Summary: Compounding of an offence under the Income-tax Act, 1961, allows a defaulter to avoid major legal consequences by paying a specified sum of money to escape prosecution. This process can be initiated either before or after legal proceedings begin, and the authority responsible for compounding has the discretion to grant this relief. Offences eligible for compounding are classified into two categories: Category A, which includes technical omissions like failure to file returns or deposit taxes, and Category B, which involves more serious violations like wilful tax evasion or falsification of records. Applications for compounding must be submitted in a specific format and are subject to various charges, including compounding fees, prosecution establishment expenses, and litigation costs. The fees vary depending on the nature of the offence, such as a percentage of the tax evaded or a fixed amount per day of non-compliance. Additional charges may apply for delayed applications or extended payment periods, and interest is levied on late payments of compounding fees. The Finance Act, 2024, has further detailed these provisions, ensuring clarity in the process of compounding offences.
Compounding of an offence is a mechanism whereby the defaulter is reprieved of major legal consequences by affording him with an opportunity to pay a sum of money to escape prosecution. The competent authority has the power to compound any offense either prior to or following the commencement of legal proceedings.
Compounding of offence under the Income-tax Act, 1961
Compounding of an offence is a mechanism whereby the defaulter is reprieved of major legal consequences by affording him with an opportunity to pay a sum of money to escape prosecution. The competent authority has the power to compound any offense either prior to or following the commencement of legal proceedings.
Classification of compounding of offences
The offences that can be compounded are classified into the following two categories:
(a) Category A Offences
(b) Category B Offences
Category A offences are the ones where the offences are of technical nature caused due to an act of omission. Whereas Category B offences are non-technical offences attributed to an act of commission.
Category A offences
| Section | Description |
| 276B | or tax payable under Section 115-O (Dividend Distribution Tax) or the tax under proviso to Section 194B, to the credit of the Central Government |
| 276BB | Failure to pay the tax collected at source |
| 276CC | Failure to furnish returns of Income |
| 276CCC | Failure to furnish return of income in search cases in block assessment scheme |
| 277 | False statement in verification etc. with reference to Category ‘A’ offences |
| 278 | Abetment of false return etc. with reference to Category ‘A’ offences |
Category B Offences
| Section | Description |
| 276 | Fraudulent removal, concealment, transfer or delivery of property to prevent tax recovery |
| 276A | Failure to comply with the provision of sub-sections (1) and (3) of Sections 178. |
| 276C(1) | Wilful attempt to evade tax etc. |
| 276C(2) | Wilful attempt to evade payment of taxes etc. |
| 276D | Failure to produce accounts and documents |
| 277 | False statement in verification etc. with reference to Category ‘B’ offences |
| 277A | Falsification of books of account or documents etc. |
| 278 | Abetment of false return etc. with reference to Category ‘B’ offences |
Besides, there are some offences, which cannot be compounded. (For this refer Tutorial on ‘Compounding of Offences’)
Filing of application
The application for compounding must be filed in the prescribed format in Annexure-I to the competent authority. The application should be filed in the form of an affidavit on a stamp paper of Rs. 100.
Compounding charges
The person must undertake to pay all compounding charges, including the compounding fee, prosecution establishment expenses, and litigation expenses including counsel’s fee, if any, as determined and communicated by the concerned competent authority.
- Compounding Fees
| Nature of default | Compounding fees | |
| Fraudulent removal, concealment, transfer or delivery of property under Section 276 | 75% of the outstanding recovery amount sought to be thwarted | |
| Failure to pay tax deducted or collected at source | On the first occasion | 2%-3% per month (or part of the month) of the tax in default |
| On subsequent occasion | 5% per month (or part of the month) of the amount of tax in default | |
| Note: The compounding fee shall not exceed the TDS or TCS amount in default and the period of default shall be calculated from the date of deduction to the date of deposit of TDS or TCS. | ||
| Wilful attempt to evade tax under Section 276C(1) | Cases involving tax sought to be evaded | 125%-150% of tax sought to be evaded |
| Cases involving penalty sought to be evaded | 100% of penalty sought to be evaded | |
| Wilful attempt to evade tax, interest and penalty under Section 276C(2) | 3% per month (or part of the month) of the amount of tax, interest and penalty sought to be evaded Note: The compounding fee shall not exceed the amount of tax, interest and penalty sought to be evaded. |
|
| Failure to furnish return of income or reply to notice | Failure to furnish return of income by due date | Rs. 2,000 – Rs. 4,000 per day |
| Failure to comply with notice for enquiry | Rs. 2,000 – Rs. 5,000 per day | |
| Failure to comply with notice for Income escaping assessment | Rs. 2,000 – Rs. 5,000 per day | |
| Failure to comply with the notice under section 153A/153C | Rs. 2,000 – Rs. 5,000 per day | |
| False statement in verification or abetment of a false return | Depends on the amount of tax which would have been evaded subject to minimum of Rs. 1 lakh | |
| Falsification of books of account or document | 100% of the sum equal to the aggregate amount of false or omitted entry involved | |
| Compounding fee from co-accused or abettor | 10% of the ‘compounding fee for the main offence’ | |
| Any other offence | Depends on the nature and magnitude of the offence and loss of revenue attributable to such offence subject to Minimum of Rs. 1 lakh | |
- Prosecution establishment expenses: Prosecution establishment expenses shall be charged at 10% of the compounding fees subject to a minimum of Rs. 25,000.
- Litigation and counsel’s fee
- Extra compounding charges in case of extension and relaxation: The compounding charges shall depend upon the time of filing of compounding application as under:
| Time of filing of compounding application | Is Pr. CCIT’s approval required to extend time-limit? | Compounding charges |
| Within 12 months | – | Normal compounding charges |
| Within 24 months | No | 1.25 times of normal compounding charges |
| Within 36 months | Yes | 1.5 times of normal compounding charges |
- Interest: If the time allowed for the deposit of compounding charges is extended beyond one month from the end of the month of intimation of compounding charges, the applicant shall be liable for payment of the following interest:
| Period of delay | Interest |
| Up to 3 months | 1% per month or part of the month on the unpaid amount of compounding charges |
| Beyond 3 months | 2% per month or part of the month on the unpaid amount of compounding charges |
[As amended by Finance Act, 2024]
