Compounding of offences under Income tax Act, 1961

Compounding of offences under Income tax Act, 1961

Introduction: This paper aims at bringing out the intricacies of prosecution of offences contained in theIncome Tax Act, 1961 and their compounding. This paper further minutia the various guidelines issued by the CBDT in this regard. The readers are cautioned to take proper care and consultation before acting on the material contained in this article.

Index:

1.General meaning of compounding of offences.

2.General meaning of Prosecution.

3. Meaning of Cognizable and Non-cognizable offences

4. Technical and Non technical offences as per Income Tax Act, 1961

5. Offences under the Income Tax Act.

6. Compounding of offences under the Income Tax Act

7. CBDT circulars on Compounding of offences

i. Letter: F. No. 4/7/69-IT (INV.), dated 21-3-1969.

ii. CBDT Instruction: Extracts from CBDT Instruction No. 1317 of 1980, [reported in M.P. Tewari v. Y.P. Chawla, ITO [1991] 187 ITR 506 (Delhi), at pp. 510-511].

iii. F.No. 285/161/90-IT(Inv.) dated 30th September, 1994

iv. F.No. 285/26/2002-IT(Inv.) Dated 29th July, 20038. Application for compounding of offences.

1. General meaning of compounding of offences

Compoundable offences are those which can be conciliated by the parties under dispute. The permission of the court is not required in such cases. When an offence is compounded, the party, who has been distressed by the offence, is compensated for his grievance.

For e.g.: Suppose

o    Somebody’s car inadvertently strikes a person on the road and the person gets wounded. Though the car driver may be guilty of rash and negligent driving, but still he can settle the matter by paying adequate compensation to the victim.

o    One person, let’s say, is constructing his house and accidentally one of the newly constructed walls fall down and a passerby gets wounded in the process. In this situation the aggrieved person has the option of compounding the offence as the owner was guilty of negligence.

However, it must be noted here that only the aggrieved party or the victim has the right to compound an offence and nobody else, not even the public prosecutor has the power to compound an offence.

2. General meaning of Prosecution :

Definition: The institution and carrying on of a suit in a court of law or equity, to obtain some right, or to redress and punish some wrong; the carrying on of a judicial proceeding in behalf of a complaining party, as distinguished from defense.

Definition: The institution, or commencement, and continuance of a criminal suit; the process of exhibiting formal charges against an offender before a legal tribunal, and pursuing them to final judgment on behalf of the state or government, as by indictment or information.

3. Meaning of Cognizable and -Non-Cognizable offenses under the Act

o    A cognizable offence in the criminal justice system of India is one in which the police is empowered to register an FIR, investigate and arrest an accused involved in cognizable crime without a court warrant.

o    As defined in Cr.PC, a non-cognizable offence is one in which police can neither register a First Information Report (FIR) nor can investigate or effect arrest without the express permission ordirections from the court.

As per section 279A the following offences shall be deemed to be non-cognizable offences notwithstanding anything contained in the code of Criminal Procedures 1973.

276B	Failure to pay tax to the credit of the central Govt. under chapter XIID orXVII-B
276C(1)	Wilful attempt to evade tax.
276C(2)	Wilful attempt to evade payment of tax
276CC	Failure to furnish the return of income.
277	False statement in verification, etc.
278	Abatement of false returns etc.

4. Technical Vs. Non Technical offences under Income tax Act, 1961

As per the guidelines of the CBDT F.No. 285/161/90-IT (Inv.) dated 30th September, 1994 and F.No. 285/26/2002-IT(Inv.) Dated 29th July, 2003 distinction between technical and non-technical offences is detailed as under:

1. Offences u/ss. 276B (relating to TDS), 276BB (relating to TCS), and 276E (omitted w.e.f. 1-4-1989 which related to section 269T) are regarded as technical. All other offences are regarded as non-technical.

2. The technical offences can be compounded even before filing complaint.

3. A technical offence may be compounded by Chief Commissioner of Income Tax or Director General of Income Tax if the following conditions are satisfied cumulatively.(now deleted by th29 July 2003 ) guidelines

i. The offence is the first one by the assessee.

ii. The compounding charges do not exceed Rs. 10 lakhs. iii. The complaint should not have been filed.

iii. In all other cases, the offence can be compounded only with the previous approval of the Board. ( these conditions deleted by CBDT guidelines F.No. 285/26/2002-IT(Inv.)

Now, In this regard, it has now been prescribed by CBDT guidelines F.No. 285/26/2002-IT(Inv.)that :

a. All types of cases relating to technical offences are to be compounded by CCIT/DGIT.

b. Distinction between first offence and subsequent offence is removed and

c. CCIT/DGIT shall not reject an application for compounding of a technical offence, if all conditions prescribed in the guidelines are satisfied.

4. A non-technical offence can be compounded with the approval of the Board subject to satisfaction of the following conditions mentioned as under:

The following conditions should be satisfied for compounding an offence.

i. There should be a written request from the assessee.

ii. The amount of undisputed tax, interest and penalties relating to the default should have been paid.

iii. The assessee should express his willingness to pay both the prescribed compounding fees as well as establishment expenses.

Additional conditions:

i. The offence is the first one by the assessee.

ii. The Board’s prior approval is obtained. However, if the amount involved exceeds Rs. 1 lakh, approval can be granted only after seeking advice from Ministry of Law. This requirement of referring the matter to Ministry of Law has not been done away with vide amendment dated – 7-292003 referred above.

