Detailed Analysis of Guidelines for Compounding of Offences under IT Act 1961

CA Ankit Gulgulia (Jain) , Last updated: 02 January 2023
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A. Introduction

In supersession of all earlier Guidelines including the last Guidelines of the issued vide F.No.285/08/2014TT (lnv.V)/147 dated 14th June, 2019, the CBDT Issued revised guidelines vide F.No. 285/08/2014-IT(lnv.V)/196 dated 16th September, 2022 which were made applicable with immediate effect.

Remember that offence under Income tax are governed by Chapter XXII of the Act and each offence is prescribed with imprisonment durations specifically to be governed pursuant to prosecution proceedings.

Detailed Analysis of Guidelines for Compounding of Offences under IT Act 1961

B. Compounding Provisions under Income Tax Act

Section 279(2) of the Act provides that any offence under Chapter XXII of the Act may, either, before or after the institution of proceedings, be compounded by the Pr.CCIT/ CClT/ Pr.DGlT/ DGIT.

These Guidelines are issued in exercise of power conferred u/s 119 of the Act read with explanation below sub-section (6) of section 279 of the Act.

C. Compounding is not a matter of right of the Assessee

Compounding of offences is not a matter of right of the assessee. However, offences may be compounded by the Department on satisfaction of the eligibility conditions prescribed in these Guidelines keeping in view factors such as conduct of the person, the nature and magnitude of the offence in the context of the facts and circumstances of each case.

D. Effect of Compounding under Income Tax Act on Prosecution Proceedings under Indian Penal Code

If the Compounding under Income tax is successfully concluded for any offence then Department shall withdraw the prosecution under Section 321 of Criminal Procedure Code, 1973.

E. Categorization of Offences under Chapter XXII for sake of these Guidelines

Though there is no such explicit categorization of offences under the Income tax Act itself but for the purpose of these guidelines the offences have been categorized in two categories viz Category A which are technical mistake based offence while Category B which are wilful offence. Hands down, Category B is treated more stringently in these guidelines, we shall discuss later.

a. Category A Offences

S.No.	Section	Description/Heading of section
I	276B	Failure to pay tax deducted at source under chapter XVII-B (TDS) or tax payable under section 115 -0 or 2nd proviso to section 194B to the credit of the Central Government (w.e.f. 01.06.1997)
II	276BB	Failure to pay the tax collected at source
III	276CC	Failure to furnish return of income
iv.	276CCC	Failure to furnish return of income in search cases in block assessment scheme
V	276DD	(Prior to 1.04.1989) - Failure to comply with the provisions of section 269SS
VI	276E	Failure to comply with the provisions of section 269 T
VII	277	False statement in verification etc. with reference to offences under Category 'A'
VIII	278	Abetment of false return etc. with reference to offences under Category 'A'.

b. Category B Offences

S.No.	Section	Description/ Heading of section
		(w.e.f. 01.04.1989) - Removal, concealment, transfer or
I.	276	delivery of property to thwart tax recovery.
11.	276A	Failure to comply with the provision of sections 178( I) and
		178(3)
111.	276AA	(prior to O 1.10.1986)- Failure to comply with the provisions of
		section 269 AB or section 269 I
IV.	276AB	(prior to O 1.04.2022) Failure to comply with the provisions of
		sections 269UC, 269UE and 269UL
V.	276C(l)	Willful attempt to evade tax, etc.
VI.	276C(2)	Willful attempt to evade payment of taxes, etc.
Vil.	276D	Failure to produce accounts and documents
YIU	277	False statement in verification etc. with reference to offences
		under Category 'B'.
IX	277A	Falsification of books of account or documents, etc.
X.	278	Abetment of false return, etc. with reference to offences under
		Category 'B'.

F. Eligibility Conditions – All are Mandatory to be Complied for opting for Compounding

1. Assessee must file to Jurisdictional competent authority in the prescribed format in the form of an affidavit on a stamp paper of Rs.100/-.

2. The compounding application may be filed suo-rnoto at any time after the offence(s) is committed irrespective of whether it comes to the notice of the Department or not.

