Delhi HC sets aside Compounding Order passed u/s 279(2) of Income Tax Act Charging 5% as Earlier offence was not Compounded [Read Order]
It was viewed that since the compounding of the first offense had not been compounded earlier, the respondents could not have claimed compounding charges at 5%
The Delhi High Court in its recent case set aside the compounding order passed under section 279(2) of the Income tax 5%, as the earlier offense was not compounded. It was viewed that since the compounding of the first offense had not been compounded earlier, the respondents could not have claimed compounding charges at 5%.
The petition has been filed by Sangeet Seth seeking directions to the respondent not to pass a compounding order under Section 279(2) of the Income Tax Act, 1961 (the Act) in terms of the Letter of Acceptance dated 29.01.2018, and with a consequential prayer to compound the criminal proceedings in CC No. 537821 of 2016 titled as 'Income Tax Officer vs. M/s Velvet Apple Hotel Pvt. Ltd.' pending before the ACCM (Spl. Acts), Central District, Tis Hazari Courts, Delhi.
The petitioner had failed to deposit Tax Deducted at Source (‘TDS’) of ₹ 6,11,820/- for the financial year 2009-10 in the account of the Central Government within the stipulated time period under the Act and deposited the said amount after delay of few months due to certain unavoidable circumstances and financial constraints which then resulted in the criminal prosecution proceedings.
The petitioner is the erstwhile director of the company which is now under liquidation and is being treated as the Principal Officer of the company, despite the fact the petitioner was never served with any notice for the same. According to him, for a default of TDS of ₹ 6,11,820/- which the petitioner had already paid a sum of Rs. 18,99,388/- (inclusive of TDS, interest on TDS, compounding charges at the rate of 3%, and penalty amount) till date in due compliance of the Letter of Acceptance for compounding dated 29.01.2018, the respondents are still prosecuting the petitioner.
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Surprisingly, vide the letter dated 08.02.2019 subsequently issued by the office of the respondent No. 1, the petitioner is being arbitrarily asked to pay further charges @ 5% instead of 3% for the purpose of compounding, which are in fact not payable.
Earlier the petitioner had filed an application for similar purpose of compounding the offence of non deposit of TDS amount of ₹6,11,820/-. However, the said application was rejected by the respondent No. 1 vide its order dated 16.02.2016, since the petitioner was unable to deposit the compounding charges within the prescribed time period because of certain financial difficulties, the offence could not be compounded at this time.
Subsequently, after becoming financially capable the petitioner preferred another application dated 05.06.2017 for compounding of offence under Section 279(2) of Act (“Second Compounding Application”), which was duly accepted by the respondents vide Letter of Acceptance dated 29.01.2018.
As per the guidelines issued by the respondents in the year 2014, since the petitioner had applied for compounding of the first offence but no such offence had been compounded earlier, the respondents could not have claimed compounding charges at 5%. He also stated that compounding charges at 5% would mean that the petitioner has to pay an amount of ₹ 8,22,133/-. The same is sought to be claimed on the ground that the petitioner has furnished wrong information in Column 10 of the Annexure A attached with the compounding application dated 05.06.2017 regarding a previous compounding calculated at the rate of 3%.
However, the case of the petitioner is that he had correctly answered the said column as “no”. Since his first compounding application had infact been rejected and no compounding had taken place with respect to this offence. The respondent no.1 then contended that the compounding charges will be calculated at 5% because the petitioner had applied for compounding for the second time. However, the same is based on a misreading of the guidelines of 2014.
On the other hand, Mr. Sanjay Kumar, counsel for the respondents contested the prayers made in the petition by stating that the petitioner cannot take the benefit of his own wrong, having given false information against Column no. 10, that no application was earlier rejected. The same amounts to concealing information which could have been a relevant consideration for the competent authority in deciding the application.
As per the guidelines issued by the CBDT in the year 2014 which governs the issue in the case, this being the second application, the petitioner shall be liable to pay 5% as compounding charges and as such the claim of 5% of the respondents is justified.
The request of compounding is not a matter of right but a discretion of the competent authority. The competent authority initially having exercised the discretion decided not to compound the offence, which was relevant consideration while deciding the second application. As per the guidelines issued by the CBDT, it is clear that for any subsequent application, the applicable rate for compounding will be 5% per month or part of a month of the amount of tax in default.
According to him, the second application dated 05.06.2017 was initially wrongly allowed in favour of the petitioner at the rate of 3%, as compounding charges per month instead of 5% as the same is not in accordance with the guidelines. The communication sent thereafter which is impugned is to bring the compounding charges in conformity with the guidelines and as such the present petition filed by the petitioner is totally misconceived.
The only issue which arises for consideration is whether the respondents are justified in claiming compounding charges at 5% instead of 3% as was communicated to the petitioner initially vide Acceptance Letter dated 29.01.2018.
The issue is no more res intergra in view of the judgment of this Court in Maspar Industries Private Limited and Ors Vs. ChiefCommissioner of Income Tax TDS and Ors, Neutral Citation: (2023)333CTR(Del)10, wherein this Court had an occasion to consider Clause 12.1 of the guidelines for compounding of offence under Direct Tax Law, 2014 issued by the Department of Revenue, CBDT, Ministry of Finance, Government of India, dated 23.12.2014.
The division bench of Justice V. Kameswar Rao and Justice Vinod Kumar observed that under what circumstances the compounding charges will be 5% instead of 3%. It was evident that 5% is only chargeable when the earlier offence has been compounded. This means that the compounding order should have been passed, and also the conditions stipulated in the said order should have been complied with (like payments), for the respondents to claim 5% charges on the second application, which necessarily has to be for a second offence.
The rationale behind imposing a higher rate for subsequent offences is to incentivise compliance and encourage the public to deduct TDS and make payments. In the present case, the case of the petitioner is that since the first application was rejected vide communication dated 16.02.2016, there is no question of a compounding order being passed or any payments thereof.
It is only in the eventuality that the application had been allowed, the offence was compounded and the charges applicable @ 3% was deposited, and the second application is for the purpose of a further offence, that 5% would become applicable. It is not such a case herein.
The court accepted the submission made by counsel for the petitioner and set aside the letter dated 08.02.2019.
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