5. Offences under the Income Tax Act,1961 Sections 275A to 280 provides for various types of offences under which the Income Tax Department can prosecute an assessee in the Court of Law. The prosecution can be launched only at the instance of the Commissioner of Income Tax or Commissioner of Income Tax (Appeals) or the Appropriate Authority.The sections under which prosecution can be launched against an assessee are

Section	Offence	Particulars	Initiation of proceedings and penalty
275A	Contravention of order u/s. 132(3)	Order for non removal of moneybullion etc. under Search and seizure	Fine and 2 yearsbut approval of CIT or CIT(A) or Appropriate Authority (as defines u/s 269UA(c) needed for initiation of proceedings)-279(1)
275B	Contravention of order u/s. 132(1)(ii)	Failure to allow inspection of books of accounts and other documents to authorized officer	Fine and 2 yearsbut approval of CIT or CIT(A) or Appropriate Authority (as defines u/s 269UA(c) needed for initiation of proceedings)-279(1)
276	Removal, concealment, transfer or delivery of property to thwart recovery of taxes.		Fine and 2 yearsbut approval of CIT or CIT(A) or Appropriate Authority (as defines u/s 269UA(c) needed for initiation of proceedings)-279(1)
276A	Failure to comply with provisions of sections 178(1) and 178(3).	Notice by liquidator of a company within 30 days of his appointment to the A.O. 178(1)Non removal of assets of the company by liquidator without permission of the CCIT or CIT 178(3)	6 months to 2 years but approval of CIT or CIT(A) or Appropriate Authority (as defines u/s 269UA(c) needed for initiation of proceedings)-279(1)
276AB	Failure to comply with provisions of section 269 UC, UE, UL.	269UC: restrictions on transfer of immovable property, where value of such property exceeds Rs. 5 lac 269UE:Vesting of property in Central Government269UL: Restrictions onregistration etc of documents in respect of transfer of immovable property.	Fine and 6 months to 2 years
276B	Failure to pay tax to the credit of the central Govt. under chapter XIID or XVII-B	Failure to pay the tax deducted at source under Chapter XVII-B or pay tax as per 115O(2) or second proviso to section194B	Fine and 3 months to 7 yearsbut approval of CIT or CIT(A) or Appropriate Authority as defines u/s 269UA(c) needed for initiation of proceedings-279(1)
276BB	Failure to pay the tax collected at source.		Fine and 3 months to 7 yearsbut approval of CIT or CIT(A) or Appropriate Authority( as defines u/s 269UA(c) needed for initiation of proceedings)-279(1)
276C(1)	Wilful attempt to evade tax.	1. If the tax sought to be evaded exceeds Rs. 100000.002. In any other case	Fine and 6 months to 7 yearsFine and 3 months to 3 years
276C(2)	Wilful attempt to evade payment of tax		Fine and 3 months to 3 yearsbut approval of CIT or CIT(A) or Appropriate Authority (as defines u/s 269UA(c) needed for initiation of proceedings)-279(1)
276CC	Failure to furnish the return of income.	1. If the tax sought to be evaded exceeds Rs. 100000.002. In any other case	Fine and 6 months to 7 yearsFine and 3 months to 3 years but approval of CIT or CIT(A) or Appropriate Authority (as defines u/s 269UA(c) needed for initiation of proceedings)-279(1)
276CCC	Failure to furnish the return of income in search cases. u/s 158BC(a)		Fine and 3 months to 3 years
276D	Failure to produce  account books and documents.	Non compliance under section 142(1)-for production of books and 142(2A)- special audit	Upto 1 year or fine @ Rs. 4-10 per day during which default continues or both but approval of CIT or CIT(A) or Appropriate Authority as defines u/s 269UA(c) needed for initiation of proceedings-279(1)
277	False statement in verification, etc.	1. If the tax sought to be evaded exceeds Rs. 100000.002. In any other case	Fine and 6 months to 7 yearsFine and 3 months to 3 yearsbut approval of CIT or CIT(A) or Appropriate Authority as defines u/s 269UA(c) needed for initiation of proceedings-279(1)
277A	Falsification of books ofaccount or documents,etc..	If a person (1st person) falsifies books of another person (2nd person) then the 1st person is guilty and he is subject to imprisonment. The 1st person will be prosecuted whether or not the 2nd person has evaded any tax or not.	Fine and 3 months to 3 yearsbut approval of CIT or CIT(A) or Appropriate Authority as defines u/s 269UA(c) needed for initiation of proceedings-279(1)
278	Abatement of falsereturns etc.	If a person (1st person) induces any other person (2nd person) to make and deliver any false account or statement or declaration in relation to any income chargeable to tax then the 1st person is guilty and he is subject to imprisonment.1. If the tax sought to be evaded exceeds Rs. 100000.002. In any other case	Fine and 6 months to 7 yearsFine and 3 months to 3 years  but approval of CIT or CIT(A) or Appropriate Authority as defines u/s 269UA(c) needed for initiation of proceedings-279(1)

6. Compounding of offences under the Income Tax Act, 1961

The Act provides relief from prosecution u/s 278AA and 279. A list of compoundable offences is provided hereunder:

Section	Offence	Compounding possible by CCIT or DGIT as per section 279(2)		Rate of compounding as per guidelines of CBDT F.No. 285/26/2002- IT(Inv.) Dated 29th July, 2003 and other guidelines.
275A	Contravention of order u/s. 132(3)	Yes, with prior approval of the CBDT		Not prescribed-on case to case basis + 10%of composition fees as establishment expenses (max Rs. 50,000.00)
275B	Contravention of order u/s. 132(1)(ii)	Yes with prior approval of the CBDT		Not prescribed-on case to case basis + 10% of composition fees as establishment expenses (max Rs. 50,000.00)
276	Removal, concealment, transfer or delivery of property to thwart recovery of taxes.	Yes with prior approval of the CBDT		Not prescribed-on case to case basis + 10%of composition fees as establishment expenses (max Rs. 50,000.00)
276A	Failure to comply with provisions of sections 178(1) and 178(3).	U/s 278AA, if there is reasonable cause then no penalty proceedings can be initiated.Otherwise composition with the prior approval of the CBDT		2% per month or part of a month of amount in default irrespective of amount in default
276AB	Failure to comply with provisions of section 269UC, UE, UL.	U/s 278AA, if there is reasonable cause then no penalty proceedings can be initiated.Otherwise composition with the prior approval of the CBDT		2% per month or part of a month of amount in default irrespective of amount in default
276B	Failure to pay the tax deducted at source.	U/s 278AA, if there is reasonable cause then no penalty proceedings can be initiated.Otherwise composition by CCIT or DGIT		2% per month or part of a month of amount in default irrespective ofamount in default
276BB	Failure to pay the tax collected at source.	Composition by CCIT or DGIT		2% per month or part of a month of amount in default irrespective of amount in default
276C	276(1) Wilful attempt toevade tax. 276(2) Wilful attempt to evade payment of tax	Under section 279(1A)it is provided that prosecution for offences u/ss. 276C and 277 cannot be initiated if the penalty imposed or imposable for concealment of income has been reduced or waived by the Commissioner u/s. 273A.In other cases with prior approval of the CBDT -do-		50% of amount  sought to be evaded irrespective of the amount sought to be evaded.2% per month or part of a month of amount in default irrespective of amount in default
276CC	Failure to furnish the return of income.	Yes with prior approval of the CBDT		2% per month of the assessed tax.
276CCC	Failure to furnish the return of income in search cases.	Yes with prior approval of the CBDT		Not prescribed-on case to case basis + 10%ofcomposition fees as establishment expenses (maxRs. 50,000.00)
276D	Failure to produce account books and documents.	Yes with prior approval of the CBDT		Not prescribed-on case to case basis + 10% of composition fees as establishment expenses (max Rs. 50,000.00)
277	False statement in verification, etc.	Under section 279(1A) it is provided that prosecution for offences u/ss. 276C and 277 cannot be initiated if the penalty imposed or imposable for concealment of income has been reduced or waived by the Commissioner u/s. 273A. with prior approval of the CBDT		100% of the tax amount sought to be evaded where the tax sought to be evaded is less than Rs.1 lakh and 200% in other cases.
277A	Falsification of books of account or documents, etc.	Yeswith prior approval of the CBDT	Not prescribed-on case to case basis + 10%composition fees as establishment expenses
278	Abatement of false returns etc.	Yeswith prior approval of the CBDT	Not prescribed-on case to case basis + 10% of composition fees as establishment expenses (max Rs. 50,000.00)