However, in a case in which prosecution complaint has already been filed in a court of law it should be filed not later than 12 month from the end of month of filing of complaint in Court.
Further, application of compounding filed after the end of 12 months from the end of the month in which prosecution complaint, if any, has been filed in the court of law, but within 24 months, will be subject to increased compounding charges at the rate of 1.25 times of the normal compounding charges a applicable to the offence.
Only in deserving cases, it can be relaxed upto 36 Months by jurisdictional authority but compounding charges shall be 1.50 times of the normal compounding charges a applicable to the offence

3. The person has paid the outstanding tax, interest (including interest u/s 220 of the Act), penalty and any other sum due, relating to the offence for which compounding has been sought before making the application.

However, if any related demand is ‘found outstanding on verification by the Department’, the same should be intimated to the applicant and if such demand including interest u/s 220 is paid within 30 days of the intimation by the Department, then the compounding application would be deemed to be valid.

4. The person undertakes to pay the Compounding charges determined in accordance with these guidelines by concerned Jurisdictional authority

5. The person undertakes to withdraw appeals filed by him, if any, related to the offence(s) sought to be compounded. In case such an appeal has mixed grounds, one or more of which may not be related to the offence(s) under consideration, an undertaking shall be given for withdrawal of such ground as are related to the offence to be compounded.

6. Any application for compounding of offence u/s 276B/276BB of the Act by an applicant for any period for a particular TAN should cover all default constituting offences u/s2768/276BB in respect of that TAN for such period.

G. 14 Offences that CANNOT BE COMPOUNDED

Where the assessee has not complied with Prohibitory orders issued under Search & Seizure proceedings { Section 275A }
Where the assessee has not allowed access to books of accounts and others under Search & Seizure proceedings { Section 275 B)
Offences under Category 'A' on more than three occasions (What is occasion is discussed later in this article). However in exceptional circumstances compounding requested in more than three occasions can be considered only on the approval of competent authority
Offences under Category 'B' other than the first offence {what is first offence is discussed later in this article}.
Any Offence under Direct Taxes Laws for which he was convicted earlier with imprisonment for two years or more, with or without fine by a court of law.
Offences committed by a person who, was convicted by a court of law for an offence under any law, other than Direct Taxes Laws, for which the prescribed punishment was imprisonment for two years or more, with or without fine and which is directly related to the offence sought to be compounded.
Any offence in respect of which, the compounding application has already been rejected, except in cases where benefit of rectification is available in these Guidelines.
The cases of a person as main accused where it is proved that he has enabled others in tax evasion such as, through entities used to launder money or generate Bogus invoices of sale/purchase without actual business, or by providing accommodation entries in any other manner as prescribed in section 277A of the Act.
Offences committed by a person who, as a result of investigation conducted by any Central or State Agency and as per information available with the jurisdictional authority, has been found involved, in any manner, in anti-national/terrorist activity.
Offences committed by a person which, as per information available with the jurisdictional authority, directly related to the case under investigation (at any stage including enquiry, filing of FIR/complaint) by Enforcement Directorate, CBI, Lokpal, Lokayukta or any other Central or State Agency.
Offences committed by a person whose application for 'plea-bargaining' under Chapter XXI-A of' Code of Criminal Procedure' in respect of any offence is pending in a Court or where a Court has recorded that a mutually satisfactory disposition of such an application is not worked out and such offence directly related to offence sought to be compounded.
Any offence which is directly related to an offence relating to

undisclosed foreign bank account/assets in any manner; or
the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015; or
Prohibition of Benami Property Transactions Act, 1988.

13. Any offence u/s 276, where the outstanding amount in recovery has not been deposited before filing the Compounding application.

14. Any other offence, which the jurisdictional authority concerned considers not fit for compounding in view of offence by habitual/repeat offender.

H. Occasion & First Offence

a. Occasion: - If in one instance, the assessee files multiple applications for one or more than one Assessment Year (AY’s), all these applications shall be treated as one "occasion".

