Question And Answer
Subject: Compounding of offense u/s 279 of Income-tax Act
Category:  Income Tax
Asked by: Nikhil Desai
Answered by:
Tags: ,
Date: September 29, 2018
Query asked by Nikhil Desai

The Querist is a private limited company. For the assessment year 2008-09, the querist filed the return of income declaring total income of Rs.17,18,090 and claimed refund of Rs.6,68,460.

During the course of scrutiny assessment, the Assessing Officer objected to the assessee’s claim of deduction for the provisions of income tax of a sum of Rs.8.70 lakhs. The representative of the assessee accepted it as an error and agreed to such claim being disallowed.

The Assessing Officer thereupon passed the order of assessment on 24.12.2010. He also instituted penalty proceedings. He passed an order of penalty under section 271(1)(c) of the Income Tax Act, 1961 (‘the Act’ for short) in which, he imposed penalty at the rate of 100% of the tax sought to be evaded. He thus, levied penalty of Rs.2,61,000/.

Subsequently, the Revenue issued a notice for initiating prosecution against the Querist under section 276C(1) of the Act. The Querist also received a notice from the concerned Magistrate.

The Querist thereupon applied to the Chief Commissioner of Income Tax and requested that the offense be compounded. It offered to pay the compounding fees as may be prescribed. In response to such application of the Querist, the department asked the Querist to pay the compounding fees of Rs.10,49,000/before 31.03.2018. It was conveyed that if the Querist does not pay such amount within the prescribed time, the application for compounding would be rejected.

It appears that the department has misread the provisions of section 276C of the Act and demanded compounding charges at 100% of the amount of income sought to be evaded instead of the amount of tax sought to be evaded.

The question is what would be the basic compounding charges that the Querist must pay in order to avail the offer for compounding the offense.

Section 276C of the Act pertains to willful attempt to evade tax, etc. Subsection (1) of which at the relevant time read as under:

276C. Wilful attempt to evade tax, etc.

(1) If a person wilfully attempts in any manner whatsoever to evade any tax, penalty or interest chargeable or imposable under this Act, he shall, without prejudice to any penalty that may be imposable on him under any other provision of this Act, be punishable,

(i) in a case where the amount sought to be evaded exceeds twentyfive hundred thousand rupees, with rigorous imprisonment for a term which shall not be less than six months but which may extend to seven years and with fine;

(ii) in any other case, with rigorous imprisonment for a term which shall not be less than three months but which may extend to two years and with fine.

Section 279 of the Act pertains to the prosecution to be at instance of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner. Subsection (1) of section 279 provides that a person shall not be proceeded against for offenses under various sections including section 276C of the Act except with the previous sanction of the Principal Commissioner or Commissioner or Commissioner (Appeals) or the appropriate authority.

Subsection (2) of section 279 provides that any offense under this chapter may, either before or after institution of the proceedings be compounded by the Principal Chief Commissioner or Chief Commissioner or Principal Director General or the Director General.

In terms of such compounding powers, the CBDT has been issuing circulars for providing guidelines for compounding offenses under the Act. We are concerned with the latest guideline issued on 23.12.2014 issued by the CBDT. This circular contains detailed provisions and procedure for compounding offenses under the Act.

Para 12 of the said circular pertains to fees for compounding. In the context of section 276C(1) of the Act, para 12.2 prescribes fees for compounding as under:

“12.2 Section 276C(1)Wilful attempt to evade tax etc. 100% of the amount sought to be evaded.”

Para 12.2 of the said circular thus prescribes compounding fees for offense under section 276C(1) at 100% of the amount sought to be evaded. This para also starts with an expression “Section 276C(1)Wilful attempt to evade tax etc.”.

The title of this para thus, is taken from the section itself and the compounding fee is to be computed at the rate of 100% of the amount sought to be evaded. Since this para does not contain any specification of “the amount sought to be evaded”, we may fall back on the statutory provisions in relation to which, this compounding fee is prescribed.

Subsection (1) of section 276C, as noted, prescribes punishment for a person who willfully attempts in any manner to evade any tax, penalty or interest chargeable under the Act. This could be without prejudice to any penalty that may be imposable on him under any provisions of the Act. Under such circumstances, as per the sections stood at the relevant time, the person concerned would be punishable;

(i) In case where the amount sought to be evaded exceeds Rs.250,000/, with rigorous imprisonment for a term which shall not be less than six months but which may extend to seven years and with fine and;

(ii) In any other case with rigorous imprisonment for a term which shall not be less than three months but which may extend to two years and with fine.

This provision thus while prescribing punishment for willful attempt to evade tax, penalty or interest chargeable, provides for a more severe punishment in case the amount sought to be evaded exceeds Rs.250,000/.

For the rest, punishment prescribed is lesser. This prescription of punishments in two categories is thus linked with the amount sought to be evaded. This amount sought to be evaded is in relation with the action of a person of a willful attempt to evade tax, penalty or interest chargeable.

In the prescription of punishment thus, when there is a reference to amount sought to be evaded, it must be seen in light of the willful attempt on the part of the concerned person to evade tax, penalty or interest. This provision thus, links the severity of punishment on the amount sought to be evaded and thus, in turn has relation to the attempt at evasion of tax, penalty or interest.

In Supernova System Private Limited vs. CCIT (SPECIAL CIVIL APPLICATION NO. 8715 of 2018 dated 17/09/2018) it was held by the Gujarat High Court) that when the CBDT circular refers to the amount sought to be evaded, it must be seen and understood in light of the provisions contained in section 276C(1) and in turn must be seen as amount sought to be evaded. 100% of tax sought to be evaded would be the basic compounding fees which in the present case would be Rs.2,71,000/and not Rs.8,70,000/as computed by the departmental authorities.



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