No composition fee is prescribed for other offences. However, it has been provided that the Board can consider the same on a case to case basis. The compounding  charges shall also include prosecution establishment expenses which will be charged @ 10% of the composition fee subject to a maximum of Rs.   50,000/

Once a case is filed in the Court of Law, the authority filing the case has no power to withdraw the same except as specifically provided in the Act. There are certain circumstances under which the prosecution can get abated.

Note: 1. It has also been prescribed that all the existing guidelines as well as the amendments shall be applicable only to future as well as pending cases. In other words, the offences already compounded shall not be reconsidered.

Note 2: Thus, compounding of an offence could only be made if a written request by way of an application is made by an assessee bringing out in the application following points.

i. The nature of offence for which prosecution is launched or proposed to be launched;

ii. The reasons and circumstances under which the offence was committed;

iii. The applicant’s willingness to pay the compounding fees including the part of litigation expenses incurred by the Department till the date of compounding of the offence;

iv. Whether the applicant satisfies the requisite conditions or not.

v. Lastly there should be a prayer to compound the offence by accepting the compounding fees on getting the approval about the compounding fees by the compounding authority.

7. CBDT Guidelines

SECTION 279  PROSECUTION TO BE AT INSTANCE OF COMMISSIONER

Apart from the above, sub-section (2) of section 279 gives powers to the Chief Commissioner/Director General to compound offences under Chapter XXII of the Income Tax Act, 1961. Such compounding can be done either before or after the institution of prosecution proceedings.

1306. Power of Chief Commissioner to compound offence – Points to be considered before deciding to compound offence

1. It was emphasized that a prosecution should not ordinarily be compounded if the prospects of success were good. The Board desires that in such case, the request of the assessee for having the offence compounded should not ordinarily be recommended to the Board.

2. The provisions of section 279(2) give discretion to the Commissioner to compound any offence under the Income-tax Act and this discretion is an unfettered one. Even so it has to be exercised in a judicial manner. Although it is neither possible to precisely lay down all the circumstances in which an offence may be compounded nor it is intended to fetter the Commissioner’s discretion in this matter, it is nevertheless necessary to have a uniform policy for exercising the discretion in a judicial manner.

3. Some of the points which have to be considered before deciding to compound an offence are indicated below:

- Compounding of an offence may be considered only in those cases in which the assessee comes forward with a written request for compounding offence.

- Cases in which the prospects of a successful prosecution are good should not ordinarily be compounded.

- Bearing in mind the deterrent effect of a prosecution, it should be considered whether the purpose will be more effectively served by making the assessee pay a deterrent composition fee or by obtaining a conviction.

- In case, where subsequent to the launching of prosecution fresh evidence becomes available which may show that the case for the prosecution is weak and the assessee is agreeable to have the offence compounded, it may be advisable to compound the offence and not to proceed with the prosecution.

4. Ultimately the answer to the question whether the prosecution should be compounded or not will depend on the facts of each case. The above aspects are only intended to provide broad guidelines. The previous approval of the Board should always be obtained before deciding to compound an offence. No assurance of any kind should be given to the assessee before obtaining the Board’s approval.

——————————————————–

Letter : F. No. 4/7/69-IT(INV.), dated 21-3-1969.

1307. Guidelines for compounding offence

Clause (B) of the circular enumerates certain cases which should not be compounded :—

(1) No compounding will be done if the assessee belongs to a monopoly or large industrial house or is a director of a company belonging to or controlled by such house;

(2) Cases in which the prospects of a successful prosecution are good should not ordinarily be compounded;

(3) Compounding will not be done in cases of second and subsequent offences. Clause (C) of the instructions enumerates cases which may be compounded:

(1)  Except in cases falling within categories (1) and (3) of (B) above, compounding of an offence can be done with the consent of the Board, if the amount involved in the offence/default is less than Rs. 1 lakh.

(2)  Except in cases falling under categories (1) and (3) of (B) above and category of (1) of (C), compounding may be done with the approval of the Minister if, in view of the developments taking place subsequent to the launching of the prosecution, it is found, after consultation with the Ministry of Law, that chances of conviction are not good.

Clause (D) of these instructions lays down that notwithstanding anything stated in (b), the Board may approve compounding in deserving and suitable cases involving hardship, with the approval of the Minister.

Section 6 of the these instructions reads as under:

“While the above are only intended to provide broad guidelines to be followed before sending a proposal for compounding, the previous approval of the Board should always be obtained before deciding about the compounding of an offence. No assurance of any kind should be given to the assessee before obtaining the Board’s approval.”

CBDT Instruction: Extracts from CBDT Instruction No. 1317 of 1980, [reported in M.P. Tewari v.Y.P. Chawla, ITO [1991] 187 ITR 506 (Delhi), at pp. -510-511].

