S. 279(2): Entire law on the compounding of offenses u/s 276C, 277 read with S. 278D explained in the context of whether the CBDT Guidelines on compounding of offenses dated 23.12.2014 prescribing eligibility conditions and the formula for calculating the compounding fee are valid or unreasonable

The petitioner challenged the imposition, legality and validity of compounding fee – a fee charged under the Income Tax Act, 1961, 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 23rd 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.

HELD by the High Court dismissing the Petition:

(i) 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.

(ii) 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.

(iii) In M. P. Purusothaman v. Assistant Director of Income Tax (Prosecution) [2001] 252 ITR 603 the High Court of Madras, while considering the power of the CBDT to compound an offence under Chapter XXII of the Act held that compounding of an offence is the exception and not the rule. It rejected the contention that the CBDT has to compulsorily hear the petitioner before rejecting the application for compounding. Compounding fee is of a deterrent nature and is imposed with a view to ensure compliance with the law.

(iv) The petitioner was conscious of the fact that if he was convicted in the criminal complaint, no compounding could have taken place after that. This is clear from a reading of Anil Batra v. Chief Commissioner of Income Tax (2011) 337 ITR 25 (Del) and Sangeeta Exports v. Union of India (2009) 311 ITR 258. Thus, the petitioner has consciously and with full knowledge applied for compounding. In fact at the time when the petitioner filed the compounding application for the first time, the charges for compounding would have been higher, as per the guidelines in operation then, than what was applied finally to the petitioner’s case. In any event, the guidelines per se do not fall foul of Article 14 inasmuch as, the only ground which is sought to be raised to challenge the same is the exorbitant nature of the compounding charges in the petitioner’s case. The petitioner has not argued that the compounding charge is per se exorbitant, in view of the facts noticed above.

(v) Viewed in the totality of circumstances, the guidelines do categorize between different types of offences and prescribe different compounding charges for different offences. The categorization or the classification in the guidelines do not appear to be arbitrary or irrational. A perusal of the 2008 Guidelines which were in operation, when the petitioner first made the application for compounding of offences reveals that under the said Guidelines, the charges leviable for an offence under Section 276C(1) were 50% of amount of tax sought to be evaded and for an offence under Section 276C(2) it was 5% per month of the tax, the payment of which was sought to be evaded, for the period of default. Thus, under the older guidelines, the compounding charges leviable against the petitioner may have been much higher.

(vi) Thus, the Guidelines of 2014, under which the last application for compounding was made, and was accepted to be in the prescribed format, has enured to the benefit of the petitioner and the application has rightly been processed under these Guidelines. The petitioner has not raised a challenge either to the 2008 Guidelines or 2003 Guidelines. It is only after the charges were framed in the criminal proceedings and after filing the applications for compounding and after compounding charges have been determined as per the formula prescribed in the 2014 Guidelines, that the challenge has been raised by the petitioner.

(vii) The petitioner having voluntarily agreed and undertaken to the department to pay the compounding charges and to withdraw his appeal, ought to be directed to be bound down by the same. It is a settlement process voluntarily invoked by the petitioner in order to escape criminal prosecution under the Act. Since an accused may have to suffer severe consequences for non-payment of tax, if he is held to be guilty, it is not open to him to challenge the reasonableness of the same. The petitioner had consciously undertaken to abide by the decision of the Committee constituted for compounding the offences.