Sham V. Walve, Advocate
The Income Tax Act, 1961 (Act) empowers the Department to launch prosecution against taxpayers / assesees in certain cases. The Act contains provisions relating to prosecution under Chapter XII. However, Section 279(2) of the Act provides for compounding of such offences either before or after the institution of prosecution proceedings. This article is an attempt to discuss the contemporary framework surrounding compounding of offences under the Act, challenges faced by the taxpayers / assesees during various stages of litigation and some landmark decisions pronounced by various forums across the country.
II. Prosecution Provisions
A brief overview of a few provisions relating to prosecution would be of essence.
- Section 276 relates to removal, concealment, transfer or delivery of property to thwart tax recovery. If a taxpayer fails to discharge his tax liability, then the Department can recover the tax dues from him by attaching his movable and immovable property. Now, if the taxpayer fraudulently removes, conceals, transfers or delivers to any person, any property or any interest therein, intending thereby to prevent that property or interest therein from being attached for recovery of tax, then prosecution proceedings can be initiated under Section 276 of the Act. As per Section 276 a taxpayer shall be punished with rigorous imprisonment for a term, which may extend to two years and shall also be liable for fine.
- Section 276C provides for punishment in case of wilful attempt to evade tax, penalty or interest or under-reporting of income. However, as per Circular No. 24 of 2019 dated 9th September 2019 issued by the Central Board of Direct Taxes (CBDT), cases where the amount sought to be evaded or tax on under- reported income is ` 25 Lakhs or below, shall not be processed for prosecution except with the previous administrative approval of the Collegium of two Chief Commissioner of Income Tax / Director General of Income Tax rank officers.
- Section 278B, provides for an offence (under the Act) committed by a company, where every person who, at the time the offence was committed, was in charge of and was responsible to the company for the conduct of the business of the company as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly. For the purposes of this Section:
- “Company” means a body corporate, and includes :-
- a firm; and
- an association of persons or a body of individuals whether incorporated or not; and
- “Director” in relation to :-
- a firm, means a partner in the firm;
- any association of persons or a body of individuals, means any member controlling the affairs thereof.
- “Company” means a body corporate, and includes :-
The aforesaid Circular No. 24 of 2019 dated 9th September 2019 laid down a procedure for identification and processing of cases for prosecution under direct tax laws, to ensure that only deserving cases get prosecuted. The Circular provided for a minimum income threshold, below which, the income shall not be processed for prosecution without the prior administrative approval of a Collegium of two Chief Commissioner of Income Tax / Director General of Income Tax rank officers in relation to certain provisions viz. offences under Sections 276B, 276BB, 276(C)(1) and 276CC.
Now let us look at the provision for Compounding of Offences under Section 279(2) of the Act.
“279. Prosecution to be at instance of [Principal Chief Commissioner or] Chief Commissioner or [Principal Commissioner or] Commissioner. – [(1) A person shall not be proceeded against for an offence under section 275-A, [section 275-B], section 276, section 276A, section 276B, section 276BB, section 276C, section 276CC, section 276D, section 277, [section 277A] or section 278 except with the previous sanction of the [Principal Commissioner or] Commissioner or Commissioner (Appeals) or the appropriate authority:
Provided that the [Principal Commissioner or] Chief Commissioner or, as the case may be, [Principal Director General or] Director General may issue such instructions or directions to the aforesaid income-tax authorities as he may deem fit for institution of proceedings under this sub-section.
Explanation.- For the purposes of this section, “appropriate authority” shall have the same meaning as in clause (c) of section 269-UA.]
[(2) Any offence under this Chapter may, either before or after the institution of proceedings, be compounded by the [Principal Chief Commissioner or] Chief Commissioner or a [Principal Director General or] Director General.]
[Explanation – For the removal of doubts, it is hereby declared that the power of the Board to issue orders, instructions, or directions under this Act shall include and shall be deemed always to have included the power to issue instructions or directions (including instructions or directions to obtain the previous approval of the Board) to other income- tax authorities for the proper composition of offences under this section.]
