Compounding Fee not become illegal or arbitrary just because it exceeds principal and interest amount

Vikram Singh Vs. Union Of India & Ors. (Delhi High Court)

Only because in a particular case, due to the delay attributable purely to the petitioner, the amount of compounding charges turned out to be much higher than the principal and the interest, it does not per se render the compounding charges illegal or arbitrary.

The petitioner ought to have exercised due diligence and deposited the tax and the interest at the inception without prejudice to his rights and contentions in the appeal. The non-payment of tax amounts, which are determined to be offences under the Act and delay by the petitioner in depositing the same is non-condonable in any manner whatsoever. Moreover, the petitioner has, by seeking compounding, consciously and voluntarily opted for:

(a) Compounding of the criminal offence;

(b)Undertaking to withdraw the appeal;

(c) Undertaking to pay the compounding charges determined;

Having filed the compounding application the petitioner cannot attempt to wriggle out of his obligations to pay the compounding charges by alleging that the same are exorbitant. The amount of compounding charges is not to be merely compared with the principal and the interest charged but has to be adjudged from the point of view of the long duration during which there was wilful non-payment of taxes. The conduct of the petitioner brooks no sympathy. The respondent authorities, it appears, were helpless. Even filing of criminal prosecution appears to have made no difference. The judgments discussed above are clear to the effect that in cases of this nature, quid pro quo or proportionality is not always applicable.

There is no element of quid pro quo required, inasmuch as, the compounding fee charged is in the nature of tax under the Act. The legislation has vested the CBDT with power to prescribe compounding fee, etc., for different offences. It is well within the powers of CBDT as vested in it under the Act. The principle of proportionality also would not apply in the present case, inasmuch as, compounding fee is in the nature of a payment made to avoid punishment for a criminal offence.

FULL TEXT OF THE HIGH COURT JUDGMENT / ORDER IS AS FOLLOWS:-

The petitioner challenges the imposition, legality and validity of compounding fee – a fee charged under the Income Tax Act, 1961 (for short,`the Act’), to compound offences committed by assessees. Challenge has been primarily raised to the legality of the quantum of compounding fee, as prescribed by guidelines issued by the Central Board of Direct Taxes (for short, ‘CBDT’) dated 23^rd December, 2014 and seeks quashing of the same as being arbitrary and unfair. The petitioner further seeks setting aside of the compounding fee of Rs. 69,75,949/- imposed upon him for compounding of offences under the Act.

Brief Background

2. A search and seizure operation was carried out at the petitioner’s residence and office in New Delhi. Pursuant to the said operation, notices dated 19^th March, 1997 were issued under Section 158BC of the Act. In response to the notices, the petitioner filed block assessment returns on 28^th May, 1997 disclosing NIL undisclosed income. The Assessing Officer (for short, ‘the AO’) passed a block assessment order dated 28^th November, 1997, under Section 158BA of the Act holding that the petitioner had earned undisclosed income of Rs. 30,15,158/- during the block assessment period.

3. The block assessment order was challenged in appeal before the Income Tax Appellate Tribunal (for short, ‘ITAT’) registered as IT(SS)375/DEL/97. No stay was granted. During the pendency of the appeal before the ITAT, prosecution proceedings were initiated against the petitioner under Sections 276C(1), 276C(2) and 277 of Act for wilful evasion of tax, wilful failure to pay tax, false verification etc., The complaint registered as case No. 23 of 2004 was filed before the ACMM, Special Acts (Central Government), Delhi. After pre- charge evidence, charges were framed against the petitioner on 21^stApril, 2010 for wilful evasion of tax and interest payable under the Act, as also for failure to pay the tax demand in spite of notice under Section 221 of the Act having been received. Another charge against the petitioner was that he had made a false verification of his block return declaring NIL undisclosed income. Order for framing of charge was passed on 25^th January, 2010. Charges were framed on 21^st April, 2010.

4. On 6^th January 2014, nearly 17 years after the assessment order was passed and 4 years after order for framing of charge was passed, the petitioner approached the Commissioner of Income Tax for compounding of offences under Sections 276C and 277 read with Section 278D of the Act for the block assessment period between 1^st April, 1986 to 1^st November, 1996. This application for settlement was rejected by the Commissioner on 31^st July, 2014, primarily on the ground that tax as due and demanded had not been paid by petitioner.

