Income Tax

Guidelines for compounding of offences under Income Tax Act, 1961

To facilitate the ease of doing business and decriminalise the offences, The Central Board of Direct Taxes has issued revised Guidelines on compounding of offence under the Income Tax Act, 1961^[1]. The current guidelines aim to simplify the process of compounding of offences and provide a new approach to its process. The present article will simplify the provisions of the guidelines and shed light on the process for compounding of offences.

What is the compounding of offences?

The phrase “compounding of Offences” can be understood as providing the accused a chance to pay a sum of money in place of the prosecution. It is a settlement mechanism where the accused gets relieved from the charges imposed on them by paying the required amount. It avoids the lengthy litigation process and frees the accused from any charges. Henceforth, it is a shortcut of removing a tag from the antecedents of the accused.

Applicability of Guidelines for Compounding of Offences

Any offences provided under Chapter- XXII of the Income tax act, 1961 can be compoundable either before or after the proceedings. The offences can be compounded by the following:

1. Principal Chief Commissioner of Income Tax
2. Principal Director General of Income Tax

Even though the guidelines provide the compounding of offences under Chapter XXII of the act, the compounding of offences shall still be based on the authority’s satisfaction. The competent authority is liable to check the conduct of the individual, the nature, facts and circumstance of the cases.

Key Meanings

1. Occasion: If an assessee files more than one application for one assessment year or more, then all the applications shall be treated as one ‘Occasion’.
2. First offence: The term ‘First Offence’ means:
3. Offences committed before:
4. The date of issue of any letter or notice for prosecution
5. Any intimation relating to filing of prosecution complaint sent by the authority.
6. Initiation of Prosecution
7. Offences disclosed by the applicant and not known to the department.

Stigma between IPC and Income Tax Act, 1961

It is a general principle that any prosecution initiated under IPC cannot be regarded under the compounding of offences. However, Section 321 of IPC states the withdrawal of such offences. According to the guidelines, if a case is filed under IPC and Income Tax act between the same parties and under similar facts. Provided that the Income Tax Act provides such an offence as compoundable, then the competent authority can file for withdrawal application for the suit under IPC.

Categorisation of Offences

The offences are classified into two categories under Chapter XXII of the act:

1. Category “A”- Offences are of Technical Nature caused under the act of Omission

Section No.	Main Head
276B	Failure to Pay tax deducted Under Chapter XVII-B or Tax Payable under Section115-O or 2nd Provision to Section-194B to the credit of the Central Government
276BB	Failure to pay the tax deducted at the source
276CC	Failure to Furnish Return of Income
276CCC	Failure to Furnish Return of Income in search Cases in Block Assessment Scheme
276DD	Failure to Comply with the Provisions of Section 269SS (Before 01-04-1989)
276E	Failure to Comply with the provisions of Section-269T(Before 01-04-1989)
277	False Statement in Verification etc.
278	Abetment of False Return etc.

• Category “B”- Offences are of Non- Technical nature caused under the Act of Omission

Section No.	Main Head
276	Removal, Concealment, Transfer or Delivery of Property to Thwart Tax Recovery
276A	Failure to Comply with the provisions of Sub Section 1 & 3 of Section-178
276AA	Failure to Comply with Section 269AB and Section-269 I (Before 01-10-1986)
276AB	Failure to Comply with the provisions of Section-269UC, 269UE & 269UL
276C(1)	Wilful attempt to evade tax, etc.
276C(2)	Wilful attempt to evade payment of tax, etc.
276D	Failure to Produce accounts and Documents
277	False Statement in Verification, etc.
277A	Falsification of Books of accounts or documents, etc.
278	Abetment of False Return

Exceptions to the compounding of offences:The two sections that are exempted from the ambit of compounding of offences are:

1. Section 275A-Contravention of an order made under Sub-Section(3) of Section 132
2. Section 275B- Failure to comply with the provisions of Clause (iib) of section- 132(1)

Procedure for Application for Compounding of offences

The procedure for compounding of offence shall be as follows:

Step-1: Payment of Outstanding Tax

Before making any application for compounding of offences, the individual has to pay:

1. Outstanding tax,
2. Interest including interest under Section 220 of the IT Act,
3. Penalty
4. Any other sum due

Step 2: Application

An application shall be filed in the prescribed form along with an affidavit on stamp paper of Rs 100. It shall be filed with the following:

1. Principal Chief Commissioner of Income Tax
2. Principal Director General of Income Tax

However, suppose the department finds out on verification that the individual has not paid the sum. In that case, the individual will be served an intimation that the said amount be paid within 30 days. Further, if the individual forgets to pay the sum, the compounding application will be rejected and vice-versa.

Step-3: Time Period

An individual can file the application independently, regardless of whether the department has any note of it.

In case any prosecution complaint is filed in court, then the compounding application shall be filed within 12 months from the end of the month of complaint filing in court. However, the current guidelines provide leverage in the period of fulfilment by extending the period of 12 months to 24 months, provided it will be subject to an increased compounding rate of 1.25 times of standard compounding charges.