JUDICIAL ANALYSIS

EXPLAINED IN - In M.P. Tewari v. Y.P. Chawla, ITO [1991] 187 ITR 506 (Delhi), the above instruction was explained with the following observations :

“The above provisions of the instructions prima facie, if not completely, partially take away the powers of the Commissioner of Income-tax to use the discretion vested in him under section 279(2) of the Act to compound the offence, if any application is made before him for this purpose. Under the impugned instruction, he is required to obtain “the previous approval of the Board before deciding to compound an offence”. Once the Legislature has vested in the Commissioner discretion to compound a particular offence, the same cannot be set at naught or curtailed substantially and/or materially by issuing the offending instructions which we hold are in direct contravention of the statutory provisions conferring the powers to compound offences on the Commissioner.” (p. 511)

“… We have already reproduced some of the clauses of the instructions which, on the face of it, run counter to the provisions of the Act. This circular, in our opinion, has substantially curtailed the powers of the Commissioner of Income-tax which are vested in him under section 279 of the Act. In fact, the decision of the Commissioner has ceased to be his decision and has become the decision of the Board and/or that of the Minister, in view of the instructions that “the previous approval of the Board should always be obtained before deciding to compound an offence”. “… No assurance of any kind should be given to the assessee before obtaining the Board’s approval”.

This was not the intention of the Legislature when section 279 of the Act was incorporated.

In the result, we allow the petition and quash that part of the instructions referred to above being clauses (B), (C) and (D) and section 6 which arbitrarily take away the powers of the commissioner to compound offences… (p. 514).

Note : In Y.P. Chawla v. CBDT [1992] 195 ITR 607, the Supreme Court reversed the above Delhi High Court decision.

1308. Liberalized guidelines for compounding of offences

The Central Board of Direct Taxes has liberalised its guidelines for compounding of offences under the Direct Tax Laws. The guidelines have liberalised the conditions for compounding of technical offences such as delay in depositing the tax deducted at source of the tax collected at source. The Chief Commissioners of Income-tax are now empowered to compound the first technical offence in any case if the compounding charges do not exceed Rs. 10 lakhs. Taxpayers whose cases were rejected earlier may also seek reconsideration of their applications under the new guidelines. However, cases in which the compounding orders have already been passed shall not be reviewed.

The revised guidelines have been issued with the objective of ensuring fairness and objectivity in compounding of offences, reducing the pendency of prosecutions before the courts and removal of unintended hardship to the taxpayers. It is expected that the liberalised guidelines will attract a large number of assessees to come forward with requests for compounding of offences for which they have been charged.

[Source : PIB Press release dated 11-10-1994].

Instruction No: 5206

Section(s) Referred: 279(2)

Statute: Income – Tax Act, 1961

Date of Issue: 30/9/1994

The existing instructions regarding compounding of offences under the laws relating to Direct Taxes have been reviewed by the Board. After careful consideration of the matter, these revised guidelines are hereby issued.

2.1 The distinction between technical and non-technical offences for the purpose of compounding of offences was removed in Board’s Instruction No. 1317 dated 11-03-1980. It has now been decided to reintroduce the concept of technical and non-technical offences for the limited purpose of compounding of the offences.

2.2 Offences punishable under the following sections showed be treated as technical offences:-

Sections (i) 275 (prior to 1.4.75 – failure to make payment or deliver returns or statements or allow inspection)

(ii)  276B (prior to 1.4.89 – failure to deduct or pay tax)

(iii)  276B (w.e.f. 1.4.89 – failure to pay tax deducted at source)

(iv)  276BB (failure to pay the tax collected at source)

(v)  276DD (failure to comply with the provisions of section 269SS)

(vi) 276E (failure to comply with the provisions of section 269I)

2.3 Offences punishable under the following sections shall be treated as non-technical or substantive offences:-

Sections i) 275A (contravention of order made u/s 132(3))

ii)  276 (w.e.f. 1.4.89 – removal, concealment, transfer or delivery of property to thwart tax recovery)

iii)  276A (failure to comply with the provisions of sections 178(1) and 178(3))

iv) 276AA (prior to 1-10-86 – failure to comply with provisions of section 269AB or section 269I)

v) 276AB (failure to comply with the provisions of section 269UC, 269UE and 269UL)

vi) 276D (wilful attempt to evade tax etc.)

vii) 276DD (wilful failure to furnish returns of Income)

viii)  276D (failure to produce accounts and documents)

ix) 277 (false statement in verification etc.)

x) 278 (abetment of false return etc.)

3.Offences under Indian Penal Code cannot be compounded. They can, however, be withdrawn. Offences under Direct Tax Laws may be compounded subject to the conditions prescribed in paragraph 4 and 5. It must be borne in mind that an assessee cannot claim, as of right, that his offence should be compounded. Factors such as conduct of the assessee, nature and magnitude of the offence and facts and circumstance of each offence will be considered while dealing with such a request.

4.Conditions for compounding technical offences:-

The following conditions should be satisfied before compounding a technical offence:-

4.1 The assessee should make a written request for compounding of the offence.

4.2 The case should be considered for compounding only when the assessee has paid the amount of undisputed tax as well as interest and penalties relating to the default. 4.3 The assessee should state that he is willing to pay the compounding fee prescribed in Para 9 below, and the prosecution establishment expenses prescribed in Para 10 below. The order compounding an offence should be passed only when the compounding charges comprising of the composition fee and establishment expenses are paid by the assessee/defaulter.

4.4 Technical offences may be compounded by CCIT or DGIT (as the case may be) if the following conditions are satisfied cumulatively:-

(i)  It is the first offence by an assessee.

(ii)  The compounding charges do not exceed Rs. 10 lakhs.

(iii) The offence is compounded only before the filing of complaint.

In the case of offences punishable u/s 276 (prior to 1.4.76), 276B (prior to 1.4.89), 276DD & 276E, complaints in respect of which have been filed before coming into force of these Revised guidelines, the CCIT/DGIT may compound the offence without seeking Board’s approval if the other conditions prescribed above are satisfied.

In all other cases, the offence shall not be compounded except with the previous approval of the Board.

4.5 The second and subsequent offences may be compounded with the approval of the Board in the following circumstances:-

(i)  The default does not involve mens rea i.e. it is not deliberate or intended to conceal any information from the department or to defraud the revenue directly or indirectly.

(ii)  Necessary steps for compliance of relevant provisions of Direct Tax Laws have been taken by the assessee prior to the detection of the default by the department. (For example in case of default in respect of tax deducted at source/tax collected at source, the tax should have been deposited by the assessee voluntarily and prior to detection of the default by the department).

