Compounding of offences under Section 279 (2) of the Income Tax Act, 1961 – Upfront Payment of Compounding Fee & Limitation for filing of the Application for Compounding of Offenses under the Income Tax Act

In the writ petition titled Vikram Singh vs. UOI (W.P.(C) 6825/2016), the Division Bench of the Hon’ble High Court of Delhi for  compounding  of  offences  under  Section  279  (2)  of  the Income Tax Act, 1961 ('Act'), the question for determination before the Hon’ble court was, whether CBDT can issue instructions requiring an applicant seeking compounding  of  an  offence,  to  pay  upfront  the  compounding  fee  even before the application for compounding can be considered on merits? On this issue the Hon’ble Court held that:
 
 
There is nothing in Section 279 of the Act or the Explanation thereunder to permit the CBDT to prescribe such an onerous and irrational procedure which runs contrary to the very object of Section 279 of the Act. 
 
The CBDT cannot arrogate to itself, on the strength of Section 279 of the Act or the Explanation thereunder, the power to insist on a 'pre-deposit' of sorts of the compounding fee even without considering the application for compounding. 
 
Theoretically there is a possibility of the the application for compounding being rejected despite the compounding fee being deposited in advance. 
 
That para 11(v) of the above Circular by the Department, then certainly it is undoubtedly ultra vires Section 279 of the Act. 
 
That the Department cannot on the strength of para 11(v) of the Circular dated 23rd December 2014 of the CBDT reject an application for compounding either on the ground of limitation or on the ground that such application was not accompanied by the compounding fee or that the compounding fee was not paid prior to the application being considered on merits.
 
The levy of compounding charges, even before its application could be considered was exorbitant and without any authority of law.
 
In the circular dated 23rd  December, 2014 issued by the Central Board of Direct Taxes (CBDT) issuing the guidelines for compounding of offences under Direct Taxes Law & Practice, 2015, the ‘compounding procedure’ under clause 11(v) has been stated as under:
 
“...The competent authority shall pass the compounding order within 30 days of payment of compounding charges. 
 
       Where compounding charge is not deposited within the time allowed, the compounding application may be rejected after giving the applicant an opportunity of being heard.  The order of rejection shall be brought to the notice of the Court immediately through prosecution counsel in the cases where prosecution had been instituted....”
 
 
The Hon’ble Court further held that the circular dated 23rd  December, 2014 does not stipulate a limitation period for filing the application for compounding. What the said circular sets out in para 8 are “Offences generally not to be compounded”.  In this, one of the  categories  which  is  mentioned  in  sub-clause  (vii)  is:  “Offences committed by a person for which complaint was filed with the competent court 12 months prior to receipt of the application for compounding”. The above clause is not one prescribing a period of limitation for filing an application for compounding. It gives a discretion to the competent authority to reject an application for compounding on certain grounds. Again, it does not mean that every application, which involves an offence committed by a person, for which the complaint was filed to the competent court 12 months prior  to  the  receipt  of  the  application  for  compoundingwill  without anything further, be rejected. In other words, resort cannot be had to para 8 of the circular to prescribe a period of limitation for filing an application for compounding.  For instance, if there is an application for compounding, in a case which has been pending trial for, let us say 5 years, it will still have to be considered by the authority irrespective of the fact that it may have been filed within ten years after the complaint was first filed.   Understandably, there   is   no   limitation   period   for   considering   the   application   for compounding.  The Hon’ble court held that the grounds on which an application may be considered, should not be confused with the limitation for filing such an application.
 
BY
 

*Vijay Pal Dalmia, Advocate
Supreme Court of India and High Court of Delhi

Email: vpdalmia@gmail.com Mobile: +919810081079

*The author, Vijay Pal Dalmia, Advocate Email: vpdalmia@vaishlaw.comMobile: +919810081079, is a practicing lawyer in Supreme Court of India and High Court of Delhi with a standing of 32 years and also specializes in Anti Money Laundering laws (AML), White collar crimes, Cryptocurrency / Virtual currency laws. 

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