“Compounding of an offence is an option available under Income tax, in case specified defaults are made and prosecution to be initiated/prosecution proceeding is launched. Usually when a defaulter receives show cause notice for prosecution, the defaulter may choose to file an application before prescribed authority and request not to initiate prosecution. In the past there were many cases where we have filed the compounding application for our clients when TDS is deducted but not paid to the government within the prescribed time limit,” says Mihir Tanna, Associate Director- direct tax, S.K Patodia & Associates LLP, a CA firm.
“CBDT issues Revised Guidelines for compounding offences under the Income- tax Act, 1961. The Guidelines simplify the compounding process, reduce complexities from multiple existing guidelines, and lower compounding charges. This is an additional step towards simplification of procedures aimed at promoting ease of compliance,” said the Income Tax Department.
What did the Income Tax Department say
The tax department in a press release dated October 17, 2024 said, “In conformity with the Finance Minister’s budget announcement on simplification and rationalization of compounding procedure, CBDT has issued Revised Guidelines for Compounding of offences under the Income-tax Act, 1961(the ‘Act’) on 17.10.2024. The revised guidelines supersede all existing guidelines on the subject and would apply to pending as well as new applications, from the date of its issue. The guidelines are expected to facilitate the stakeholders by reducing complexities arising out of existing multiple guidelines, simplifying the compounding procedure and lowering the compounding charges. The guidelines have been simplified inter-alia by eliminating the categorization of offences, removing the limit on number of occasions for filing applications, allowing fresh application upon curing of defects which was not permissible under earlier guidelines, allowing compounding of offences under section 275A and 276B of the Act, removing the existing time limit for filing application viz 36 months from the date of filing of complaint, etc. To facilitate compounding of offences by companies and HUFs, the requirement of main accused filing the application has been dispensed with. The offences of the main accused as well as any or all co- accused can be compounded on payment of relevant compounding charges by the main accused and/or any of the co-accused, under the revised guidelines. The compounding charges have also been rationalized by abolishing interest chargeable on delayed payment of compounding charges, reducing rates for various offences such as for TDS defaults, multiple rates of 2%, 3% and 5% have been reduced to single rate of 1.5% per month and basis for calculation of compounding charges for non-filing of return has been simplified. Other simplification measures include removal of charge of separate compounding fee from co- accused. The revised guidelines are an additional step towards simplification of procedures aimed at promoting ease of compliance.”
What are the new guidelines for revised compoundable offences?
In a circular dated October 17, 2024 the Ministry of Finance via Income Tax Department has said the following:
Scope of the guidelines to prosecutions under Income Tax Act, 1961
● These Guidelines shall come into effect from the date of issuance. They shall apply mutatis mutandis to all applications which are either filed after the date of issuance of these guidelines or were already filed earlier but had not been disposed. For applications, pending on the date of issuance of these Guidelines, if compounding charges have already been determined and intimated but not fully paid, the compounding charges shall be re-determined, provided they are lower as per these Guidelines. However, no refund or adjustment against other dues shall be made if the higher compounding charges, determined as per the previous Guidelines, have already been paid.
● Applications may also be filed again, in case applications under earlier guidelines were rejected only on account of curable defects such as non-payment of outstanding tax, interest, penalty, or any other sum related to the offence, filing of application in incorrect proforma, mention of incorrect assessment year/financial year or section under which offence has been committed, non-payment or short payment of compounding charges, non-submission of undertaking regarding withdrawal of appeals, etc. Credit for the payment already made shall be given against the compounding charges to be paid under these Guidelines. Further, it is clarified that those applications rejected in the past on merits by the Competent Authority shall not be reconsidered, under this provision.
Compounding Application Fee
For Compounding Application or the Consolidated Compounding Application, filed on or after the date of issuance of these guidelines, irrespective of the year of offence, the applicant shall deposit non-refundable fee as following:
1. Single Compounding application- Rs 25,000 (per application).
2. Consolidated Compounding application- Rs 50,000 (per such application).
“The said fee is a non-refundable fee, but adjustable against applicable total compounding charges decided by the Competent Authority, if any. The Compounding Application Fee, at above rates, shall also be payable in respect of applications which were filed before the date of issuance of these guidelines but have been rejected and that are proposed to be revived in terms of these guidelines. The Compounding Application Fee shall not be payable in respect of applications pending as on date of issuance of the guidelines and filed in terms of earlier guidelines,” said the Income Tax Department in the circular.
