the assessment order is received.
The Assessing Officer is required to pass an order accepting or rejecting the application within three months from the end of the month in which the application is received.
Statutory Limitation Prior to Amendment
Immunity under section 270AA was available only where penalty proceedings were initiated for “under-reporting of income”.
Where under-reporting was in consequence of misreporting of income, immunity was statutorily barred, irrespective of whether the assessee paid tax, interest, or any additional amount.
2. Amendment Proposed by Clause 15
Clause 15 proposes to remove the absolute bar on immunity in cases of misreporting.
Under the amended provision, immunity may also be granted where penalty is initiated for under-reporting of income in consequence of misreporting, provided the assessee complies with additional fiscal conditions.
3. Revised Conditions for Immunity in Misreporting Cases
In addition to satisfying the existing conditions of section 270AA, the assessee must pay:
- Tax payable as per the assessment or reassessment order;
- Applicable interest; and
- Additional income-tax equal to 100% of the aggregate tax payable on the under-reported income.
Only upon fulfilment of all the above conditions can immunity from penalty and prosecution be considered.
4. Important Clarifications
- The amendment does not reclassify misreporting or dilute its seriousness.
- The statutory penalty framework under section 270A for misreporting remains unchanged.
- Immunity is made available only as a settlement-style option, upon payment of an amount equivalent to the tax sought to be evaded.
- Immunity continues to be discretionary, subject to statutory compliance and verification by the Assessing Officer.
5. Retrospective Operation
The amendment is proposed to take effect from 1 March 2026, and will apply to:
- Assessment Year 2026-27, and
- earlier assessment years, where proceedings are pending and conditions of section 270AA can still be satisfied.
The retrospective date ensures uniform availability of the immunity mechanism for assessments finalized around the transition period.
6. Practical Implications for Taxpayers
Who May Consider This Option
- Assessees facing penalty proceedings involving misreporting;
- Cases where prosecution exposure is significant;
- Situations where the assessee prefers certainty over prolonged litigation.
Points of Caution
- Seeking immunity requires complete waiver of appellate remedies.
- The additional tax payment is mandatory and non-negotiable.
- Once immunity is granted, the matter attains finality.
Conclusion
Clause 15 of the Finance Bill, 2026 introduces a controlled expansion of section 270AA by permitting immunity even in cases of misreporting, subject to full fiscal compliance including payment of additional income-tax equal to 100% of the tax payable.
The amendment balances deterrence and dispute resolution, offering taxpayers a clear statutory exit from penalty and prosecution without undermining enforcement against misreporting.
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