Compounding of Offences and Immunity from Prosecution under the Income Tax Act 2025 (Sections 491, 519, 520, 521)

Under the Income-tax Act, 2025, an offence can end without a conviction in two ways. It can be compounded under section 491(4), by a Principal Chief Commissioner, Chief Commissioner, Principal Director General or Director General. Or the Central Government can tender immunity from prosecution under section 519 to a person who gives a full and true disclosure and helps with evidence. Two other sections shape the outcome: section 520 fixes which court tries tax offences, and section 521 switches off probation for adult offenders.

This guide explains each provision, who can use it, and what is lost if conditions are broken. Every statement is taken from the Act as amended by the Finance Act, 2026. It is information, not advice, and compounding or immunity is never a right. Last reviewed on 10 November 2026.

What is the difference between compounding and immunity?

	Compounding (section 491(4))	Immunity (section 519)
Who decides	Principal Chief Commissioner, Chief Commissioner, Principal Director General or Director General	The Central Government
Who benefits	A person facing an offence under the Chapter containing sections 473-484	A person directly or indirectly concerned in, or privy to, concealment of income or evasion of tax, whose evidence is needed
When	Before or after proceedings are instituted	When the Government thinks it necessary or expedient, for reasons recorded in writing
Condition	None stated in the section itself	Full and true disclosure of the whole circumstances
Covers	The offence under the Act	Prosecution under this Act, the Bharatiya Nyaya Sanhita, 2023 or any other Central Act, plus penalty under this Act
Can it be undone?	The section does not say	Yes. Immunity is deemed withdrawn if conditions are broken (section 519(3))

Which offences can be compounded?

Section 491(4) says "any offence under this Chapter" may be compounded. The Chapter includes the offences in sections 473 to 484, which are the ones listed in section 491(1) as needing sanction:

• section 473 (contravention of an order made during a search action) and section 474 (failure to afford facility for inspection of books of account during a search);
• section 475 (removal, concealment, transfer or delivery of property to prevent tax recovery);
• section 476 (failure to pay tax to the credit of the Central Government under Chapter XIX-B) and section 477 (failure to pay tax collected at source);
• section 478 (wilful attempt to evade tax) and section 479 (failure to furnish returns of income);
• section 480 (failure to furnish return setting forth undisclosed income) and section 481 (failure to comply with a direction of special audit or valuation);
• section 482 (false statement in verification), section 483 (falsification of books of account or documents) and section 484 (abetment of a false return).

Compounding can happen before or after proceedings are started. The Act does not set a fee, a form or a time limit for a compounding application in the sections reviewed here. Any such procedure would come from instructions the Board issues under section 491(6), which I have not reviewed for this article.

Who can compound, and who controls how it is done?

Three layers matter:

1. Sanction to prosecute. Under section 491(1), nobody is proceeded against for these offences without the previous sanction of the Principal Commissioner, Commissioner, Commissioner (Appeals) or Joint Commissioner (Appeals).
2. Power to compound. This sits one level up, with the Principal Chief Commissioner, Chief Commissioner, Principal Director General or Director General (section 491(4)).
3. Board instructions. Section 491(6) says the Board's power to issue instructions includes instructions, even a requirement to get the Board's previous approval, for the "proper composition of offences".

What is immunity from prosecution under section 519?

Section 519(1) lets the Central Government tender immunity to a person who appears to have been directly or indirectly concerned in, or privy to, concealment of income or evasion of tax. The Government must think it necessary or expedient to obtain that person's evidence, and must record its reasons in writing.

The tender can cover two things:

• immunity from prosecution for any offence under this Act, the Bharatiya Nyaya Sanhita, 2023 or any other Central Act in force; and
• immunity from any penalty under this Act.

It is made on condition of a full and true disclosure of the whole circumstances of the concealment or evasion. Once the person accepts the tender, section 519(2) makes them immune, to the extent the immunity extends, from prosecution for the offences it covers and from the penalty.

When is immunity withdrawn?

Under section 519(3), if the Central Government finds that the person has not complied with the conditions, is wilfully concealing anything, or is giving false evidence, it may record a finding to that effect. Immunity is then deemed withdrawn.

Section 519(4) spells out the result. The person may be tried for the offence covered by the tender and for any other offence connected with the same matter. They also become liable to the penalty they would otherwise have faced.

Which court tries a tax offence (section 520)?

Section 520 is one line: no court inferior to a Judicial Magistrate of the first class can try an offence under the Act. Section 496 adds that offences in the same Chapter are triable only by a designated Special Court, where one is designated for the area or class of cases. Under section 496(2), a court that has not been designated as a Special Court may keep trying an offence already pending before it until disposal.

Why is probation not available (section 521)?

Section 521 says the Probation of Offenders Act, 1958 and section 401 of the Bharatiya Nagarik Suraksha Sanhita, 2023 do not apply to a person convicted of an offence under the Act, unless that person is under eighteen years of age. For an adult, a conviction therefore cannot be converted into release on probation. That is one more reason the two routes above (compounding and immunity) matter before the matter reaches judgment.