5. On 23^rdDecember, 2014, the CBDT issued revised guidelines for compounding of offences. The petitioner deposited the tax amount of Rs. 8,19,419/- on 13^th November, 2014 and thereafter on 20^th November 2015, informed the authorities that the interest amount of Rs. 19,33,295/-also stood deposited. A further sum of Rs. 90,136/- which was the balance amount of interest was, thereafter, deposited by the Petitioner on 6^th January 2016. On 7^th January, 2016 a fresh application for compounding was filed.

6. Notice dated 18^th January, 2016 was issued to the petitioner informing him that an application for compounding of offences should be made to the Principal CCIT. On 22^nd January, 2016 the petitioner submitted the application to the Principal CCIT. Since the same was not in the prescribed format as was intimated to the petitioner vide letter dated 10^th March, 2016, the petitioner thereafter made a fresh application in the prescribed format on 1st April, 2016.

7. The petitioner received letter dated 26^th April, 2016 calling upon him to deposit a sum of Rs. 69,75,949/- as compounding charges, including limitation expenses and counsel’s fee, before his application for settlement could be considered. A calculation sheet was attached to the said communication.

8. The petitioner then informed the department that he had deposited the entire tax and interest and his appeal was still pending before the ITAT.

9. Since the department insisted upon the payment of compounding charges as a pre- deposit in order to entertain the compounding application, the Petitioner approached this Court vide W.P.(C) No. 6825/2016 in July 2016. On 3^rd November, 2016 the Principal CCIT rejected the petitioner’s compounding application on the ground of limitation. The writ petition was finally allowed on 11^th April, 2017 with the Court holding that compounding charges cannot be collected prior to the compounding application being decided on merits. The question as to whether compounding charges can be levied at all, on the strength of the circular, was left open by this Court.

10. On 19^th May 2017, the petitioner was informed that the application for compounding had been considered by the competent authority and it was decided that the offences could be compounded subject to the following conditions:

“In connection, 1 have been directed to intimate you that Competent Authority to compound offences for compounding on 18-05-2017 deliberated upon the judgment pronounced by the Honorable Delhi High Court in this case and reviewed its earlier decision dated 01-112016 on the issue of compounding of offences u/s 279(2) of the Income Tax Act considering the observations made by the Honorable Court in Para 9 of the judgment in the case of Sh. Vikram Singh. On due deliberations, all the members of the Committee decided that the offences in the case of Sh. Vikram Singh, may be compounded subject to:-

a) The assessee making the payment of sum of Rs. 69,75,949/- ( Rs. Sixty nine lacs seventy five thousand nine hundred forty nine) (as per annexure) in the form of compounding charges including the compounding fee, the prosecution establishment expenses and litigation expenses including counsel’s fee within a period of 60 days from the receipt of intimation.

b) The assessee undertaking to withdraw appeals filed by him which are pending at appellate level.”

11. The imposition of compounding fees to the tune of Rs. 69,75,949/- was reiterated vide letters, on 19^th May, 2017, 30^th May, 2017 and 23^rd June, 2017 by the authorities. The petitioner then filed the present writ petition before this Court. On 24^th July, 2017, it was directed that the compounding application filed by the petitioner shall not be rejected for non-payment of compounding charges. Thereafter, on 18^th August, 2017 the proceedings before the ACMM in CC No. 294032/2016 were also stayed by this Court. We have heard arguments of both sides.

Petitioner’s submissions

12. Learned counsel appearing for the petitioner submits that the quantum of compounding charges is exorbitant and in fact constitutes a tax or a levy without the sanction of law. It is further submitted that as against the total tax demand of Rs. 8,19,419/-, that remained unpaid, and interest thereon of Rs. 20,23,431/-, the compounding charges are disproportionate and unreasonable. In his submission, the guidelines of 2014, which prescribe the manner of calculation of compounding charges is ultra vires, inasmuch as the power to issue orders, instructions or directions for proper composition of offences under Section 279 of the Act cannot be deemed to include the power to impose amounts which are astronomical and have no proportionality to the tax and interest which was to be paid.

13. The petitioner submits that the compounding charges are, in effect, in the nature of a tax and penalty which do not have any sanction under the Act. Since the notification, in effect, takes away the discretion vested in the authorities, the same is ultra vires Section 119 (1) of the Act as it seeks to prescribe a method to calculate the compounding fee. He relies upon various authorities to submit that the compounding fee charged has no statutory basis and the exorbitant nature of the same renders it discriminatory and illegal, as also unconstitutional.

14. Following are authorities relied upon by the petitioner.