Meaning of the term “compounding of offences”:
Compoundable offences are those offences that can be conciliated by the parties between themselves. The permission of the court is not necessary. When an offence is compounded, the aggrieved party is adequately compensated.
For example, if a person is inadvertently hit by someone’s car on the road and gets hurt, though the car driver may be responsible for the accident, but still he can settle the issue by paying compensation to the person.
However, it should be remembered here that only the aggrieved person has the right to compound an offence.
Cognizable and Non-Cognizable offences under the Income Tax Act:
A cognizable offence is one in which the police can investigate and arrest an accused without a warrant issued by the court.
According to the Criminal Procedure Code, a non-cognizable offence is one in which police cannot investigate or arrest without a warrant from the court.
Rules relating to compounding:
Compounding of an offence could be made by way of a written request made by an assessee to the department stating the following points –
1. The nature of offence for which prosecution is initiated;
2. The situations under which the offence was committed;
3. The applicant’s willingness to pay the compounding charges including the litigation expenses of the Department till the date of compounding;
4. Whether the requisite conditions have been satisfied;
5. A prayer to compound the offence by accepting the compounding fees by the authority.
Guidelines framed by the CBDT:
Sub-section (2) of section 279 gives powers to the Chief Commissioner of Income Taxes or the Director General to compound offences under Chapter 22 of the Income Tax Act, 1961. It can be done either before or after the initiation of prosecution proceedings.
Power of Chief Commissioner to compound offences:
The points which should be considered before deciding to compound an offence are as follows –
1. A prosecution should not be compounded if the possibilities of success are good.
2. The Board states that if there are possibilities of success, the request of the assessee for having the offence compounded should not be forwarded to the Board.
3. Section 279(2) give discretion to the Commissioner to compound any offence under the Act and such discretion should be exercised in a judicial manner.
4. Though it is neither possible to state all the circumstances in which an offence can be compounded, however it is necessary to have a uniform policy to apply the discretion.
5. Compounding of an offence may be considered only in those situations where the assessee appears with a written request for compounding the offence.
6. It should be noted whether the purpose will be served better if the assessee is made to pay a deterrent fee or by passing an order of conviction.
7. If after initiating prosecution, new evidence becomes available which reveal that the case is weak and the assessee wants to have the offence compounded, it is advisable to compound the offence in such a case.
8. Whether the prosecution should be compounded or not depends up on the facts of the case.
9. The previous approval of the Board should always be obtained before compounding an offence.
10. No assurance should be given to the assessee to compound a case before obtaining the Board’s approval.
Cases which should not be compounded:
1. No compounding is done if the assessee belongs to a monopoly industry or is a director of a company controlled by such an industrial house;
2. Cases in which the prospects are good should not be compounded;
3. Compounding will not be done in cases of second offences;
4. Compounding of an offence cannot be done without the consent of the Board;
5. Compounding may be done with the approval of the Ministry of Law if it is found after consultation that chances of conviction are not good;
6. The Board may approve compounding in suitable cases involving hardship with the prior consent of the Ministry of law;
7. Offences under Indian Penal Code cannot be compounded;
8. Offences under Direct Tax Laws may be compounded subject to the requisite conditions;
9. An assessee cannot claim as a matter of right that his offence should be compounded.
Fees for compounding:
The fees for compounding of various offences in addition to penalty are as follows –
1. Section 276 – Failure to pay or deliver return or statement – The fee would be an amount of Rs. 2/- for every day of the default.
2. Section 276B – Failure to deduct or pay tax – The fee would be 10% per month in default where the said amount is more than Rs. 1 lac and 5% per month in other cases.
3. Section 276B – Failure to pay the TDS – The fee would be 5% per month of the amount of tax in default.
4. Section 276DD – Failure to pay the TCS – The same rules as in respect of Section 276B shall be applicable.
5. Section 276D (1) – Willful attempt to evade tax – If the amount sought to be evaded is less than Rs. 1 lac the fee shall be 100% of amount sought to be evaded. If the amount sought to be evaded is more than that, the fee shall be 200% of the amount sought to be evaded.
Judicial view:
In M.P. Tewari v. Y.P. Chawla, ITO [1991] 187 ITR 506 (Delhi), the guidelines of the Central board of Direct Taxes were explained. The instructions partially take away the powers of the Commissioner of Income Tax to exercise the discretion provided under section 279(2) of the Act to compound an offence, if any application is filed before him. The impugned instruction states that the Commissioner of Income Tax is required to obtain the previous approval of the Board before compounding an offence.
It was observed that after the Legislature has vested in the Commissioner the discretion to compound an offence, it cannot be curtailed by issuing instructions which are in contravention of the provisions conferring the powers upon the Commissioner.
It was held that the circular has curtailed the powers of the Commissioner vested in him under section 279 of the Act. The discretion of the Commissioner has become the discretion of the Board and/or that of the Ministry of law. However this was not the intent of the Legislature when section 279 of the Act was enacted.
The petition was allowed and the part of the instructions which arbitrarily take away the powers of the commissioner to compound offences was accordingly quashed.
Revised guidelines issued by the CBDT:
Thereafter the Board reviewed the existing instructions relating to compounding of offences under the laws relating to income tax reviewed by the Board. After careful observation of the matter, the revised guidelines were issued.
The Central Board of Direct Taxes liberalized the guidelines for compounding of offences. The differences between technical and non-technical offences for the purpose of compounding of offences have been removed.
The Chief Commissioners of Income tax can now compound the first technical offence if the compounding charges are less than Rs. 10 lakhs. Taxpayers whose cases were rejected earlier may ask for reconsideration. However, cases in which the compounding orders have been passed cannot be reconsidered.
The revised guidelines have been issued to ensure fairness in compounding of offences as well as to reduce the pending prosecutions in the courts. It also aims to remove the hardship to the taxpayers. It expects to attract a large number of assessees to come appear before the department for compounding of offences charged against them.
