The Income Tax Department has issued new guidelines to simplify the process of compounding offences under the Income Tax Act, 1961. Compounding of an offence refers to a procedure in which a taxpayer who has committed a default under the Income Tax Act can file an application to the competent tax authority, acknowledging the offence and seeking to drop the case after paying a reduced penalty. The new guidelines make this process simpler, with lower charges, and provide taxpayers with greater relief.
What is Compounding of an Offence?
Compounding of an offence is a provision that allows taxpayers to settle their tax defaults without going through a full-fledged prosecution. In cases where a default is committed, such as failure to pay tax, filing incorrect returns, or delaying TDS payments, taxpayers can apply to the tax authority for compounding. If approved, the prosecution is dropped in exchange for the payment of a reduced penalty.
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Mihir Tanna, Associate Director at S.K Patodia & Associates LLP, explains, "Compounding of an offence is an option available under Income tax, in case specified defaults are made and prosecution is to be initiated. In the past, we have filed compounding applications for clients, particularly in cases where TDS was deducted but not paid on time."
The revised guidelines issued by the Central Board of Direct Taxes (CBDT) aim to simplify the compounding procedure and reduce the complexity arising from multiple existing guidelines. These changes are a part of the government's efforts to promote ease of compliance and encourage taxpayers to settle their issues without facing prosecution. The guidelines, effective from October 17, 2024, replace all previous guidelines on the matter and apply to both pending and new applications.
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Simplified Process: The categorization of offences has been removed, reducing confusion and streamlining the process.
Lower Charges: The charges for compounding have been reduced, with a flat rate of 1.5% per month for TDS defaults, compared to the earlier varying rates.
No Time Limit for Filing Applications: Earlier, taxpayers had a 36-month limit to file for compounding after a complaint was filed. The new guidelines remove this restriction.
Consolidation of Applications: Taxpayers can now file a single application for multiple offences under different years or quarters, streamlining the process.
As the Income Tax Department mentioned in its press release, "The revised guidelines simplify the compounding process, reduce the complexities, and lower compounding charges, marking an important step towards simplifying procedures and promoting ease of compliance."
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The new compounding guidelines offer several benefits to different stakeholders, including individuals, businesses, and Hindu Undivided Families (HUFs). Previously, only the main accused could file for compounding, but under the revised guidelines, co-accused can also file and pay the charges.
The guidelines also remove the limit on the number of occasions for filing compounding applications and allow fresh applications if the previous ones were rejected due to curable defects like non-payment of taxes or interest.
To file a compounding application, taxpayers must submit an affidavit on stamp paper, along with details of the offence(s) committed. For applications covering multiple offences or years, a "Consolidated Compounding Application" can be filed.
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The applicant must pay all outstanding taxes, penalties, and interest related to the offence before filing the application. If the authorities find any discrepancies, the applicant must clear them within 30 days. Additionally, the applicant must undertake to withdraw any appeals filed related to the offence for which compounding is sought.
A significant update is the introduction of a non-refundable fee for filing a compounding application. For a single compounding application, the fee is set at Rs 25,000, while for a consolidated application, the fee is Rs 50,000. However, these fees are adjustable against the final compounding charges.
"The said fee is non-refundable but adjustable against applicable charges," the Income Tax Department noted.
While the new guidelines provide several opportunities for taxpayers to avoid prosecution, there are cases where compounding is not permitted without the approval of the CBDT Chairman. These include:
Serious Offences: If the taxpayer has been convicted of an offence with a prison sentence of two years or more.
Involvement in Anti-National Activities: If the taxpayer is found to be involved in anti-national or terrorist activities, as reported by relevant agencies.
Money Laundering and Tax Evasion: If the taxpayer facilitated tax evasion through fraudulent mechanisms like bogus invoices or money laundering.
In a landmark judgment, the court emphasized,
"Compounding of an offence under the Income Tax Act is a tool that allows taxpayers to rectify their defaults and avoid prosecution. It serves the dual purpose of simplifying the settlement process for defaulters while ensuring that the revenue due is collected."