CBDT may relax restrictions above for compounding of an offence in a deserving case, on consideration of a report from Jurisdictional authority, on the petition of an applicant.

b. First offence means

i. Offences committed prior to any of the following-

the date of issue of any letter/notice in relation to the prosecution or
Any intimation relating to filing of prosecution complaint sent by the Department to the person concerned, or
Launching of the prosecution,

whichever is earlier, or

ii. Offence(s) not detected by the department but voluntarily disclosed by a person with the filing of application for Compounding of Offence(s) in the case under the Act for one assessment year or more. For this purpose, the offence is relevant if it is committed by the same person/entity. Further, the first offence is to be determined separately for each of the Category B offences

I. Where to File the Compounding Application

The jurisdictional Pr.CClT/ CCIT/ Pr.DGIT/ DGIT, is the Competent Authority for compounding of offences under Category 'A' and Category 'B'.
Where offence is of non-payment of TDS/TCS of resident and non-resident deductees and multiple jurisdictions exists, the Jurisdictional Pr.CCIT/ CCIT/ Pr.DGIT/ DGIT in whose jurisdiction compounding application has been filed will be the Competent Authority.
In cases of Multiple TAN’s, the PAN Jurisdictional Pr.CCIT/ CCIT/ Pr.DGIT/ DGIT will be the Competent Authority.

J. Compounding Procedure

a. Applicant to file Application: As per Prescribed Format in Annexure 1 to the Guidelines

b. Jurisdictional Authority seeks Checklist from Jurisdictional AO / DC: I On receipt of the application for compounding, the report on the same shall be obtained from the Assessing Officer/Assistant or Deputy Director concerned who shall submit it promptly along-with duly filled in check-list (Annexure-2), to the Competent Authority, through proper channel

c. If Application is Rejected: In cases where, the compounding application is not found to be acceptable, then the Competent Authority shall dispose of every such application through a speaking order in the suggested format (Annexure-3 - Part-II). Such order may be passed within six months from the end of the month of receipt of the application as far as possible.

d. If Application is Accepted: In cases where, the compounding application is found to be acceptable, then the Competent Authority shall intimate the applicant that such application is found to be acceptable along with the compounding charges payable, and other liabilities pending. Such intimation may be issued within six months from the end of the month of receipt of the application as far as possible.

e. Payment of Compounding Charges: The Competent Authority shall intimate the amount of compounding charges to the applicant, requiring him to pay the same within one month from the end of the month of receipt of such intimation by the applicant.

Extension till 6 Months can be granted by competent authority
Extension beyond 6 Months up to 12 Months can be granted only by jurisdictional PR CCIT
Extension beyond 12 Months can be granted only by Member (Inv) of CBDT on proposal of competent authority
In all above extensions, Interest has to be paid @ 1% per month or part of month is period of 1 month is extended up to 3 Month, after that interest @ 2% per month or part thereof has to be paid till extension allowed.

f. Passing of Compounding Order: The Competent Authority shall pass the compounding order in the suggested format (Annexure-3 - Part-I } within one month from the end of the month of payment of compounding charges. Where compounding charge is not deposited within the time allowed, the compounding application shall be rejected after giving the applicant an opportunity of being heard only in relation to compounding charges payable

g. Intimation of Compounding Order to Court hearing the prosecution case: The order of acceptance/rejection of application of compounding shall be brought to the notice of the Court, where the prosecution complaint was filed/or the complaint is pending, immediately through prosecution counsel in all cases where prosecution proceedings have been instituted

h. Rectification of Compounding Order: Normally it cannot be done once application is rejected but if any compounding application has been rejected solely on account of late payment of compounding charges or shortfall in payment of compounding charges and if such shortfall is for some bonafide mistakes or on some other technical grounds, such compounding order can be rectified at the written request of the applicant provided the payment of compounding charges was made before rejection or time allowed by the Competent Authority whichever is applicable.

However, the applicant will be required to pay interest on the unpaid compounding barges from the due date of payment as per original intimation of compounding along with the shortfall in compounding charges as discussed above.

i. Timelines mentioned above are only for administrative purpose and do not prescribe any limitation period for disposal of application

j. Wherever the facility to perform any function relating to processing of any compounding application is available on ITBA, such function should be performed on ITBA.

K. Total Compounding Charges

for successful disposition of compounding process closure shall constitute three components à 1) Compounding Fees 2) Prosecution Establishment Expenses and 3) Litigation expenses.

Compounding Fees à We shall discuss this in next para, this is different for each different offence as prescribed in these guidelines
Prosecution Establishment Expenses à 10% of above compounding fees with minimum of Rs 25,000/-
Litigation expenses à includes Counsel's fee paid/payable by the Department in connection with offence(s) compounded by a single order.