4.6 In case of second and subsequent offence, the compounding fee shall be enhanced by 100% each time. Thus for second offence it will be 200% of the normal fee and so on. 4.7 For the limited purpose of determining authority granting approval for compounding, the compounding charges at the time of passing order u/s 279(2) shall be considered. However if the computation of compounding charges is dependent upon the income or tax etc. determined in the assessment order or any other order which is subject matter of appeal, revision, reference etc., the compounding charges shall be calculated on the basis of the assessment order or such other order. It may be clarified that compounding charges payable

5. Compounding of substantive/non-technical offences:-

Following conditions must be cumulatively satisfied before compounding a substantive offence.

(i)  the conditions prescribed in Para 4.1, 4.2, 4.3, are satisfied,

(ii)  It is first substantive offence.

(iii) The prior approval of the Board is obtained. If the amount involved in the offence Exceeds Rs. 1 lakh, the Board shall grant approval if MOL advises that the chances of successful prosecution are not good.

6. Notwithstanding anything contained in paragraph 4 & 5 above, the F.M. may grant approval for compounding the offence in a suitable and deserving case.

7. While seeking the Board’s approval CCIT/DGIT shall clearly report whether all the prescribed conditions for compounding have been met.

8. For the purpose of these guidelines the “first offence” will mean the following:-

a) Offences under any of the Direct Tax Laws committed prior to the date of issue of any prosecution show-cause notice or any other mode of intimation by the department to the person concerned or prior to launching of prosecution, whichever is earlier. Any offence, even though committed prior to the issue of such show cause notice or intimation or filing of complaint but discovered or disclosed after the first compounding order shall not be considered as “first offence”.

(b) Offences not detected by the department but voluntarily disclosed by a person prior to the first compounding of offence in his case under any Direct Taxes Acts. For this purpose offence is relevant if it is committed by the same taxable entity.

9. Fees for compounding:-

The composition fee for compounding of various offences in addition to any interest / penalty leviable) will be as follows:-

9.1 Section 276:- Failure to make payment or deliver return or (prior to 1.4.76) statement or allow inspection. The composition fee would be an amount of Rs. 2/- for every day during which the default continues.

9.2 Section 276B:- Failure to deduct or pay tax (prior to 1.4.89). 10% per month or part of a month of the amount in default where the said amount exceeds one lac and 5% per month or part of a month of the amount in default in other cases.

9.3 Section 276B:- Failure to pay the tax deducted at source (w.e.f. 1.4.89) 5% per month or part of a month of the amount of tax in default.

9.4 Section 276DD. Failure to pay the tax collected at source. The same guidelines as in respect of Section 276B in Para 9.3 above shall be applicable for an offence under this section also.

9.5 Section 276D (1):- Wilful attempt to evade tax etc.

(a)  If the amount sought to evaded is less than Rs. one lac the compounding fee shall be 100% of amount sought to be evaded.

(b)  If the amount sought to be evaded is more than Rs. one lac the compounding fee shall be 200% of the amount sought to be evaded.

For the removal of doubts, it is clarified that the composition fee as per the scale given above shall be charged even if no penalty was actually levied or the amount of penalty was reduced or cancelled in appeal. It is also clarified that where the same set of facts and circumstances attract prosecution u/s 276C (1), 277 and 278, the compounding fee shall be charged by treating all these offences as one offence.

9.6 Section 276C(2):- Wilful attempt to evade payment of any tax etc. 5% per month or part of a month of the amount, the payment of which is sought to be evaded, for the period of default.

9.7.1 Section 276CC:- Failure to furnish returns of income 5% per month or part of a month of the tax determined on regular assessment as reduced by the tax deducted at source and advance tax, if any, paid during the financial year immediately preceding the assessment year reckoned from the date immediately following the date on which the return of income was due to be furnished, to the date of furnishing of the return or where no return was furnished, the date of completion of the assessment.

9.7.2 Where before the date of furnishing of the return or when no return was furnished, the date of completion of assessment any tax is paid by the assessee u/s 143A or otherwise:

(i)  Compounding fee shall be calculated in the manner prescribed in Para 9.7.1 above, Upto the date on which the tax is so paid and

(ii)thereafter the fee shall be calculated at the aforesaid rate on the amount of tax determined on regular assessment as reduced by the TDS, advance tax and tax paid u/s 140A or otherwise before filing the return of income or where no return was furnished, the date of completion of assessment.

9.8 Section 276DD:- Failure to comply with the provisions of section 269SS) (prior to 02-04-89)

A sum equal to 50% of the amount of any loan or deposit accepted in contravention of the provisions of section 269SS.

9.9 Section 276E:- Failure to comply with the provisions of section 269I (prior to 01-04- 89). A sum equal to 50% of the amount of deposit repaid in contravention of the provisions of section 269I.

9.10 Section 277:- False statement in verification etc.

Section 278:- Abetment of false return etc.

For both these offences the same guidelines will be applicable as for the offences u/s 276D(1).

9.11 No composition fee has been prescribed for offences u/s 275A, 276(w.e.f. 1.4.89), 276A (w.e.f. 1.4.65), 276AA, 276AB and 276D as these provisions should be strictly enforced. However if there are any mitigating circumstances in any given case, the Board may consider the same on a case to case basis.

9.12 The prescribed compounding charges shall be chargeable while compounding offence. However, in extreme and exceptional case of genuine financial hardship the compounding charges may be suitably reduced with the approval of F.M.

10. In addition to the composition fee, the compounding charges shall include prosecution establishment expenses. A consolidated fee for prosecution establishment expenses will be charged which would cover the litigation expenses also. Accordingly, prosecution establishment expenses will be charged at the 10% of the composition fee subject to a maximum amount of Rs. 50,000/-. This limit will apply even where a number of offences are compounded under a single order.

11. The revised guidelines outlined above are in supersession of all earlier instructions / clarifications on the subject and apply to future as well as pending cases. However the offences already compounded under the old guidelines shall not be reconsidered. 12. In a case where prosecution has not been filed, no order for compounding of offence need be passed, if as per guidelines issued vide F.No. 285/160/90-IT(Inv.) dated 7.2. 1991, the smallness of the default does not call for launching of prosecution. However in such cases levy of interest and penalties prescribed under the Direct Taxes Acts must be considered on merits.

