Compounding of Offences under Income-tax Act, 1961

In the world of income tax regulations, compounding of offences provides a unique mechanism for defaulters to escape major legal consequences. This article delves into the concept of compounding offences under the Income-tax Act, 1961, elucidating the process, eligibility conditions, compounding charges, and various aspects of classification. Offences are categorized as Category A and Category B, each carrying its own set of rules and regulations. Furthermore, we explore the offences that cannot be compounded and the conditions that must be met for successful compounding. Understanding these nuances is vital for both taxpayers and professionals in the realm of taxation.

Compounding of Offences 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.

What is Compounding of offence?

Compounding of offence is a process whereby a person committing a default under the Income-tax Act files an application to the competent authority accepting that it has committed an offence and so that same should be compounded.

Competent authority shall be Principal Chief Commissioner or Chief Commissioner or Principal Director-General or Director-General having jurisdiction over the assessee.

It should be noted that the compounding of offences is not the right of the assessee. The competent authority may compound the offences on being satisfied with the fulfilment of the conditions subject to which the assessee is eligible for compounding of offence.

When evaluating each case, the authority must take into account several factors, including the type and severity of the offense.

Classification of compounding of offences

The offences can be 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.

Besides, there are some offences, which cannot be compounded.

Category A offences –

Section	Description
276B	Failure to pay the tax deducted at source under Chapter XVII-B 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)	Willful attempt to evade tax etc.
276C(2)	Willful 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

OFFENCES THAT CANNOT BE COMPOUNDED

In the following circumstances, the offences are not compounded. However, the CBDT may relax the restrictions in the deserving cases on consideration of a report from the Pr. CCIT of the concerned region on a petition by the applicant.

Specified Offences

Then following offences are not to be compounded:

Section	Description
275A	Contravention of authority’s order to not deal with the goods that could not be seized
275B	Failure to provide access to books of account and other documents to the authorized officer during the search and seizure

Category A Offences

Category A Offences are not considered for compounding if it has already been requested on more than 3 occasions in respect of such offences. However, in exceptional circumstances, compounding requested in more than 3 occasions can be considered with the approval of the Pr. CCIT of the concerned region only.

Where an assessee files multiple applications for one or more than one assessment year in one instance, all these applications shall be treated as one occasion.

Category B Offences

Category B Offences are not generally compounded on other than a first offence.

Here, ‘First Offence’ means:

(a) Offences which is committed prior to earlier of the following:

• Date of issue of any letter or notice in relation to the prosecution;
• Intimation relating to filing of prosecution complaint sent by the department to the persons concerned; or
• Launching of the prosecution;

(b) Offences that were not detected by the department but voluntarily disclosed by the assessee with the filing of application of compounding of offence for one or more assessment years.

To determine the first offence, the offence is relevant if it is committed by the same person or the same entity. First offence is to be determined separately for each of the Category B offences.

Offences for which assessee has been convicted

Any Offence under Direct tax laws for which an assessee has been convicted earlier with imprisonment for 2 years or more, with or without fine by a court of law, are not compounded.

Similarly, offences are not compounded if they are committed by a person, who was convicted by a court of law for an offence under any law other than Direct Tax Laws, for which the prescribed punishment was the imprisonment of two years or more (with or without fine) and which is directly related to the offence sought to be compounded.

Compounding Application has been rejected

Any offence is not compounded if an application for compounding of such offence has already been rejected, except where the benefit of rectification is available.

Enabling Others in Tax Evasion

The case of the main accused is not to be compounded where it is proved that he has enabled others in tax evasion such as:

a) Laundering of money through the use of entities;

b) Generating bogus invoices of sale or purchase without actual business; or

c) Providing accommodation entries in any other manner prescribed under Section 277A.

Involvement in anti-national or terrorist activity

Where an assessee has been found involved in anti-national or terrorist activity, in any manner, as a result of an investigation conducted by any Central or State agency or as per information available with the concerned competent authority, such offences are not to be compounded.

Cases having bearing on a case under investigation

Offences committed by a person which, as per information available with the concerned competent authority, directly related to the case under investigation, at any stage including enquiry or filing of FIR/complaint, by Enforcement Directorate, CBI, Lokpal, Lokayukta or any other Central or State Agency, are not to be compounded.

Application for plea bargaining is pending in court

Offences committed by a person, whose application for plea-bargaining in respect of any offence is pending in a Court or where a Court has recorded that a mutually satisfactory disposition of such an application is not worked out and such offence has a bearing on the offence sought to be compounded, is not to be compounded.

Outstanding tax recovery

Offence under Section 276 cannot be compounded if the outstanding amount in recovery has not been deposited before filing the compounding application.

Other Offences

The Following offences are not to be compounded:

(a) Offence which is directly related to an offence relating to undisclosed foreign bank account or assets in any manner;

(b) Offence which is directly related to an offence under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015;

(c) Offence which is directly related to an offence under the Benami Transactions (Prohibition) Act, 1988; and

(d) Any other offence, which the concerned competent authority does not consider fit for compounding in view of offence by habitual/repeat offender.

Eligibility conditions for compounding

An offence can be considered for compounding subject to the fulfilment of the following conditions:

Filing of application

– Form for 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.

