The Delhi High Court on Wednesday delivered relief to a former hotel director, setting aside an Income Tax Department letter that sought higher compounding charges in a long-running case of delayed tax deduction deposit. The bench of Justice V. Kameswar Rao and Justice Vinod Kumar ruled that the department had wrongly demanded 5% charges instead of the initially accepted 3%, bringing clarity to the application of compounding guidelines.
Background
The matter dates back to 2009–10, when Sangeet Seth, then director of Velvet Apple Hotel Pvt. Ltd., failed to deposit Tax Deducted at Source (TDS) of about ₹6.11 lakh within the stipulated time. Though the amount was later deposited with interest, prosecution was launched under the Income Tax Act.
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Seth's first attempt at compounding in 2014 was rejected after he failed to pay charges due to financial stress. When he reapplied in 2017, the application was accepted at a 3% rate, and he deposited over ₹18.99 lakh, covering tax, interest, penalty, and compounding fees. However, in 2019, the department suddenly issued a fresh letter demanding additional charges at a 5% rate, claiming he had misrepresented his earlier application history.
Court's Observations
The Judges carefully examined the Central Board of Direct Taxes (CBDT) guidelines of 2014, which allow higher compounding charges of 5% only in cases where an earlier offence has actually been compounded.
Justice Rao noted,
"The rationale behind a higher rate is to incentivise compliance. But it applies only when the first offence is compounded. If the application itself was rejected, no question of 5% arises."
The bench also referred to its earlier decision in Maspar Industries Pvt. Ltd. v. Chief Commissioner of Income Tax, where the distinction between rejected and compounded applications was clarified. The court stressed that since Seth's first application never resulted in compounding, the 2019 letter was based on a misinterpretation of the rules.
Decision
Concluding the hearing, the bench set aside the Income Tax Department's 08.02.2019 letter and directed the authorities to proceed in accordance with law, treating the compounding charges at 3% as valid.
The letter dated 08.02.2019 is set aside, the court declared, bringing an end to years of uncertainty for the petitioner.
The writ petition was accordingly disposed of, and pending applications declared infructuous.
Case Title: Sangeet Seth v. Chief Commissioner of Income Tax & Ors.
Case Number: W.P.(C) 16569/2023 & CM APPL. 66783/2023