13. These guidelines shall apply mutatis mutandis to offences under the other Direct tax Laws also.

These guidelines may be brought to the notice of all concerned. [Board's F.No. 285/161/90-IT (INV>), dt. 30.9.'94]

————————————————————————

F.No.  285/26/2002IT(Inv.)
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct xesTa

New Delhi, the 29th July, 2003

To

All Chief Commissioners of Income Tax,

All Directors General of Income Tax (Inv.).

Subject: Guidelines for compounding of offences under Direct Tax Laws –Amendments – regarding.

Sir,

The existing Guidelines for compounding of offences under the Direct Tax Laws issued vide Board’s F.No. 285/161/90-IT(Inv.) dated 30th September, 1994 have been reviewed in the light of past experience and future needs. Following amendments are hereby made to these Guidelines with immediate effect:

(A) PROCEDURAL -AMENDMENTS:

(I) Under the existing Guidelines, Technical Offences (enlisted in para 2.2 of the said Guidelines) are to be compounded, by the Chief Commissioner of Income Tax or Director General of Income Tax(Inv.) (as the case may be), if following conditions are collectively satisfied:

(i)  It is the first offence by the assessee.

(ii)  The compounding charges do not exceed Rs. 10 lakh.

(iii) The offence is compounded only before the filing of complaint.

In all other cases, the technical offences as per existing Guidelines are to be compounded with the approval of the Board.

In this regard, it has now been decided that:

(a)  all types of cases relating to technical offences are to be compounded by CCIT/DGIT;

(b)  distinction between first offence and subsequent offence is removed; and (c) CCIT/DGIT shall not reject an application for compounding of a technical offence, if all conditions prescribed in the Guidelines are satisfied.

(II) Para 5(iii) of the existing Guidelines provides that for compounding of substantive/non-technical offences, in which the amount involved in the offence exceeds Rs. 1 lakh, the Board shall grant approval if Ministry of Law advises that the chances of successful prosecution are not good. This requirement of referring the matter to the Ministry of Law has now been done away with.

(B) REDUCTION OF COMPOUNDING FEE

With a view to encourage the assessees to get their offences compounded, compounding fee in respect of the following offences has been substantially reduced as under: (I) Section 276B (prior to 1.4. 1989) – Failure to deduct or pay tax –

Under the existing guidelines, compounding fee is 10% per month or part of a month, of the amount in default where the said amount exceeds Rs. one lakh and 5% per month or part of a month of the amount in default in other cases. It has now been reduced to 2% per month or part of a month of amount in default irrespective of amount in default.

(II)   Section 276DD (prior to 2.4. 1989) – Failure to comply with the provisions of Section 269SS –  Under the existing Guidelines, compounding fee is 50% of the amount of any loan or deposit accepted in contravention of the provisions of Section 269SS. It has now been reduced to 20% of the amount of any loan or deposit accepted in contravention of the provision of Section 269SS

(III)  Section 276E (prior to 1.4.1989) – Failure to comply with the provisions of Section 269T -Under the existing Guidelines, compounding fee is 50% of the amount of deposit repaid in contravention of the provisions of Section 269T. It has now been reduced to 20% of the amount of deposit repaid in contravention of the provisions of Section 269T.

(IV) Section 276CC – Failure to furnish returns of income – Under the existing Guidelines, compounding fee is as under “9.7.1 – 5% per month or part of a month of the tax determined on regular assessment as reduced by the tax deducted at source and advance tax, if any, paid during the financial year immediately preceding the assessment year reckoned from the date immediately following the date on which the return of income was due to be furnished, to the date of furnishing of t he return or where no return was furnished, the date of completion of the assessment. 9.7.2 – Where before the date of furnishing of the return or where no returns was furnished, the date of completion of assessment of any tax is paid by the assessee u/s 140A or otherwise:

(ii)  Compounding fee shall be calculated in the manner prescribed in para 9.7.1 above, up to the date on which the tax is so paid and

(iii)  Thereafter the fee shall be calculated at the aforesaid rate on the amount of tax determined on regular assessment as reduced by the TDS, advance tax and tax paid u/s 140A or otherwise before filing the return of income or where no return was furnished the date of completion of assessment.”

It has now been reduced to 2% per month or part of a month of the tax to be calculated as above.

(V) Section 276C(1) willful attempt to evade tax, etc. –

Under the existing Guidelines, the fee is:

(a)  If the amount sought to be evaded is less than Rs. one lakh, the compounding fee shall be 100% of amount sought to be evaded.

(b)  If the amount sought to be evaded is more than Rs. one lakh, the compounding fee shall be 200% of the amount sought to be evaded.

It has now been reduced to 50% of amount sought to be evaded irrespective of the amount sought to be evaded.

2. All other provisions of the existing Guidelines and clarifications issued subsequently from time to time shall continue to be applicable.

3. Above amendments shall be applicable to future as well as to cases pending at any stage. However, the offences already compounded shall not be reconsidered.

4. These amendments shall apply mutatis mutandis to offences under the other Direct Tax Laws also.

5. These amendments may be brought to all concerned and be given wide publicity. Yours faithfully,

Sd/-

( SHARAT CHANDRA )

Director (Inv. II & III) & OSD (Legal)

Copy to:

1. PS to Finance Minister/Secretary (R)/Chairman & Members (CBDT)

2. All Joint Secretaries/Directors/Dy. Secretaries/Under Secretaries in CBDT.

Sd/-

( SHARAT CHANDRA )

Director (Inv. II & III) & OSD (Legal)

Salient features of CBDT Circulars/Guidelines

CBDT Instructions: The Central Board of Direct Taxes has been issuing instructions and guidelines to its officers, to be followed before compounding any offence. However, there was a lot of debate over the Board’s powers to fetter the discretion of the tax authorities by issuing instructions or directions, particularly in the wake of Delhi High

Court’s judgment in the case of M.P. Tiwari vs. Y. P. Chawla ITO 187 ITR 506 (M.P.),

wherein it was held that instructions issued are invalid and ultra vires. This led to a retrospective insertion of explanation to section 279 consequent to which the Hon’ble Supreme Court reversed the Delhi High Court’s decision. The Supreme Court’s decision is reported in 195 ITR 607 (SC).Subsequently, in September 1994, the Central Board of Direct Taxes, after reviewing the earlier guidelines, has issued revised guidelines. These guidelines have also been amended vide CBDT’s F No.265/26/2002 IT(INV) dated 29-7-2003 [263 ITR(St.)3] The salient features of these guidelines are as under:

1. The guidelines have reintroduced the concept of distinction between technical and non-technical offences. Offences u/ss. 276B, 276BB, and 276E are regarded as technical. All other offences are regarded non-technical.