Step-4: Withdrawal of Appeals

The individual shall withdraw the appeal related to the offences for which the compounding application has been made. In case the appeal consists of mixed grounds, then the ground for which the offence is sought by the individual to be compounded will be withdrawn.

Non-Compoundable offences

The offences that are compoundable under the guidelines are:

1. Offences mentioned under Category “A” can be compounded for three occasions; however, if more than that, the approval of the Principal Chief Commissioner of Income Tax is needed.
2. Offences mentioned under category “B”, not including offences mentioned under the head “First offence, Part a).”
3. Any offence that an individual commits under Direct Tax laws for which they were convicted and awarded imprisonment for two years or more.
4. Any offence that an individual commits under any law other than Direct Tax law for which the prescribed punishment is Two years or more and is directly related to the offences sought to be compounded.
5. Any offence in respect of which the application for compounding of offence have already been rejected
6. Cases of an individual where they were the main accused, and it is proved that they had facilitated others in the process of tax evasion through entities or by providing accommodation entries as mentioned under Section 277A of the IT Act.
7. The individual is involved in any Terrorist and Anti-national activity.
8. Offences committed by an individual are under investigation by ED, Lokpal, CBI, Lokayukta or any central or state agency.
9. Offences committed by an individual whose application for ‘plea bargaining’ under Chapter XXI-A of Cr. PC is pending, and such offence relates to the offence sought to be compounded.
10. Any offence that directly relates to:
11. Undisclosed foreign banks accounts/assets in any manner
12. Black money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act,2015
13. Prohibition of Benami Property Transactions Act, 1988
14. An offence under Section-276-where the outstanding amount has not been deposited before filing the application
15. Any other offence which the Pr. CCITand Pr. DGIT considers it not suitable for compounding.

Time Relaxation

The Pr. CCIT can relax the time limit of 12 months for application filing. The extended time limit of 24 months can be extended further to 36 months. In all the cases where relaxation of time is provided under this provision, the compounding charges would be 1.5 times the standard compounding charges.

Competent authority for compounding of offence

The competent authority for compounding of offence are:

1. Offences under Category “A” or “B”: ConcernedJurisdictional  Pr.CCIT or Pr. DGIT
2. Offence under Section 276B and 276BBof the act for non-payment of TDS/TCS in respect of both resident and non-resident Payees:Pr. CCIT or Pr. DGIT of the jurisdiction where compounding application has been filed
3. offence under Section 276B,276BB of the act and where the individual has more than one TAN lying in two or more jurisdictions: Pr. CCIT or Pr. DGIT of the jurisdiction where the PAN of the applicant is falling

Procedure for Compounding by Competent Authority

The procedure for compounding of offence are as follows:

1. On application submission, the Assessing officer shall prepare a report and submit it to the competent authority along with the filled check-in list.
2. If the competent authority does not accept the application. In that case, the said application will be disposed of by a speaking order, and such order shall be passed within six months from the end of the month of receipt of the application.

If the competent authority does not accept the application. In that case, the authority shall inform the applicant within six months from the end of the month of receipt, stating the total amount that should be paid.

• The applicant must pay the sum within 1 monthon receipt of such intimation. The said limit can be extended to 6 months by the authority under a written application by the applicant. The period above 6 months but up to 12 months shall be allowed provided that the applicant has taken approval from Pr. CCIT of the concerned region.
• If the authority extends the period and the applicant has paid the compounding charges, then, in that case, the applicant has to pay 1% interest for three months. After that, the rate of 2% will apply in the subsequent months.
• After receiving the compounding amount, the compounding authority shall pass a compounding order within one month of payment of charges. The applicant shall be given an opportunity to be heard if the competent authority has rejected the application for compounding offences.
• In cases where a prosecution case is filed in court, the intimation of acceptance and rejection of compounding application shall be communicated to the court.
• If any compounding application has been rejected on the pretext of non-payment or late payment of compounding charges. In that case, such order or rejection can be rectified by the competent authority on a written request by the applicant, provided that the payment of charges has been before such rectification.

The time limit prescribed under the above guideline is merely indicative, and it did not provide any limitation period for disposal of compounding application.

Compounding Charges

The charges shall include the following amounts:

1. Compounding Fee
2. Establishment of Prosecution Expenses: 10% of Compounding Fee minimum Rs 25,000
3. Litigation Expenses: Includes court fees and any other expenses incurred by the department

These charges shall be payable in addition to the outstanding tax, penalty, interest, and any other sum.

Process for Computing Compounding Fee

The fees for compounding of offences for various sections are as follows:

1. Section 276: The fee shall be 75% of the outstanding recovery amount sought to be thwarted through removal/transfer/delivery of property/concealment.
2. Section 276B and 276BB: The fee for compounding of offence under these sections shall be:
3. 2% per month of the default amount of tax in the cases where the applicant files the application on its own and where no prosecution proceedings have been initiated. However, offences found in the search and seizure process shall not be covered under this category.
4. 3% per month of the default amount of tax in cases where the application is filed in response to the intimation of prosecution proceedings by the department.
5. 5% per month of the default amount of tax in respect of any other application.