Worked examples with numbers

The figures below are illustrative. They use the prosecution bands in section 478 and the approval limits in section 469, which sit next to compounding in the same scheme. Assumptions are stated for each.

Example 1: Which section 478 band applies? (tax year 2026-27)

Assume two taxpayers where the tax on under-reported income is the amount sought to be evaded, and the offence is proved.

Step	Taxpayer A	Taxpayer B
1. Tax sought to be evaded	Rs 8,00,000	Rs 42,00,000
2. Above Rs 50 lakh? (band a)	No	No
3. Above Rs 10 lakh but not above Rs 50 lakh? (band b)	No (Rs 8 lakh is below Rs 10 lakh)	Yes
4. Punishment under section 478(1)	Fine only (band c)	Simple imprisonment up to 6 months, or fine, or both

Compounding changes the end point, not the band. It is the authority in section 491(4) who decides whether to compound the offence.

Example 2: Approval limits in section 469 (tax year 2026-27)

Section 469 is the penalty-waiver provision linked to prosecution by section 491(3). Assume Meena has a section 439 penalty matter and applies on grounds of genuine hardship under section 469(5).

Step	Case X	Case Y
1. Aggregate penalties to be reduced, waived or compounded	Rs 70,000	Rs 1,40,000
2. More than Rs 1,00,000? (section 469(6))	No	Yes
3. Who signs off	Principal Commissioner or Commissioner alone	Same officer, after prior approval of the Principal Chief Commissioner, Chief Commissioner, Principal Director General or Director General
4. Time to decide (section 469(7))	Within 12 months from the end of the month in which the application was received

Real-life scenarios

Ravi, a company director who is a witness

Ravi worked in the accounts team of a trading firm that hid cash receipts. After a search, the department needs his account of how the books were kept. The Central Government may record reasons and tender him immunity under section 519(1), on condition he discloses everything he knows. He accepts and gives a full statement. He is protected from prosecution and penalty to the extent of the tender. If it later turns out he kept back a second set of ledgers, the Government can record a finding under section 519(3). The immunity is then deemed withdrawn and he can be tried for the offence and for related offences (section 519(4)).

Meena, a proprietor with an unpaid tax-collected-at-source matter

Meena runs a small business and is facing proceedings under section 477 for tax she collected at source but did not pay to the Government. She pays what is due and writes to the authority empowered under section 491(4), asking that the offence be compounded. The section lets that authority compound the offence even though proceedings have already started. Whether it does so is the authority's decision, and any Board instructions under section 491(6) will govern how.

Sanjay, a 17-year-old who inherited a family shop

Sanjay is under eighteen and is convicted of an offence under the Act. Section 521 does not bar probation for him, so the Probation of Offenders Act, 1958 and section 401 of the BNSS can apply. An adult convicted of the same offence would not get that option.

Common mistakes

• Treating compounding as a right. Section 491(4) says the offence "may be compounded". It is a power, not an entitlement.
• Assuming immunity is permanent. Section 519(3) and (4) let the Government withdraw it for non-compliance, concealment or false evidence, after which prosecution and penalty are back on the table.
• Mixing up who decides. Sanction to prosecute sits with the Principal Commissioner or Commissioner (section 491(1)). Compounding sits higher (section 491(4)). Immunity sits with the Central Government (section 519).
• Expecting probation after a conviction. Section 521 shuts that door for anyone aged eighteen or more.
• Missing the link with penalty waiver. Under section 491(3), no one is proceeded against under section 478 or 482 for a tax year where the section 439 penalty has been reduced or waived under section 469. Our guide to penalty waiver and immunity from prosecution covers that route.

Quick reference

Question	Answer	Where
Who can compound an offence?	Principal Chief Commissioner, Chief Commissioner, Principal Director General or Director General	Section 491(4)
When can it be compounded?	Before or after proceedings begin	Section 491(4)
Who tenders immunity?	The Central Government, for reasons recorded in writing	Section 519(1)
Condition for immunity	Full and true disclosure of the whole circumstances	Section 519(1)
What happens if conditions are broken?	Immunity deemed withdrawn; trial and penalty revive	Section 519(3), (4)
Lowest trial court	Judicial Magistrate of the first class	Section 520
Probation for adults?	Not available	Section 521

Where this is in the Act

• Section 491: sanction for prosecution, bar after penalty waiver (sub-section 3), compounding (sub-section 4), evidence rule (sub-section 5), Board instructions (sub-section 6).
• Section 519: power to tender immunity from prosecution.
• Section 520: cognizance of offences; no court below a first-class Judicial Magistrate.
• Section 521: Probation of Offenders Act, 1958 and section 401 of the BNSS not to apply, except under eighteen.
• Section 496: Special Courts. Sections 469 and 478: penalty waiver and the evasion offence referred to above.

If you handle notices for several clients, tracking which matter is at which stage (sanction, compounding request, hearing date) is mostly a diary problem. Finexo's practice management software for CAs keeps client-wise tasks and due dates in one place. It does not file applications or advise on whether to seek compounding.

Related reading: income tax offences and prosecution.