2. The technical offences can be compounded even before filing complaint.

3. The restriction on compounding of offences by large and monopoly industrial houses has been removed.

4. The powers of compounding have been delegated to the Chief Commissioners of Income-tax and the requirement of CBDT’s consent has been reduced to the minimum.

5. The revised guidelines have been made applicable to all pending applications and even the cases rejected under the old guidelines can be considered.

6. The following conditions should be satisfied for compounding an offence.

i. There should be a written request from the assessee.

ii. The amount of undisputed tax, interest and penalties relating to the default should have been paid.

iii. The assessee should express his willingness to pay both the prescribed compounding fees as well as establishment expenses.

7. A technical offence may be compounded by Chief Commissioner of Income Tax or Director General of Income Tax if the following conditions are satisfied cumulatively.

i. The offence is the first one by the assessee.

ii. The compounding charges do not exceed Rs. 10 lakhs.

iii. The complaint should not have been filed.

In all other cases, the offence can be compounded only with the previous approval of the Board. In this regard, it has now been prescribed that

a. All types of cases relating to technical offences are to be compounded by CCIT/DGIT.

b. Distinction between first offence and subsequent offence is removed and

c.  CCIT/DGIT shall not reject an application for compounding of a technical offence, if all conditions prescribed in the guidelines are satisfied.

8. A non-technical offence can be compounded with the approval of the Board subject to satisfaction of the following conditions cumulatively in addition to conditions mentioned in Para 6 above.

i. The offence is the first one by the assessee.

ii. The Board’s prior approval is obtained. However, if the amount involved exceeds Rs. 1 lakh, approval can be granted only after seeking advice from Ministry of Law. This requirement of referring the matter to Ministry of Law has not been done away with vide amendment dated 29-7-2003 referred above.

9. The guidelines also provide that in suitable and deserving case, the offence may be compounded after seeking approval from F.M.

10. The composition fees for compounding of various offences are as under: Sec 276B 2% per month of the amount of tax in default.Sec 276BB        2% per month of the amount of tax in default.

Sec 276C(1)     50% of the tax amount sought to be evaded

Sec  276C(2)     2% per month of the amount of tax the payment of which is sought to be   evaded.

Sec 276CC         2% per month of the assessed tax.

Sec 277     100% of the tax amount sought to be evaded where the tax sought to be evaded is less than Rs.1 lakh and 200% in other cases.

No composition fee is prescribed for other offences. However, it has been provided that the Board can consider the same on a case to case basis. The compounding charges shall also include prosecution establishment expenses which will be charged @ 10% of the composition fee subject to a maximum of Rs. 50,000/-.

11. It has also been prescribed that all the existing guidelines as well as the amendments shall be applicable only to future as well as pending cases. In other words, the offences already compounded shall not be reconsidered.

12. Thus, compounding of an offence could only be made if a written request by way of an application is made by an assessee bringing out in the application following points.

i. The nature of offence for which prosecution is launched or proposed to be launched;

ii. The reasons and circumstances under which the offence was committed;

iii. The applicant’s willingness to pay the compounding fees including the part of litigation expenses incurred by the Department till the date of compounding of the offence;

iv. Whether the applicant satisfies the requisite conditions or not.

v. Lastly there should be a prayer to compound the offence by accepting the compounding fees on getting the approval about the compounding fees by the compounding authority.

13. Draft Applications

13.1 In case of section 276B

Name
Address
Date

The Chief Commissioner of Income Tax,
Mumbai,

Sir,

Sub : Application for compounding of prosecution u/s. 276-B in the case of ……………….. for A.Y. …………………. Regarding.

1. The applicant is assessed to income-tax with the I.T.O., … ……/A.C.I.T.,…. ……../Dy. C.I.T., …………./Jt. C.I.T………… Range ……….., Mumbai.

2. The applicant is being prosecuted for non-payment of following taxes deducted at source from the salary of the employees within the time stipulated under section 200 read with Rule 30 of the I.T. Rules, 1962 for the Assessment Year written hereunder:

A.Y. Amount of tax Due Actual deducted date of date of at source payment payment

3. The applicant states that the following factors have contributed for the alleged failure in payment of the tax deducted at source within the stipulated time under the Acts and Rules.

1.     The appellant is doing business of ………………………… for last ………… years. In the initial stages, it was having a monopoly in this business. However, due to passage of time competition increased and in the accounting years relevant to the Assessment Years referred to above the applicant found it extremely difficult to face the stiff competition. As a result of this stiff competition, the sales has shown regular downward trend and has gone down from …………………………. in the year ……………. to Rs……………….. in the year ………………………….

2.     The applicant had also experienced labour problems from …………….. to …………….. There was a strike for a period of ………………. days by the workers of …………………… The workers after calling off the strike, after the period of …………….. days had adopted ‘go slow’ tactics with the result that the applicant suffered heavy financial losses and disruption of office work.

3.     The applicant is regular in payment of tax deducted at source and filing the returns thereof up to the A.Y. ………………… i.e., immediate previous A.Y. relevant to the A.Y. for which the proceeding u/s. 276B are initiated for the first time and a complaint is lodged in the Presidency Magistrate Court, Bombay.

4.     In the accounting year relevant to the years for which prosecution proceedings are commenced, due to strike as explained above, the office work was completely disturbed/disrupted. The applicant was, therefore, not in a position to comply with the requirement of the I.T. Law in the absence of the books of account.

5.     Due to fire in the factory premises in the month of ………………. 199… the applicant had lost almost all the record for the period up to ……………………. date and therefore had to reconstruct the record. The reconstruction of record was delayed as the factory and the office premises were totally closed for a period ………………. years.

6.     The applicant for the above Assessment Years has suffered losses and these losses are accepted by the Department.

7.     Considering the above facts as reasonable cause and as nominal penalties as detailed below were levied u/s. 201 for the alleged default in non-compliance with the provisions of section 200 as detailed below, were cancelled by the CIT(A).

