Compounding of offences under direct tax laws is a mechanism that allows a defaulter to avoid prosecution by paying a specified sum to the competent authority. This process can be initiated before or after legal proceedings, depending on the nature of the offence. Offences are categorized into Category A (technical, omission-based) and Category B (non-technical, commission-based). Category A offences include failures like non-payment of tax deducted at source, while Category B offences involve more severe violations such as attempts to evade taxes or falsification of documents. However, not all offences are eligible for compounding. Offences that have been previously rejected, involve anti-national activities, or have resulted in prior convictions with imprisonment of two years or more, cannot be compounded. The application for compounding must be filed in a prescribed format and within specific time limits, which vary based on whether prosecution has been initiated. The compounding fees vary based on the nature and severity of the offence, and additional charges may apply if extensions or relaxations are granted. The competent authority responsible for processing these applications is usually the Principal Chief Commissioner or Director-General of the jurisdiction concerned.
Q1. What is Compounding of Offence?
Ans: 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 specified offences can be compounded by the competent authority either before or after the initiation of proceedings.
Q2. Who is a competent authority?
Ans: Competent authority means Principal Chief Commissioner or Chief Commissioner or Principal Director-General or Director-General having jurisdiction over the assessee.
Q3. What are the Category A offences?
Ans: Category B offences are non-technical offences attributed to an act of commission.
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 [The Finance Act 2023 has inserted a sunset date that no fresh prosecution proceedings shall be initiated under this provision on or after 01-04-2023]. |
| 276AB | Failure to comply with the provisions of sections 269UC, Section 269UE and Section 269UL. |
| 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 |
Q4. What are the Category A offences?
Ans: 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.
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 |
Q5. What are the Category B Offences?
Ans: In the following circumstances, the offences cannot be compounded. However, the CBDT may relax the restrictions in the deserving cases on consideration of a report from the Principal CCIT of the concerned region on a petition by the applicant.
| 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 |
Q6. What are the Category B Offences?
Ans: Category B offences are non-technical offences attributed to an act of commission.
Category B Offences –
| Section | Description |
| 276 | Failure to comply with the provision of sub-sections (1) and (3) of Section 178 [The Finance Act 2023 has inserted a sunset date that no fresh prosecution proceedings shall be initiated under this provision on or after 01-04-2023]. |
| 276A | Failure to comply with the provision of sub-sections (1) and (3) of Section 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 |
Q7. Which specified offences cannot be compounded?
Ans: 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. |
Q8. When can Category A Offences not be compounded?
Ans: Category B Offences are not generally compounded on other than a first offence.
Q9. When can Category A Offences not be compounded?
Ans: 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 Principal 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.
Q10. When can Category B Offences not be compounded?
Ans: ‘First Offence’ means:
(a) Offences which are 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 which 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. The first offence is to be determined separately for each of the Category B offences.
Q11. Whether compounding allowed for the offences for which the assessee has been convicted?
Ans: 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, cannot be compounded.
Similarly, offences cannot be 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.
Q12. Is compounding allowed if the application for such an offence was previously rejected?
Ans: Any offence cannot be compounded if an application for compounding of such offence has already been rejected, except where the benefit of rectification is available.
Q13.Is compounding allowed where the assessee has been found involved in anti-national or terrorist activity?
Ans: 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 cannot be compounded.
Q14. Can offences under Section 276 be compounded if the outstanding amount in recovery is not deposited before filing the application?
Ans: No, offence under Section 276 cannot be compounded if the outstanding amount in recovery has not been deposited before filing the compounding application.
Q15. Which form shall be filed for an application for compounding?
Ans: 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 stamp paper of Rs. 100.
Q16. What is the time limit for filing of an application for compounding?
Ans: 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.
Q17. Is there any relaxation available on the time limit for filing of application of compounding?
Ans: Where 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. However, 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 Principal 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.
Q18. What are the compounding fees specified for various defaults?
Ans: The compounding fees shall depend on various factors, such as the nature & occasion of the offence, period of default, outstanding tax liability, etc. An overview of the compounding fees is given in the below table:
| 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 a 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 |
Q19. What are the other charges which are required to be paid with the compounding fee?
Ans: a. Prosecution establishment expenses – Prosecution establishment expenses shall be charged at 10% of the compounding fees subject to a minimum of Rs. 25,000.
b. Litigation and counsel’s fee
c. Extra compounding charges in case of extension and relaxation
Q20. Is any interest levied 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?
Ans: 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 |
Q21. Who will be the competent authority where jurisdiction on the applicant lies with more than one Commissioner?
Ans: 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.
Q22. Who will be the competent authority where the applicant has more than one TAN and jurisdiction over these TANs lies with more than one Commissioner?
Ans: 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.