The fees under the said head shall not exceed the TDS amount that is in default.

• Section-276C(1): Cases that involve evasion of tax:
• 150% of such tax amount if evasion is more than RS 25 lakhs
• 125% of such tax amount, in any other case

In cases where there is an evasion of a penalty, then, 100% of such penalty

• Section 276C (2): 3% per month of the default amount of tax, penalty and interest, the payment of which was evaded for the default period. The period for default shall be calculated as:
• Where the amount is not paid under Section 156 of the Act, then the date immediately following the due payment till the payment of the due amount.
• Where the self-assessment amount is not paid under Section 140A of the Act, then the due date of filing of return of Income under Sub Section 1 of Section 139 to the date of actual payment.

Any period of stay granted by the Income Tax Authority, court or the appellate tribunal shall be excluded.

Section 276CC and Section 276CCC:

1. If there is a default in filing of return of income under Section 139(1).In that case, the period of default shall be computed from the due date of filing of return till the date of actual filing or completion of the assessment, whichever is earlier. The compounding fee shall be:
2. Rs 4,000 per day, where the tax on returned income reduced by tax mentioned under section 140A (1) of the act is paid before the due date of filing of a return, is more than Rs 25 lakhs
3. Rs 2,000 per day, in cases other than(a)
4. In cases where the difference between the tax payable on the returned income and the aggregate tax mentioned under Section 140A(1) already paid is paid before the due date of return filing, and the amount of tax paid is less than  1,00,000. In that case, the fee shall be the difference amount subject to a limitation of Rs 10,000.
5. The default period computed for non-compliance of notice under Section 142(1)(i), 148,Section 153A and 153C (Before01-04-2021) will be:
6. The date mentioned in the notice to the date of filing of return or completion of the assessment, whichever is earlier. The amount of default shall be:
7. Rs 5,000 per day, where the tax on returned income reduced by tax mentioned under section 140A (1) of the act is paid before the due date of filing of the return, is more than Rs 25 lakhs
8. Rs 3,000 per day, in cases other than (a)
9. The period between the due date under section 139(1) and the date mentioned in the notice under section 142(1) (i), 148, 153A and 153C, respectively, if there is a default in the filing of return. The amount of default shall be:

i.  Rs 4,000 per day, where the tax on returned income reduced by tax mentioned under section 140A (1) of the act is paid before the due date of filing of the return, is more than Rs 25 lakhs

ii.  Rs 2,000 per day, in cases other than (a)

1. Late filing of return along with non-payment of self-assessment tax:
2. Both the situations are covered under sections 276CC and 276C(2), respectively, and they shall be treated differently
3. Any action under Section 276C (2) is to be initiated only after the issue of notice under Section 156.
4. Section 276DD: 20% of the amount of loan amount or deposit accepted in contravention of Section  269SS
5. Section 276E: 20% of the amount of deposit Repaid in contravention of Section 269T.
6. Section 277, Section 277A and Section278:
7. If the facts and circumstances are eligible to attract prosecution under sections 277 and 278, respectively. Then the compounding fees shall be charged by treating both offences as one offence.
8. If the facts and circumstances are eligible to attract prosecution under other sections in addition toan offence under sections 277 and 278, respectively. Then the compounding fees shall be charged at the rate mentioned in the other section.
9. If the case does not involve any offence under any other Section except under Section 277 or 278. In that case, the compounding fees shall be charged according to the amount of tax that could have been evaded, limited to one lakh, subject to revision.
10. Where the offence is under section 277A, the compounding fees shall be 100% of the aggregate omitted amount.
11. Section 278B and Section 278C:
12. If the offence is committed by a HUF or Company, including co-accused or abettor, then the fee shall be 10% of the fee charged for the main offence, which may be subject to revision. It shall be charged from each person charge under Section 278B or 278C.This fee is in addition to the fees charged to the main accused.
13. If the main accused does not come up for compounding of offence, then the offence of the co-accused cannot be compounded separately.
14. If one or more co-accused is not agreeing to pay the compounding charges and the main accused agrees to pay on their behalf or on his own, then the compounding of the offence of the main accused cannot take place.
15. Any other offence: If no specific fee is enumerated for any section other than those mentioned above, then the competent authority will determine the charges, which shall be a minimum of Rs 1,00,000.

Conclusion

The current guidelines will provide a chance of recovery from default made by an individual. The policies have widened the scope of compounding of offence and provide a detailed structure for compounding fees. It has converted Section 276, which is punishable as compoundable and provides the liberty to the individual to get free from the prosecution charges by paying the compounding fee. Also, the time limit has been increased from 24 months to 36 months, which gives the assesse extra time, provided that the extensionis subject to approval from the competent authority.

Read our Article:Compounding of offences under FEMA