A.Y. Amount of Penalty

4. The applicant is prepared to pay the Compounding Fees as prescribed. The applicant understands that as per the present norms, the Compounding Fees, payable may work out Rs. …………………….. which the applicant is prepared to pay.

5. The amount of tax involved is small and the applicant has discharged all its obligation under the Act. There are no taxes outstanding as far as the Assessment Years referred to above are concerned.

6. The applicant in the above circumstances, requests the Hon’ble Chief Commissioner to kindly consider the applicant’s case for compounding the above offence in terms of section 279(2) of the I.T. Act, 1961 and the prosecution may kindly be waived/the case filed in the Court of the Presidency Magistrate may kindly be withdrawn.

Thanking you,

Yours faithfully,

13.2 General Application

Name
Address
Date

The Chief Commissioner of Income Tax,
Mumbai

Sir,

Sub: Application for compounding of prosecution u/ss. 276/C & 277 in the case of …………….. for A.Y. ………………… Regarding.

1. The applicant is assessed to income-tax with the I.T.O., … ……/A.C.I.T.,… …../Dy. C.I.T., …/Jt. C.I.T…………. Range ………, Mumbai.

2. The applicant is being prosecuted u/ss. 276C, 277 and 278 for alleged concealment of income of Rs. ………………. for the A.Y. ……………. Briefly the facts of the case are as under.

1.     A.The applicant had filed a return of income showing total income of Rs………………. on ………………………… for the A.Y. ……………………… The business of the applicant is that of dealer in ……………. The applicant in the course of carrying on business had taken certain loans on hundies amounting to Rs………………. as per details hereunder.
Date of Name of Amount Remarks Loan the Banker of Loan
Besides this, the applicant had also effected purchases from following parties amounting to Rs………………… as under:
Name Date Amount Whether register of the or unregistered seller dealer under sales tax

o    The A.O. in the course of the assessment proceedings had called upon the applicant to produce the evidence in support of the loans taken as well as the purchases effected by the applicant as detailed above.

o    The applicant had filed the confirmation of loans from all the above parties. However, as the A.O. was not satisfied about genuineness of the above loans since these loans were either in cash from these parties, who were assessed to income tax or were from the parties who were not assessed to Income-tax. The A.O. was therefore, of the view that the loans amounting to Rs……………… as detailed above were not genuine. The A.O. further observed that if the applicant was readily agreeable for certain addition on account of non-genuineness of loans and purchases, no penalty proceeding u/s. 271(1)(c) would be initiated if the assessee files a revised return disclosing additional income.
The applicant in the circumstances and in order to avoid protracted litigation in the matter readily agreed for an addition of Rs…………….. as against the total loan of Rs……………. referred to above on the condition that no proceedings u/s. 271(1)(c) or the prosecution for alleged concealment of income was initiated. Hereto annexed is a copy of letter dated …………….. of the applicant narrating the above facts and conditions under which the return was revised for your ready reference and record.

o    As regards the alleged non genuineness purchases, it was submitted to the A.O. that the assessee is carrying on business in which at times it is difficult to obtain proper bills of purchase. The assessee filed with the A.O. details of purchase and sales to show that the purchases were genuine as the same were matched by corresponding sales. The A.O. did not doubt the sales as the quantity account matching the purchases and sales was also filed. It was in these circumstances submitted that simply because certain purchases were in cash and because the parties concerned had moved from their last known addresses, no adverse inference could be drawn against the applicant regarding the genuineness the purchases referred to above. The applicant had also filed sales tax order in support of the above fact. The applicant had, therefore, submitted that simply because the purchases were from unregistered dealers who were not available now at the addresses available with the applicant, no addition on account of alleged purchases could be made. The A.O. completed the assessment by making an addition of Rs……………….. as non genuine purchases. The A.O. did not accept the conditions referred to above, viz. that no penalty or prosecution proceedings could be initiated. The A.O. levied a penalty of Rs……………. u/s. 271(1)(c).

o    The applicant, as a matter of compromise, accepted the Assessment Order but has filed appeal against the said penalty order u/s. 271(1)(c) levying penalty of Rs…………………. The CIT(A) confirmed the penalty order. The applicant has now filed an appeal to the Income Tax Tribunal which is pending.

o    In the meantime, the Department initiated proceeding u/s. 276C for wilful attempt to evade tax and also initiated proceedings u/s. 277 for false verification in the return of income.

B. The applicant, in the above circumstances, submit that the case of the applicant is fit for compounding the prosecution u/ss. 276C and 277 for following reasons.

1.     The applicant had voluntarily and readily agreed for addition of Rs…………….. to the total income of the applicant. The Assessment Order would not show that the A.O. has given any finding that the loans of Rs…………….. were proved to be non genuine and represented the applicant’s income. The A.O. simply accepted the revised return disclosing additional income of Rs…………….. which was disclosed without specifying the exact amount of loans creditorwise considered as non genuine. Thus there is no finding in the Assessment Order that the applicant concealed income by showing specific non genuine loans.

2.     Further as against the amount of Rs………………….. as per details in para A(i) only Rs…………. a part of the same is offered for taxation in the hands of the applicant. This fact would clearly show that the loans referred to above were not considered as non genuine but were only suspected to be non genuine and thus there was no detection of any concealed income by the Department.

3.     As regards the URD purchases the sales tax order would clearly establish that the purchases were effected by the applicant. The quantity account details and the sales were accepted by the Department which would clearly show that the applicant had effectively and genuinely made the purchases. However, because of the peculiar nature of the business, the applicant was not in a position to produce the parties. Inability to produce should not be construed to mean that the purchases were not genuine. The applicant in order to avoid protracted litigation had agreed to the addition. There is no finding in the Assessment Order that the applicant did not genuinely made the purchase. Hence the charge of concealment of income cannot be substantiated.

4.     The applicant had cooperated with the Department in completing the assessment and has also paid all taxes for these years.

5.     The applicant is prepared to pay the prescribed compounding fees which the applicant understand works out to Rs………………….

 C. The applicant in the above circumstances, requests the Hon’ble Chief Commissioner to kindly consider the applicant’s case for compounding the above offence in terms of section 279(2) of the I.T. Act, 1961 and the prosecution may kindly be waived/the case filed in the Court of the Presidency Magistrate may kindly be withdrawn.