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Revised guidelines for compounding and decriminalizing of income tax offences – A step in right direction

Some of the major changes made include making offence punishable under Section 276 of the Income Tax Act as compoundable but have been moved from category A to category B.

Revised guidelines for compounding and decriminalizing of income tax offences – A step in right direction
The guideline also comes with a Caveat that Compounding of offences is not a matter of right; offences may be compounded by the Competent Authority on satisfaction of the eligibility conditions prescribed in these guidelines.

Taxpayers are now witnessing a new era where economic offenses are no more taken with an attitude of “Letting things be”. Even when an assesse failed to file its Return in time and to pay the tax due before the due date of filing the return of income, prosecution u/s 276 CC and 276C (1) of the Income Tax Act was launched and the High Court also refused to grant relief. The Court ruled that Section 278E gives a presumption to lay prosecution in case of non-filing of Return within the time limit and suppression of income in the Return filed, is with malafide intention to evade Tax.

As the field officers take the matters to prosecution more frequently, the CBDT has come up with the balm in the right time, by issuing revised guidelines vide for Compounding of Offences under the Income-Tax Act vide F. No. 285/08/2014-IT (Inv.V)/196 dated 16th September 2022. Compounding of offence is a process whereby the person/entity committing default will file an application to the compounding authority accepting that it has committed a crime, so that same should be condoned.

The offenses have been classified into Category A & B. The category A offences are the ones where the offences are of technical nature caused by an act of omission. Whereas the category B offences are non-technical offences attributed to an act of commission.

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Some of the major changes made include making offence punishable under Section 276 of the Act as compoundable but have been moved from category A to category B. Section 276 talks about removal, concealment, transfer or delivery of property to thwart tax recovery. As always, there is also a negative list which would not be compounded. Offences punishable under sections 275A & 275B shall not be compounded in any circumstances. Compounding of Category A offences on more than three occasions and Category B offence other than first offence, will not be permissible except on exceptional circumstances. Further any offence which has bearing on any offence under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, Benami Transactions (Prohibition) Act,1988; or investigations by the ED/CBI/Lokpal/Lokayukta/ any other Central or Stage Agency shall not be allowed to be compounded.

The guideline also comes with a Caveat that Compounding of offences is not a matter of right; offences may be compounded by the Competent Authority 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. Further the person applying for compounding should have 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.

Also, the applicant should undertake to withdraw appeals filed by him, if any, related to the offence(s) sought to be compounded. Furthermore, 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 defaults constituting offence u/s 276B/276BB in respect of that TAN for such period.

Further, the scope of eligibility for compounding of cases has been relaxed whereby the case of an applicant who has been convicted with imprisonment for less than 2 years being previously non-compoundable, has now been made compoundable. The discretion available with the competent authority has also been suitably restricted. The time limit for acceptance of compounding applications has been relaxed from the earlier limit of 24 months to 36 months now, from the date of filing of complaint.

The compounding charges shall be 1.25 times the normal compounding charges in case the application of compounding is filed after the end of 12 months, but within 24 months, from the end of the month in which prosecution complaint, if any, has been filed in the court of law. Additional compounding charges in the nature of penal interest at the rate of 2% per month up to 3 months and 3% per month beyond 3 months have been reduced to 1% and 2%, respectively.

The application can be made in Annexure 1; Suggested Checklist for Compounding has been made available for the field officers in Annexure 2; Order u/s 279(2) has been made available in Annexure 3. Specific upper limits have been introduced for the compounding fee covering defaults across several provisions of the Act. While there could be many further relaxations which taxpayers expected, yet it is important that an effort has been made by these guidelines to initiate the process of decriminalization of tax laws.

(By Vivek Jalan, Partner, Tax Connect Advisory Services, a multi-disciplinary tax consultancy firm)

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