Compounding Application
● An application for compounding is made to the Pr. CCIT/CCIT/PR.DGIT/DGIT, having jurisdiction over the case, for compounding of the offence(s) in the prescribed format (Annexure-1), in the form of an affidavit on a stamp paper of Rs 100.
● The compounding application may be filed for offence(s) pertaining to one financial year (in case of taxpayers) or quarter (in case of tax deductors) or for multiple years/quarters. The Compounding Application, filed for multiple years/quarters, shall be called ‘Consolidated Compounding Application’. Similarly, if there are more than one rejected application under the previous Guidelines, one Consolidated Compounding Application may be filed for all such previous applications.
● The compounding application or ‘Consolidated Compounding Application’ may be filed suo-moto at any time after the offence(s) is committed, irrespective of whether it comes to the notice of the Department or not. The Compounding Application or the Consolidated Compounding Application may also be filed after launch of prosecution proceedings.
“Section 276B of the Act provides for prosecution in case of failure to pay TDS within time limit. Defaulter shall be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to seven years and with fine. In recent budget section was amended to provide for exemption from prosecution to a person, if the payment of TDS in respect of a quarter has been made on or before due date of TDS returns,” says Tanna.
Payment of all taxes, interest & other sums relating to offence for which compounding sought
● All outstanding tax, interest (including interest u/s 220), penalty and any other sum due, relating to the offence(s) for all relevant years(s) and/or quarter(s) for which compounding has been sought shall be paid before making the Compounding Application or the Consolidated Compounding Application, as the case may be.
● However, if on verification by the Department, any related demand is found outstanding or is considered payable, the same on being intimated to the applicant, shall be paid (including interest u/s 220) within 30 days of the intimation by the Department or such period (not exceeding three months) allowed by the Competent Authority. The compounding application or the consolidated compounding application, as the case may be, shall be considered valid only consequent to the payment of all the demand pertaining to the offence)s) for respective years/quarters.
● Undertaking by the applicant: The applicant shall undertake to pay the Compounding charges, determined in accordance with these guidelines by the Pr. CCIT/CCIT/Pr. DGIT/DGIT concerned, within the stipulated time frame.
● Withdrawal of appeals: The person/applicant shall undertake to withdraw appeals filed by him, if any, related to the offence(s) sought to be compounded. In case such an appeal has mixed consideration, an undertaking shall be given for withdrawal of such grounds as are related to the offence to be compounded.
● Consolidation of offences: Any application for compounding of offence u/s 276B/276BB by an applicant for any period for a particular TAN should cover all defaults constituting offence u.s 276B/276BB in respect of that TAN for such period. For the purpose of considering the quantum of TDS defaults, the total default on account of non-payment of TDS/TCS for a quarter shall be considered by combining the defaults in all the statements filed by the TDS deductor, in respect of the relevant quarter.
Offences compoundable only with the approval of higher authority
The Competent Authority, in the following cases, may compound only with the approval of Chairman, CBDT:
● In case of an offence for which the applicant has been convicted with imprisonment for two years or more, with or without fine, by a court of law;
● In case of an offence which is related to another offence under any other law for which he has been convicted with imprisonment for two years or more, with or without fine by a court of law;
● If the applicant, as per information available on the basis of an investigation conducted by any Central or State Agency, has been found to be involved, in any manner, in anti-national or terrorist activity. In such cases, the Competent Authority shall consult with relevant Agency and seek inputs regarding the said activity and its implications, for the purpose of deciding it as a deserving case and incorporate them while seeking approval;
● In case of an applicant, being a person other than the main accused, where it is proved that the applicant facilitated tax evasion through mechanisms such as use of entities for laundering of money, generation of bogus invoices of sale/purchase without actual business, by providing accommodation entries in any other manner, as prescribed in section 277A;
● If the offence is directly related to an offence under the following Acts:
1. The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015; or
2. Prohibition of Benami Property Transactions Act, 1998;
● In case of an offence under section 275A and/or 275B.
For more details about the circular go to income tax website here: https://pib.gov.in/PressReleseDetailm.aspx?PRID=2065945®=3&lang=1 and https://incometaxindia.gov.in/Lists/Press%20Releases/Attachments/1208/Press-Release-CBDT-issues-Revised-Guidelines-for-compounding-offences-under-the-Income-tax-Act-1961-dated-17-10-2024.pdf.