III. Compounding Framework
The principle of institutional independence requires the state to ensure that our district judiciary is not unnecessarily burdened with a high caseload. Hence, the legislative intent behind introducing a compounding provision can be best described as ‘interest reipublicae ut sit finis litium’ meaning that it would be in the best interest of the state to keep litigation to a minimum. In a recent move, the Learned Finance Minister Nirmala Sitharaman in her budget speech (2023-24) said that for enhancing ‘ease of doing business’ in India, more than 39,000 compliances have been reduced and more than 3,400 legal provisions have been decriminalized. Moreover, the nature of offences under direct tax laws are technical and do not prejudicially affect public at large. Therefore, such offences can be effectively dealt with by way of compounding rather than pursuing long drawn prosecutions. Now, it is imperative to analyse the cotemporary framework surrounding compounding of offences, to find out whether it fulfills the objectives or not.
The CBDT issued ‘Guidelines for Compounding Offences dated 14th June 2019 (Guidelines 2019) with reference to inter alia, the prosecution provisions of the Act. Now, in Paragraph No. 7(ii) of the Guidelines 2019, it was provided that no application of compounding can be 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 in respect of the offence for which compounding is sought. However, the CBDT provided a relaxation in filing of a Compounding Application vide Circular No. 25 of 2019 dated 9th September 2019 as a one-time measure, till 31st December 2019. The CBDT further extended this time limit vide Circular No. 1 of 2020 dated 3rd January 2020 till 31st January 2020.
Thereafter, the CBDT issued revised ‘Guidelines for Compounding Offences dated 16th September 2022’ (Guidelines 2022) in supersession of all earlier guidelines on compounding of offences under the Act. The Guidelines 2022 hold the field as a new framework for all matters relating to compounding of offences under the Act, keeping in mind the Government’s policy of decriminalization of offences and ‘ease of doing business’.
A few notable changes in the new framework as opposed to the previous framework are that the offence punishable under Section 276 of the Act has been classified as compoundable and in case of an applicant who has been convicted with imprisonment for less than 2 years previously being non compoundable, has now been made compoundable. However, the prescribed time limit for filing a Compounding Application (12 months from the end of the month in which prosecution complaint, if any, has been filed in the court of law) has remained unchanged from the previous framework.
IV. Challenges faced by Taxpayers
- There have been multiple challenges faced by the taxpayers at different stages of litigation for compounding of offences. Firstly, as per Section 279, the sanction for proceeding against a person for an offence is granted by Principal Commissioner or Commissioner or Commissioner (Appeals). However, the Compounding Application is adjudicated upon by the Principal Chief Commissioner or Chief Commissioner or a Principal Director General or Director General. It is pertinent to note that there are only a few officers of such high rank available with the Department. Such officers have to also perform multifarious administrative assignments. Therefore, burdening them with such additional task would only result in an unnecessary delay in adjudication of the Compounding Applications. Moreover, the authority granting sanction should also be allowed to grant immunity from prosecution if it deems fit. In light of this, the provision perhaps may have to be revisited by the legislature.
- Secondly, the taxpayers are facing undue hardship due to delay in adjudication of their Compounding Applications. As per the procedure, once the Authority accepts the Compounding Application, it intimates to the taxpayer, the amount of compounding charges to be paid within 1 month from the end of the month of receipt of such intimation. However, in case the taxpayer is unable to pay such charges within 1 month, option for extension has been provided as follows:
Sr.No. Extension as per Guidelines of 2019 Extension as per Guidelines of 2022 1. Pr.CCIT/CCIT/Pr. DGIT/DGIT may extend this period by 3 months. Pr.CCITI/CClTI Pr.DGITI DGIT may extend this period upto 6 months. 2. Beyond three months with the previous approval in writing of the Committee (as per Para 10 of the Guidelines 2019). Beyond 6 months and upto 12 months with the previous approval in writing of the Pr. CCIT of the Region concerned. 3. Beyond 12 months with the previous approval of Member (Inv.) CBDT on a proposal made by the Authority. Beyond 12 months with the previous approval of Member (Inv.) CBDT on a proposal made by the Authority.
