compounding of offences under the Income Tax Act approved by SIT

The Special Investigation Team (SIT) has recently approved compounding of offences under the Income Tax Act for Indians having foreign accounts who are facing prosecution for tax evasion. The Chairman, Justice MB Shah along with vice-chief, Justice A. Pasayat has signed the compounding proposal initiated by the Central Board of Direct Taxes.

Scope of compounding under the new rules:

The income tax authorities in India have for many years been investigating on the account holders in the foreign banks who appear to be of Indian origin There is a separate list of such account holders which was provided to the government of India by the French government.

The present guidelines for compounding of offences under Income Tax Act, 1961 have been reviewed including the guidelines issued in the year 2008.

Under the Income Tax Act for Indian nationals holding accounts in foreign banks, the Special Investigation Team which has been investigating on black money has given a direction to compound the offences. Many foreign bank account holders who have been prosecuted for evading taxes and not declaring their incomes can now avail this facility.

This new facility of compounding offences would be extended to foreign account holders who have fully complied with the authorities and paid taxes. The facility would also be extended to those account holders who have partially complied. A se result, criminal proceedings will be dropped against such Indians having accounts in foreign banks.

The rules will apply to all residents of India. The new Provisions will apply to both undisclosed foreign income as well as assets which shall include any financial interest in an entity.

CBDT is going to issue a notification in connection with compounding of offences under Section 119 of the Act. Holders of foreign accounts, who have complied, can pay penalty to drop the case. Persons who have not admitted their foreign bank accounts also have the option of paying taxes after signing the consent forms by admitting their account for availing the compounding facility.

These guidelines shall be applicable from 01.01.2015 and shall apply to all applications received on or after the said date. The applications received before the date shall continue to be dealt with the guidelines frame don 16.05.2008.

Power discretionary in nature:

Compounding of offences is a discretionary power of the tax authorities under Section 279 of the Act. It is not a matter of right. However, offences may be compounded upon satisfaction of the conditions prescribed in the guidelines keeping in view many factors like the conduct of the person, nature of the offence, facts of the case, etc.
In case of compounding, the matter is settled between the tax authorities and account holders without the intervention by courts.

Panel to deal with compounding:

A panel has been set up by the department, consisting of the Chief Commissioner (Central), Director-General (Investigation) and the Commissioner of the zone having jurisdiction of the case will deal with the applications for compounding.

In some cases, original account holders have expired, and their beneficiaries who are not aware of the foreign accounts have paid taxes. However people who honestly came forward and are willing to pay taxes, shall be allowed to compound the offence.

The authorities may also adopt a rational approach for non-compliant account holders if they come forward to pay due taxes.

Justice Pasayat in one of his judgments observed that the tax officials should not be bloodhounds, they should act as watchdogs.

Rate of tax:

The undisclosed foreign income or assets shall be taxed at the rate of 30%. No exemption or deduction admissible under the existing Act shall be allowed.

Penalties:

Violation of the proposed new legislation will attract penalties. The penalty for non-disclosure of income or an asset situated outside India will be equal to 90 % of the undisclosed income or the value of such asset plus tax payable at 30%.

Failure to furnish return for foreign income or assets shall attract a penalty of Rs.10, 00,000/-. The same amount is prescribed for cases where though the assessee has filed a return, he has not disclosed the foreign income and assets.

Prosecutions:

The Bill proposes punishment for many kinds of violations. The punishment for willful attempt to evade tax in relation to a foreign income or an asset located outside India will be rigorous imprisonment from three years to ten years. In addition, it will also entail a fine.

Failure to furnish a return in respect of foreign assets and bank accounts or income will be punishable with rigorous imprisonment for six months to seven years. The same punishment is prescribed for cases where the assessee has filed a return but has not disclosed the foreign assets or has filed incorrect details of the same.

The above provisions are also applicable in case of beneficial owners of illegal foreign assets. Abetment of some person to make a false return or statement or declaration under the Act will be punishable with imprisonment of a term ranging from six months to seven years. This provision will also apply to banks and financial institutions helping in concealment of foreign income or assets of Indians or filing false documents.

Application for compounding of offences:

The application for Compounding of Offences under Income Tax Act which should be submitted by assessee should contain the name of the assessee, his status, offence committed with relevant sections, assessment year, position of the case, facts of the case, reason of default, amount of tax, interest, penalties, etc. payable in connection with the default. It should also state whether a conviction order has already been passed by the court.