Section 278B of the Income-tax Act, 1961: Offences by Companies

What is an offence by a company under income-tax law?

An income-tax offence by a company is a criminal contravention of an applicable offence provision of the relevant Income-tax Act. Section 278B does not independently create every such offence or prescribe a universal sentence. Instead, it determines which persons may be prosecuted and punished where a company has committed an offence under the 1961 Act.

It extends beyond incorporated companies to firms and associations or bodies of individuals, as defined in the section. Prosecution of individuals requires consideration of their actual role at the time of the alleged offence.

Section 278B of the Income-tax Act, 1961: Subsection-wise explanation

Section 278B(1): Company and persons in charge

Where an offence under the 1961 Act is committed by a company, the company and every person who, when the offence occurred, was both in charge of and responsible to the company for the conduct of its business are deemed guilty and may be prosecuted and punished. The statutory proviso protects a person who proves that the offence occurred without their knowledge or that they exercised all due diligence to prevent it.

Section 278B(2): Consent, connivance or neglect

Separately, a director, manager, secretary or other officer is liable where the offence is proved to have occurred with that person's consent or connivance, or is attributable to their neglect. This is a distinct route to liability and is not limited to persons covered by subsection (1).

Section 278B(3): Fine imposed on a company

Where the punishment for an offence is imprisonment and fine, the company is punishable with a fine. Individuals falling within subsection (1) or (2) remain liable to be proceeded against and punished under the relevant offence provisions. Subsection (3) was inserted by the Finance (No. 2) Act, 2004 with effect from 1 October 2004.

Section 487 of the Income-tax Act, 2025: Corresponding provision

Section 487 reorganises the corporate-offence rules into five subsections while preserving the core concepts of company liability, responsible persons, due diligence, officer involvement and punishment.

• 487(1): The company and persons in charge of and responsible for its business may be held liable for an offence committed by the company.
• 487(2): A person covered by subsection (1) may establish lack of knowledge or that all due diligence was exercised to prevent the offence.
• 487(3): A director, manager, secretary or other officer may be liable where consent, connivance or neglect is proved.
• 487(4): Where imprisonment and fine are prescribed, the company is punished with fine, while relevant individuals remain liable under the Act.
• 487(5): Defines company and director for the purposes of this section.

The legal rules must be read alongside the substantive offence and applicable repeal, savings and transitional provisions. The corresponding section number alone does not determine which Act governs a particular matter.

Definitions of company and director

Under the Explanation to Section 278B and Section 487(5):

• Company: A body corporate, including a firm and an association of persons or body of individuals, whether incorporated or not.
• Director in relation to a firm: A partner in the firm.
• Director in relation to an association of persons or body of individuals: A member controlling its affairs.

These definitions are specific to the relevant prosecution provisions and should not be confused with the narrower everyday meaning of an incorporated company or its board of directors.

Section 278B and Section 487: Key comparison

How liability and due diligence are assessed

The prosecution provision requires attention to the person's role and the facts of the offence. A company should maintain clear records of responsibility for tax returns, withholding, tax payments, statutory approvals, compliance reviews and escalation of identified defaults.

Illustrative example: Responsible finance officer

If a company's tax-related offence occurs while a finance officer is actually in charge of and responsible for the relevant business functions, Section 278B(1) or Section 487(1), as applicable, may be engaged. The officer may seek to prove the statutory defence, based on the evidence of knowledge and due diligence.

Illustrative example: Director involved in a false filing

If an offence is committed with a director's consent or connivance, or is attributable to the director's neglect, the separate officer-liability provision may apply. Whether the offence itself is established and whether the requisite involvement is proved remain essential questions.

Practical documentation

• Maintain written delegation and approval matrices for tax compliance.
• Keep evidence of reconciliations, reviews, internal controls and corrective action.
• Document professional advice and prompt responses to notices or identified errors.
• Preserve records showing who was responsible when the alleged offence occurred.

These practices can help establish facts but do not automatically confer immunity from prosecution.

Official statutory references

• Income Tax Department: Section 278B of the Income-tax Act, 1961
• Income Tax Department: Income-tax Act, 2025 (Section 487)
• Income Tax Department: Section correspondence navigator

Historical legislative note: Section 278B(3) was inserted by Act 23 of 2004, section 61, effective 1 October 2004. This article is general legal information and not advice for a particular prosecution.