In a case where the litigation expenses are not readily ascertainable, the competent authority may arrive at Litigation expenses, inter alia, on the basis of rates prescribed by the Government and on the basis of existing records with the Government and the counsel as per Board's letter F.NO.279/Misc/M-77/2011-ITJ dated 18/10/2016.

Compounding charges are payable in addition to the outstanding tax, interest, penalty and any other sum, if any payable or imposable as per provisions of the Act. Such tax, interest, penalty and any other sum shall be paid before filing the compounding application as required in these Guidelines

Compounding Fees

Sl. No.	Section & Offence	Sub Category of Offence	Compounding Fees Quantum
1	Section 276		75% of the outstanding recovery amount sought to be thwarted through the removal/ concealment/ transfer/ delivery of property.
2	Section 276B & Section 276BB – Failure to Pay TDS and TCS	Where no prosecution proceedings have been initiated, and the applicant has suo-moto filed compounding application, before any offence u/s.276B/2768B of the Act for any period is brought to his knowledge by the Department. * However, such offences which arc detected in the course of any search and seizure or survey operation will not fall in this category	2% per month or part of a month of the amount of tax in default disclosed in the compounding application subject to maximum of TDS amount in default
		Wherein compounding application has been filed in response to intimation of prosecution proceedings by the Department and it is First Occasion	3% per month or part of a month of the amount of tax in default disclosed in compounding application subject to maximum of TDS amount in default
		Wherein compounding application has been filed in response to intimation of prosecution proceedings by the Department and it is subsequent occasion	5% per month or part of a month of the amount of tax in default subject to maximum of TDS amount in default
3.	Section 276C(1) - Willful attempt to evade tax, etc.	In the cases involving tax sought to be evaded (where evasion of interest and penalty may be consequential)	Where such tax attempted to be evaded exceeds Rs. 25 lakhs, 150% of such tax amount In any other case, 125% of the tax attempted to be evaded
		In cases involving attempt to evade only the penalty	100% of such penalty
4	Section 276C(2) - Willful attempt to evade payment of any tax interest and penalty		3% per month or part of the month of the amount of tax, interest and penalty, the payment of which was sought to be evaded, for the period of default*.
5	Section276CC (Failure to furnish return of income) and Section 276CCC (Failure to furnish return of income as required under section l58BC) In all the cases, the compounding fee shall not exceed the tax in default on returned income or assessed income. whichever is higher. Further, In a case the income determined u/sl43(1) is more than the returned income, tax on the same will be applied for computing tax slab prescribed above.	ln a case of default in furnishing the return of income the default period will be computed from the due date u/s 139( I) to the date of actual filing of return or completion of assessment, whichever is earlier	1. Rs.4,000/- per day - Where unpaid tax (after adjusting TDS & Tax Paid) on returned income exceeds Rs 25 lakhs; 2. Rs. 2,000/- per day - In cases other than in (i) above. 3. If Unpaid Tax is less than 1 Lac then maximum fee shall be restricted to 10,000/-
		In case of non-compliance of notice u/s 142( I )(i) of the Act A) Default period shall be computed from the due date u/s 139( I) to the date specified in the notice u/s 142( l) B) for the period between date specified in notice u/s 142( I) to the date of filing of return of income or completion of assessment, whichever is earlier	For A it shall be :- Rs 4,000 per day if unpaid tax exceeds 25 L Rs.2,000/- per day in other cases For B it shall be :- Rs 5,000 per day if unpaid tax exceeds 25 Lakhs Rs.3,000/- per day in other cases
		In a case of an offence of non-compliance of notice u/s 148 of the Act the default period will be computed from the date specified in such notice till filing of return or assessment whichever is earlier	Rs 5,000 per day if unpaid tax exceeds 25 Lakhs Rs.3,000/- per day in other cases If default is in return filing also, the abovementioned charges of return filing shall be additionally levied.
		offence of non-compliance of notice u/s I 53A/l 53C Default period shall be from the date specified in such notice till filing of return or assessment whichever is earlier,	Rs 5,000 per day if unpaid tax exceeds 25 Lakhs Rs.3,000/- per day in other cases If default is in return filing also, the abovementioned charges of return filing shall be additionally levied.
6	Section 276D - (Failure to comply with the provisions of Section 269SS) (prior to 01.04.89)		A sum equal to 20% of the amount of any loan or deposit accepted in contravention of the provisions of Section 269SS
7	Section 276E - (Failure to comply with the provisions of Section 269T) (prior to 01.04.89)		A sum equal to 20% of the amount of any loan or deposit accepted in contravention of the provisions of Section 269T
8	Section 277 (False statement in verification, etc.,) and Section 277 (Falsification of books of account or document, etc.,) and Section 278 (Abetment of false return, etc Where prosecution is attracted both u/s 77 as well as section 278 or even in addition to another offence liable for compounding. then compounding fee shall be charged for offences under these sections by treating them as one offence	In case of Singular offence u/s 277 / 278	the compounding fee hall be decided by the Competent Authority having regard to the amount of tax which would have been evaded as a result of such offence u/s 277 or 278 subject to a minimum compounding fee of Rs.1,00,000/-) which may be increased based on the assessment of loss caused to the revenue, directly or indirectly, for each of such offence on completion of assessment/reassessment.
9	277A – False Entry		compounding fee shall be charged at the rate of 100% of the sum equal to the aggregate amount of such false or omitted entry involved
10	Section 278B (Offences by companies) and Section 278C (Offences by Hindu undivided families)		In this case, compounding fees of main accused shall be chargeable based on above mentioned rates. All other persons charged shall be liable for compounding fees equal to 10% of fees payable by main offence. Further, depending upon involvement this can be even reduced or enhanced by competent authority. Also, sub accused can only be compounded if main accused comes forward for compounding In case of Multiple Co-accused all must apply for compounding or one must unequivocally undertakes to pay the compounding charges on his own behalf and on behalf of all such co-accused as well