– Time Limit for Filing of Application – The assessee can file the application for compounding at any time after committing the offence, regardless of whether the same has come to the notice of the department or not.

However, if a prosecution complaint has already been filed in a court of law, the application should be filed within 12 months from the end of the month in which the prosecution complaint was filed.

– Relaxation of Time Limit for Filing of Application – Where a prosecution complaint has already been filed in a court of law, the application for compounding can be filed even after the expiry of 12 months, but within 24 months from the end of the month in which the prosecution complaint was filed. In such cases, compounding charges will be levied at the rate of 1.25 times of the normal compounding charges applicable to the offence.

The time limit of 24 months may be further extended to 36 months in deserving cases with the approval of the jurisdictional Pr. CCIT. In such cases, compounding charges will be levied at the rate of 1.5 times of the normal compounding charges applicable to the offence.

Thus, 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	NA	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

Payment of outstanding dues

The person must ensure that all outstanding tax, interest, penalty, and any other sum due in relation to the offence for which compounding is sought is paid before making the application.

In the event that the department discovers any outstanding amount, it shall inform the applicant. The application for compounding will only be considered valid if the demand is paid by the assessee within 30 days of communication.

Undertaking to pay 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 Fee –

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

– Other Charges –

• 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 – Application for compounding shall be made within 12 months from the end of the month in which prosecution complaint has been filed.

Where compounding application has been filed after 12 month but within 24 months, compounding charges in such cases shall be 1.25 times of the normal compounding charges. Further, where compounding application has been filed after 24 month but within 36 months, compounding charges in such cases shall be 1.5 times of the normal compounding charges.

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

Undertaking to withdraw appeal

The person who has committed the offence is required to undertake to withdraw any appeals that have been filed relating to the offence that is being sought to be compounded. In cases where the appeal has mixed grounds, the undertaking is only required in respect of the grounds that are related to the offence that is being compounded.

Furnish details of all defaults

In order to file a compounding application for offences under Section 276B and 276BB, the assessee is required to furnish all the defaults constituting an offence under the said sections for that particular TAN for the period under compounding.

Other provisions related to Compounding of Offences under Income-tax Act, 1961

Authority to compound an offence

The authority to compound an offence lies with the Principal Chief Commissioner, Chief Commissioner, Principal Director-General, or Director-General (hereinafter collectively referred to as ‘Commissioner’) having jurisdiction over the assessee.

–     Compounding relates to authorities in a different jurisdiction – In cases where an assessee has committed an offence under Section 276B or Section 276BB and the jurisdiction over such a person lies with more than one Commissioner, the Commissioner in whose jurisdiction the compounding application has been filed will be the competent authority.

–     Compounding relates to multiple TAN – Where an applicant has more than one TAN and the jurisdiction over these TANs lies with two or more Commissioners, the compounding application shall be filed with the Commissioner having jurisdiction over the TAN in the region in which the PAN jurisdiction of the applicant is falling.

Conclusion of penalty proceedings

In cases where penalty proceedings that bear on the offence sought to be compounded are pending at the time of filing the compounding application, efforts shall be made to conclude these proceedings expeditiously and recover the demand before the compounding proceedings can be concluded.

Procedure of compounding

Upon receipt of a compounding application, the competent authority shall call for a report from the concerned assessing officer. Upon receipt of the report, the competent authority shall consider the application and pass a speaking order to dispose of the application.

Important Points on Compounding of Offences under Income-tax Act, 1961

1. 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. Any offence can be compounded by the competent authority either before or after the initiation of proceedings.

2. Compounding of offence is a process whereby the person/entity committing default files an application to the competent authority (Principal Chief Commissioner or Chief Commissioner or Principal Director-General or Director-General having jurisdiction over the assessee) accepting that it has committed an offence and so that same should be condoned.

3. For compounding, the offences can be classified into two categories, that is, Category A Offences and Category B Offences.

4. For compounding, the offences can be classified into two categories, that is, Category A Offences and Category B Offences. Category A offences are the ones where the offences are of technical nature caused by an act of omission. Whereas Category B offences are non-technical offences attributed to an act of commission.

5.  Category A offences are the ones where the offences are of technical nature caused by an act of omission.   Failure to pay the tax collected at source, Failure to furnish returns of Income and Failure to furnish return of income in search cases in block assessment scheme are covered under this category.

6. Category B offences are non-technical offences attributed to an act of commission. This includes Willful attempt to evade tax.

The following specified offences are not to be compounded – (a) Contravention of authority’s order to not deal with the goods that could not be seized (Section 275A); (b) Failure to provide access to books of account and other documents to the authorized officer during the search and seizure (Section 275B), etc.

7. Where a prosecution complaint has already been filed in a court of law, the application for compounding can be filed even after the expiry of 12 months, but within 24 months from the end of the month in which the prosecution complaint was filed. In such cases, compounding charges will be levied at the rate of 1.25 times of the normal compounding charges applicable to the offence.

The time limit of 24 months may be further extended to 36 months in deserving cases with the approval of the jurisdictional Pr. CCIT. In such cases, compounding charges will be levied at the rate of 1.5 times of the normal compounding charges applicable to the offence.