Rohit Sharma & Sarthak Gupta

In recent past, there has been a spurt in issuance of prosecution notices to initiate criminal prosecution proceedings by the Income Tax Department against individuals (working in official capacity at Companies) and Corporates on account of various offences including black money, wilful attempt to evade tax or payment of any tax, wilful failure in filing returns of income, failure (or delay) to deposit the TDS/TCS. Aggressive stand taken by the Income Tax Department can be attributed, amongst others, to deficit in collection of due taxes and instilling fear in the mind of tax evaders.

To substantiate statistically above scenario, attention is required to the press release by PIB, which provide that during FY 2017-18, the Department filed prosecution complaints for various offences in 2225 cases (compared to 784 in FY 2016-17)marking an increase of 184%. The number of complaints compounded by the Department during the FY2017-18 stands at 1052 (as against 575 in FY 2016-17) registering a rise of 83%.

However, this aggressive stand has not gone well with the business community at large and hence, representation on this account has already been made with the government.  Income Tax Department’s aggressive stand leaves assesses with two approaches only – to face criminal prosecution or take the compounding route. Compounding is a process wherein an assessee can avoid prosecution for offences committed under the Income Tax Act, 1961 (‘IT Act’) upon payment of compounding charges and satisfying other prescribed conditions.  It is pertinent to mention here that compounding is not a right of the assessee.

Recently, Central Board of Direct Taxes (CBDT) issued letter dated 14th June, 2019 setting out new guidelines for Compounding of Offences (‘New Guidelines’) in supersession of its earlier Guidelines on the subject matter dated 23-Dec-14. Section 279(2) of IT Act provides for an opportunity for compounding of any offences committed under chapter XXII of the IT Act (i.e. Offences and Prosecutions) by Principal Chief Commissioner (Pr. CCIT) or Chief Commissioner (CCIT) or Principal Director General (Pr. DGIT) or Director General (DGIT).

Summary of the key aspects of the New Guidelines is as follows:

New Guidelines came into effect from 17-Jun-19 and shall be applicable to all applications for compounding henceforth. Application received before 17-Jun-19 shall be governed by erstwhile guidelines.

Categorisation of Offences: There are two categories of offences (for the limited purpose of compounding) as follows:

  • Offences under Category A: Broadly, it covers offences relating to failure to deduct or pay taxes, failure to submit returns/statement, return of income, 269SS, 269T, false statements in relation to Category A offences.
  • Offences under Category B: Broadly, it coversWilful attempt to evade tax, payment of tax, failure to produce books, falsification of books of account, abetment of false return in relation to Category B offences.

Eligibility conditions: An applicant would need to comply with following conditions for an eligible compounding application:

  • To be made to the prescribed authority in prescribed format (in Affidavit form on stamp paper of INR 100);
  • Can be filed suo-moto at any time after the offence is committed irrespective whether it is detected by the Department or not;
  • Outstanding tax, interest and penalty related to the offence is deposited before the application is submitted;
  • Undertakes to pay the requisite compounding charges determined in accordance with the guidelines;
  • Undertakes to withdraw appeal filed, in relation to the offence, sought to be compounded;

Compounding charges: Compounding charges shall consist of compounding fee, prosecution establishment expenses (@ 10% of compounding fees, subject to minimum of INR 25,000) and litigation expenses (including Counsel’s fees). Compounding fee (as a 2%-5%) varies for offences committed under each section. Compounding charges in excess of Rs. 10 Lakhs would require a prior approval of a Committee consisting of 3 members of prescribed ranks (previously, monetary limit was prescribed for Category B offences only).

Cases not to be compounded:

Amongst others, Category A offences on more than 3 occasions, Category B offences [other than first offence committed prior to issuance of notice/intimation/proceedings related to prosecution (whichever is earlier)] or voluntary disclosure (for cases not detected by Department)], offences for which already convicted (unless further appeal preferred) by a court of law under direct tax laws, application previously rejected (unless rectified), offences having a bearing on case under investigation by ED, CBI, Central or State Agency.

Finance Minister may relax restrictions in relation to offences in a deserving case, on consideration of a report from the Board on the petition of an applicant.

Interplay with Indian Penal Code (IPC): If prosecution compliant is filed under both Acts (i.e. IT Act and IPC) on same facts, and if the compliant under IT Act is compounded, then the process of withdrawal of the compliant under IPC may be initiated by the Competent Authority.

Key changes bought in via New Guidelines are as follows:

  1. Tax Department, taking strict stand on black money, has included additional offences in the list of offences, which are generally not to be compounded:
    1. Offences related to undisclosed foreign bank account/assets, Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 and Benami Transactions (Prohibition) Act, 1988;
    1. Offences u/s 275A [Contravention of order u/s 132(3)], 275B [Failure to comply with Sec 132(1)(iib)] and 276 [Removal, concealment, transfer or delivery of property to thwart tax recovery] of the IT Act. Earlier, these offences were covered under Category B.
  • Increase in minimum compounding fee from INR 25,000 to INR 1 Lac for offences where no specific fee is mentioned. Further, compounding fee has also been increased for offences (where specific mention is made in the guidelines) as well.
  • Various relaxations have been built-in to make compounding process pro-assessee like:
  • Relaxation in application eligibility condition: Department will intimate the applicant on any related outstanding demand related to the offence and the same can be deposited within 30 days of intimation. Further, relaxation can be provided in a deserving case where the compounding application is filed even after 12 months but before completion of 24 months from the end of the month in which prosecution complaint was filed with the court of law provided such delay is attributed to reasons beyond applicant’s control.
  • Reduced time limit for payment of compounding charges: New Guidelines provide that the applicant shall pay the compounding charges within 1 month from the end of the month (earlier 60 days) of receipt of intimation.
  • Where relaxation of time is provided, compounding charges shall be 1.25 times of the normal compounding charges. Further, where any extension of time is allowed, interest @ 2% per month (upto 3 months) / 3% (beyond 3 months) shall be levied.

Validity of the CBDT’s compounding Circular has been challenged in past. However, in the case of Vikram Singh Vs Union of India, Delhi High Court ruled, in relation to  erstwhile CBDT circular dated 23rd December, 2014, that CBDT’s power to issue guidelines/circulars cannot be questioned and compounding, not being a right, it is well within the power of CBDT to prescribe fees to compound different offences. The purpose of issuing guidelines and circulars is to maintain uniformity and degree of objectivity amongst income tax officers.

Further, it was held that the “offences generally not to be compounded” listed in the guidelines are merely grounds for competent authority to decide whether application should be accepted and it do not prescribe a limitation period. Hence where application involving an offence for which the complaint was filed to the competent court 12 months prior to the receipt of the application for compounding, such application cannot be rejected merely on this ground.

Conclusion:

As it is generally said, ‘devils lie in the details’ and so the success of the compounding process would depend upon its rightful execution in a time bound manner and the confidence it can generated amongst tax-payers to come clean without getting exposed/run risks of other governmental agencies.