In India’s vast corporate tax framework, compliance is everything. But what happens when a company slips up — by mistake or on purpose? The law doesn’t just look at the company. It also looks at the people running it.
That’s exactly where Section 278B of the Income Tax Act, 1961 steps in.
It lays down how companies and their officers are prosecuted for offences like tax evasion, concealment, or false filings — ensuring accountability right up the management ladder.
It’s a deeming provision — which means the law assumes responsibility unless the person in charge proves otherwise. Let’s unpack how it works and what protection exists for genuine directors.
What Is Section 278B of the Income Tax Act?
Section 278B defines the liability of companies & their officers when an offence under the Income Tax Act has been committed by a company.
If a company commits a tax offence — say, fails to deposit TDS, files a false return, or conceals income — then not just the entity but also its directors, managers, and principal officers may be held guilty.
Key Legal Text
“Where an offence under this Act has been committed by a company, every person who, at the time the offence was committed, was in charge of & responsible for the conduct of the business of the company, shall be deemed to be guilty of the offence…”
Translation?
If you were steering the ship when the offence occurred, you’re answerable — unless you can prove it happened without your knowledge or despite all due diligence.
The Nature of the Provision
Section 278B is a deeming provision — it assumes guilt first & shifts the burden of proof to the officers.
It’s meant to stop executives from hiding behind employees or processes.
Still, it’s balanced: genuine directors who acted diligently can defend themselves by proving lack of knowledge or reasonable preventive effort.
Also Read: Penalty for Under-Reporting and Misreporting of Income
Applicability and Scope
The section covers a wide range of organisations:
- ✅ Private and Public Limited Companies
- ✅ Partnership Firms (with similar provisions)
- ✅ Associations or Bodies of Individuals
Typical offences include:
- Concealment of income
- Falsification of accounts
- Failure to pay TDS
- Abetment of false return filings
Section 278B(1) — Who Exactly Is Liable?
The first sub-section targets those in charge of the company’s business at the time of the offence:
- Managing Directors
- Whole-time Directors
- CFOs / Finance Heads
- Principal Officers
- Key Managers
However, liability isn’t automatic.
Such officers can defend themselves by proving the offence occurred without their knowledge or despite due diligence.
Principal Liability — Company First, Then Officers
A company, being a separate legal person, is primarily responsible for any tax offence it commits.
Once found guilty, the law extends that guilt to the officers who directed or approved the act.
Example:
If ABC Ltd. files a false ITR to underreport income, both the company & the director who signed off can face prosecution under Section 278B.
Understanding the “Deeming” Rule
In tax law, deeming provisions create a legal fiction.
Section 278B presumes every senior officer guilty unless proven otherwise — but provides two clear escape routes:
- The act was committed without their knowledge, or
- They exercised due diligence to prevent it.
This keeps honest directors safe while holding negligent ones accountable.
Also Read: Penalty for Late Filing You Can’t Ignore
Section 278B(2) — Consent and Connivance
Sub-section (2) goes deeper. It says:
If the offence occurred with the consent, connivance, or neglect of any director, manager, secretary, or officer, that person too shall be deemed guilty.
In short — even if you didn’t directly do it but looked the other way, the law still catches up.
Illustration
- Imagine XYZ Pvt Ltd. underreports ₹ 2 crore income.
- The return is signed by the MD & vetted by the CFO.
- When the department finds the fraud:
- The company is liable.
- The MD & CFO are deemed guilty unless they prove they were unaware or had taken preventive steps.
That’s Section 278B in action — shared accountability between the corporate entity and the humans behind it.
Common Offences That Trigger Section 278B
- Abetment of false return filings
- Failure to deposit TDS
- Concealment of income"
- Maintaining false books of accounts
- Ignoring notices or summons
Each offence can lead to prosecution of both the company & responsible officers.
Compounding of Offences
Relief does exist.
Certain offences can be compounded — settled by paying prescribed fees instead of facing full prosecution.
Even a co-accused director can apply for compounding separately, offering a way to protect themselves when the company chooses not to.
Defences Available to Officers
To avoid liability, an accused officer must show:
- The offence occurred without their knowledge, or
- They used all due diligence to prevent it, or
- The act was outside their scope of control.
Courts review each case individually — examining designations, roles, and actual involvement.
Also Read: Penalty for Failure to Get Accounts Audited
Judicial Interpretation
Courts have clarified that prosecutions under Section 278B cannot be automatic.
In SMS Pharmaceuticals Ltd vs Neeta Bhalla (2005), the Supreme Court held that simply being a director isn’t enough — the prosecution must show that the person was actually in charge of business operations.
This protects independent & non-executive directors from blanket liability.
Key Takeaways
- Section 278B makes both the company & its responsible officers liable for tax offences.
- It’s a deeming provision, presuming guilt unless rebutted.
- The company’s liability comes first, followed by individuals in charge.
- Sub-section (2) punishes acts done with consent or negligence.
- Compounding offers a settlement option for co-accused individuals.
- Offences include concealment, false returns, and TDS defaults.
Preventive Measures for Companies
To stay clear of prosecution under Section 278B:
- Maintain accurate and transparent accounts.
- Deposit TDS and advance tax on time.
- Conduct regular internal audits."
- Train directors & officers on tax responsibilities.
- Keep meeting records and minutes for all major tax decisions.
A documented culture of compliance is the strongest legal defence.
Conclusion
Section 278B is both a sword & a shield. It ensures companies cannot hide behind their corporate veil — yet it also protects sincere directors who act in good faith.
At its heart, the section enforces one principle: responsibility follows control. If you manage the business, you must ensure it stays compliant.
The easiest way to stay safe? Timely filings, clean records, and professional guidance.
Has your company received a notice under Section 278B? Or are you a director unsure about personal exposure?
👉 Visit CallMyCA.com — our Chartered Accountants and legal experts will help you assess liability, prepare compounding applications, and build a strong defence strategy under the Income Tax Act.
