Compounding-of-Offences

Guidelines for Compounding of Offences

Guidelines for Compounding of Offences

Compounding of an offence means that the charges against an assessee would be dropped in return for the payment of penalty. The guidelines applicable for compounding of offences under the Income Tax Act were introduced by the Central Board of Direct Taxes (CBDT) with effect from 17.06.2019. The guidelines apply to all applications made to the CBDT requesting for compounding of an offence. The present article briefly discusses the guidelines introduced by the CBDT.

Power to Compound Offences

  • The power to compound offences is vested in the following officers in the CBDT:
    • Principal Chief Commissioner of Income Tax (Pr. CCIT),
    • Chief Commissioner of Income Tax (CCIT)
    • Principal Director General of Income Tax (Pr. DGIT)
    • Director-General of Income Tax (DGIT)
  • Compounding of the offence may take place before, during or after the initiation of proceedings under the Income Tax Act. However, the request to initiate compounding measures should originate from the assessee. The assessee may not make a request for compounding of an offence. In such circumstances, the officer of the CBDT is not permitted to initiate compounding proceedings on own motion.

Compounding not to be Matter of Right

The assessee is not allowed to claim compounding as a matter of right. The competent officer of the CBDT is allowed to compound offences exclusively upon satisfaction of the eligibility conditions. The conditions for eligibility are the following:

  • The periodicity with which the offence has been committed by the assessee- that is, whether the offence has been committed regularly or repeatedly or whether it has been committed sporadically
  • The nature and magnitude of the offence, considered in the context of the facts and circumstances of the case
  • The question of whether the offence is of nature which would encourage the public to circumvent the provisions of the Act

Compounding for IPC Prosecutions

Prosecutions which have been initiated under the Indian penal Code (IPC) cannot be compounded. A complaint leading to prosecution may be filed against the assessee under the provisions of both the IPC and the Income Tax Act. Both of the complaints may be based on the same facts and circumstances. Also, the complaint which pertains to the Income Tax Act may be approved for compounding. In such circumstances, the compounding under the Income Tax Act does not automatically confer compounding under the Indian Penal Code and vice versa. However, compounding of the offence under one legislation can function as a contributory factor. The contributory factor applies in the processing of the offence for compounding under the other legislation.

Classification of Offences

Offences under the Income Tax Act are classed into two parts, i.e. Category ‘A’ and Category ‘B’. The classification is made for the exclusive purpose of compounding of offences. The classification made is the following:

Category A

Offences belonging to this category are listed here:

  • Failure to remit payments of Income Tax on or before the due date
  • Refusal to allow inspection of books of accounts
  • Failure to deductor remit tax deducted at source (TDS) on or before the due date
  • Failure to remit the tax collected at source
  • Failure to furnish income tax returns under a self-assessment
  • Failure to furnish income tax returns in search cases or under a block assessment scheme.
  • Failure to comply with Section 269SS or Section 269T
  • Abatement of a false return

Category B

Offences belonging to this category are listed here:

  • Failure to comply with Section 178, Section 269AB or Section 269I
  • Failure to comply Sections 269UC, Section 269 UE and269 UL
  • Willful attempt to avoid the incidence of Income Tax
  • Willful attempt to evade a legitimate obligation under the Income Tax Act
  • Failure to produce books of accounts and other documents
  • Falsification of books of accounts and documents

Eligibility for Compounding

An offence is eligible for compounding on completion of the following requirements:

  • An application should be filed to the Pr. CCIT/CCIT/Pr. DGIT/DGIT who is having jurisdiction over the case for the compounding of offences. The application must be prepared in the form of an affidavit.
  • The assessee can file the application for compounding at any time after the offence is committed. The application can be filed whether or not the offence comes to the notice of the department. However, compounding applications cannot be filed after the end of twelve months. The twelve months should be calculated from the month in which the prosecution complaint has been filed in the court. Applications which are filed after 12 months but before 24 months will be accepted provided the delay is caused by reasons that are beyond the control of the applicant.
  • The assessee should have remitted the outstanding tax, interest, penalty and any other sum due. The amount should relate to the offence for which the compounding has been sought before the competent authority.
  • The assessee should accept the responsibility of paying the compounding charges as mentioned by the officer of the CBDT. The assessee should accept the responsibility to withdraw appeals filed by him concerning the offence sought to be compounded.

Offences Debarred from Compounding

Compounding is not allowed for the following offences:

  • A Category A offence, if committed more than three times
  • A Category B offence, which was committed owing to the wilful default of the assessee
  • An offence committed, for which a court convicted the assessee under the Act
  • Any offence in relation to which the compounding application has already been rejected
  • When the assessee has enabled other assessees to evade tax
  • An offence committed by a convict for any offences, other than the Act, for which the period of punishment was two years or more
  • An offence committed by a person that may potentially impact the case which is under investigation
  • An offence committed by a person whose application for plea-bargaining under Chapter XXI-A of the Criminal Procedure Code is pending on a court
  • When a court has declared that a mutually satisfactory disposition of the compounding application cannot be sanctioned
  • When the offence may potentially impact another offence sought to be compounded
  • An offence which may potentially impact an offence relating to undisclosed foreign bank account or assets
  • An offence which may potentially impact any offence under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015
  • An offence which may potentially impact another offence under the Benami Transactions (Prohibition) Act, 1988
  • Any other offence which the authorised officials consider to be not suitable for compounding, after considering the nature and magnitude of the offence

Compounding Charges

The charges for compounding include compounding fee, prosecution establishment expenses and litigation expenses. The compounding fee will be levied depending on the nature of the offence. Prosecution establishment expenses will be levied at the rate of 10% of the compounding fees, subject to a minimum of twenty-five thousand rupees. Also, litigation expenses, including Counsel fees payable by the CBDT, should be borne by the assessee.

Notification from Ministry of Finance

As per the notification from the Ministry of Finance dated 09.09.2019, the submission time for requesting to compound offences has been extended till 31.12.2019. The notification is given below for reference:

Extension-of-due-date-for-Compounding-of-offences

Other Related Guides

Form 3CM Form 3CM - Income Tax Order of approval of in-house research and development facility under section 35(2AB) of the Income-tax Act, 1961
Section 197 of Income Tax Act Section 197 of Income Tax Act The Income-tax laws permit certain taxpayers to get relief from TDS at a lower or nil rate under Section 197 of the Inc...
India USA DTAA India USA DTAA - Double Tax Avoidance Agreement The Government of India has entered into Double Tax Avoidance Agreements (DTAA) with various countrie...
Form 10CCB Form 10CCB- Income Tax Audit report under section 80-I(7)/80-IA(7)/80-IB/80-IC
Advance Ruling under Income Tax Advance Ruling under Income Tax An advance ruling refers to the facility of obtaining a judgment in advance from the Authority for Advance Rulings. T...

Post by Sreeram Viswanath

IndiaFilings is India's largest online compliance services platform dedicated to helping people start and grow their business, at an affordable cost. We were started in 2014 with the mission of making it easier for Entrepreneurs to start their business. We have since helped start and operate tens of thousands of businesses by offering a range of business services. Our aim is to help the entrepreneur on the legal and regulatory requirements, and be a partner throughout the business lifecycle, offering support at every stage to ensure the business remains compliant and continually growing.