Now, the difficulty faced by a lot of taxpayers at this stage is that the Authority makes a proposal to the CBDT for further extension but the CBDT invariably is unable respond to the Authority in respect of such extension. It is to be noted that the acceptance of Compounding Application is not in dispute at this stage. Hence, due to such long delay in merely granting an extension, the taxpayers are burdened with the liability to pay hefty amounts of interest each passing month. This administrative deficiency in turn results into grave prejudice to the taxpayers. The prescribed period of limitation under the Guidelines (2019 & 2022) for filing of Compounding Applications appears to be a rather rigid measure.
- Certain clauses of the Compounding Guidelines appear to be against the spirit of the compounding provision in the Act,which culminates into rejection of the Compounding Applications filed by the taxpayers. For instance, Clause 8 of the Guidelines, 2019 provides for offences normally not to be compounded. Now, it can be reasonably inferred from the wording ‘normally not to be compounded’ that there is still some room for discretion to be exercised by the officer to entertain the Compounding Applications in certain cases. However, a failure to exercise such discretion on the part of the officer may cause prejudice to the taxpayers.
V. Judicial Decisions
- The question regarding period of limitation for filing a Compounding Application came up for consideration before the Hon’ble Allahabad High Court in the case of G.P Engineering Works Kachhwa v. Union of India  139 taxmann.com 130 (Allahabad) wherein the Hon’ble Court held that the CBDT by a circular can neither provide limitation for the purposes of Section 279(2) nor can restrict the operation of Section 279(2) of the Act in purported exercise of its power to issue a circular under the second Explanation appended to Section 279 of the Act (refer above). The Court further held:
“10. A circular is subordinate to the principle Act or Rules, it cannot override or restrict the application of specific provision enacted by legislature. A circular cannot travel beyond the scope of the powers conferred by the Act or the Rules. Circulars containing instructions or directions cannot curtail a statutory provision as aforesaid by prescribing a period of limitation where none has been provided by either the Act, 1961 or the Rules. The authority to issue instructions or directions by the Board stems from the second Explanation appended to section 279 of the Act, 1961. It is well settled that the Explanation merely explains the main section and is not meant to carve out a particular exception to the contents of the main section (Ku. Sonia Bhatia v. State of U.P.  2 SCC 585 at page 597).
13. However, in the present case a specific limitation has been provided by Para 7(ii) of the compounding guidelines contained in the circular dated 14-6-2019 in purported exercise of power under the second Explanation to section 279(2) of the Act, 1961. The second Explanation merely enables the Board to issue instructions or directions to other Income- tax authorities for the proper composition of offences under that section. That is to say the instructions or directions may prescribe the methodology and manner of composition of offences to clarify any obscurity or vagueness in the main provisions to make it consistent with the dominant object of bringing closure to such cases which may be pending interminably in our Court system. Such instructions or directions that are prescribed by the Explanation cannot take away a statutory right with which an assessee has been clothed, or set at naught the working of the provision of compounding of offences.”
- The Hon’ble Bombay High Court in Footcandles Film Pvt. Ltd. v. Income Tax Officer  146 taxmann.com 304 (Bombay) held that that the guidelines contained in the CBDT Guidelines dated 14th June 2019 could not curtail the power vested in Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General under the provisions of Section 279(2) of the Act from entertaining an application for compounding of offence at any time during the pendency of the proceedings, be they before the Magistrate or on conviction of the Petitioners, in an appeal before the Sessions Court. Aslong as a proceeding, as referred to in sub-section (1), is pending, an application for compounding of offence would be maintainable under sub-section (2) of Section 279 of the Act and will have to be dealt with by the authorities on its own merits. The Hon’ble Court also found that it was a classic case for consideration for compounding of offence, inasmuch as the Petitioner had deposited the TDS due, though beyond time limit set down, but before any demand notice was raised or any show cause notice was issued. The Hon’ble Court remanded the matter back to the authority for fresh consideration of the Petitioner’s Compounding Application. The Hon’ble Court arrived at this conclusion after taking into consideration the following judicial decisions:
- Firstly, distinguishing the Hon’ble Delhi High Court’s decision in Anil Batra v. Chief Commissioner of Income Tax (2011) 15 Taxman.Com 121 (Delhi) on the ground that the said decision did not deal with the ‘Guidelines of 2019’ and nor did it deal with the question of whether guidelines can set a period of limitation for filing of an application for compounding offences.