Few Important Rulings

1. Ramesh Jain Versus Union Of India Principal Chief Commissioner Of Income Tax M.P 2022 (11) Tmi 894 - Madhya Pradesh High Court

Income Tax Authorities have the power to compound the offence either before or after the institution of the proceedings but certainly not after the conviction of offence by any court of law.

2. Anil Batra v. CIT reported in [2011] 15 taxmann.com 121 (Delhi) and Sangeeta Exports (P.) Ltd. v. Union of India reported in [2008] 173 Taxman 21 (Delhi)

To contend that compounding of offences is not a matter of right. The compounding application can only be allowed, subject to the satisfaction of the competent authority of the eligibility conditions as prescribed in the CBDT Guidelines, 2019 and keeping in view the factors such as conduct of the applicant and other relevant facts and circumstances.

3. M/S G.P Engineering Works Kachhwa And 2 Others Versus Union Of India And 3 Others [2022] 446 ITR 563 (All)

No limitation for submission or consideration of compounding application has been provided under sub-section (2) of Section 279 of the Act, 1961. Therefore, the Central Board of Direct Taxes by a circular can neither provide limitation for the purposes of sub-section (2) nor can restrict the operation of sub-section (2) of Section 279 of the Act, 1961, in purported exercise of its power to issue circular under the second Explanation appended to Section 279 of the Act, 1961.

4. M/S Supernova System Private Limited Versus Chief Commissioner Of Income Tax-2 2018 (9) Tmi 1322 - Gujarat High Court

In this case, department made incorrect computation of fees not in accordance with guidelines. Applicant paid amount under protest and challenged the computation. Held that the department shall carry out fresh computation of the petitioner's liability to pay compounding charges in terms of this guidelines and refund the excess amount back.

Concluding Remarks

Over the years, no doubt CBDT has liberalized the compounding both ambit and this is a welcome step. Assessee’s must appreciate that this is department’s right to allow compounding based on cases deemed fit. We trust the above efforts would assist you in your knowledge grasp of subject matter.

The author can also be reached at ankitgulgulia@gmail.com

About the Author:

The author is a fellow Member of the Institute of Chartered Accountants of India, Certified IFRS & Business Valuation from ACCA, UK and Practising Chartered Accountant with 12 Years Plus rich Experience in Audit, Taxation Valuation & Strategic Advisory. He has been Published in several media interviews and articles with esteemed forums like Zee News, NDTV India, Hindustan Times, ET. He is also an onboard Independent Director with Listed Companies.

Attached File : 36011_48166_guidelines_for_compounding_of_offences_under_income_tax_act.doc

Published by

CA Ankit Gulgulia (Jain)
(B.COM (H), FCA, CIFRS, CBV, R-ID (IICA), R. Valuer (IBBI))
Category Income Tax Report