- Secondly, Sports Infratech (P.) Ltd. v. Deputy Commissioner of Income- Tax (HQRS) (2017) 78 taxmann.com 44 (Delhi), wherein the Division Bench of the Hon’ble Delhi High Court held that the condition in the guidelines, no doubt, is important but cannot be the only determining factor for deciding an application under Section 279(2) of the Act.
- Thirdly, Vikram Singh v. Union of India (2017) 80 taxmann.com 371 (Delhi), wherein the Division Bench of the Hon’ble Delhi High Court held that the grounds on which an application may be considered, should not be confused with the limitation for filing such an application.
- Fourthly, Government of India, Ministry of Finance, Department of Revenue (Central Board of Direct Taxes) v. R. Inbavalli (2017) 84 taxmann.com 105 (Madras), wherein the Division Bench of the Hon’ble Madras High Court held that, mere pendency of the appeal against the conviction, could no longer be a reason for refusing the consideration for compounding of offence.
- Lastly, K.V. Produce and Ors. v. Commissioner of Income-Tax and Anr. (1992) 196 ITR 293 (Kerala), wherein the Single Judge Bench of the Hon’ble Kerala High Court held that, though circulars issued under Section 119 of the Act, may have the force of law, they may not override the law itself. Concepts like “ultra vires” would come into play if a notification of a rule runs derogatory to the parent law.
- The Hon’ble Madras High Court in the case of K.M. Mammen v. Principal Commissioner of Income Tax  139 taxmann.com 57 (Madras) held that that there is a fair amount of discretion vested with the officer even in the cases covered by Para 8 of the Guidelines of 2019 wherein the phrase used is “offence normally not to be compounded”. Thus, even these cases can be compounded.
- It is pertinent to note that an analogous provision of compounding under Section 147 of the Negotiable Instruments Act, 1881 made the offence of ‘dishonour of cheques’ compoundable without prescribing any time limit for filing a Compounding Application. Compounding of the offence at later stages of litigation in cheque bouncing cases has thus been held to be permissible. The Hon’ble Supreme Court in K.M. Ibrahim v. K.P. Mohammed & Anr. 2009 (14) SCALE 262 held thus:
“12. It is true that the application under Section 147 of the Negotiable Instruments Act was made by the parties after the proceedings had been concluded before the Appellate Forum. However, Section 147 of the aforesaid Act does not bar the parties from compounding an offence under Section 138 even at the appellate stage of the proceedings. Accordingly, we find no reason to reject the application under Section 147 of the aforesaid Act even in a proceeding under Article 136 of the Constitution.”
The taxpayers cannot take the mandate of law lightly and are bound to follow the same. However, the challenges faced by taxpayers will inevitably result into pro-longed litigations and increase the burden on our courts. Ultimately, it defeats the whole purpose of a compounding provision contained in the Act and deprives the taxpayers of the benefits arising therefrom. It certainly runs contrary to the very object it sought to achieve. Therefore, a robust compounding mechanism will go a long way in aligning with the Government’s vision of enhancing ease of doing business in India. As Late Shri N.A. Palkhivala had once said, “Taxes are the life-blood of any government, but it cannot be over-emphasized that the blood is taken from the arteries of the taxpayers and, therefore, the transfusion has to be accomplished in accordance with the principles of justice and fair play”
Lastly, I express my sincere appreciation to Mr. Bhavik Chheda, Intern at my chambers, for effectively contributing to this Article.