CBDT Compounding of offences Guidelines not illegal or arbitrary. Principle of proportionality also not apply as fee is paid to avoid punishment for a criminal offence-High Court
Chapter XXII of the Income Tax Act, 1961 (the Act) deals with Offences and Prosecution. Section 279(2) provides that any offence prescribed under the said Chapter (from section 275 to section 278) may either before or after the institution of proceedings can be compounded by the prescribed authority.
Central Board of Direct Taxes (CBDT) has also issued Guidelines for Compounding of Offences under Direct Tax Laws, 2014 (Guidelines) dated 23rd December, 2014 for compounding of offences committed by assesses. The guidelines which came into effect from 01.01.2015, apart from prescribing eligibility, category of offences, procedure etc. also prescribes the compounding fee and charges to be paid.
The guidelines clarify that compounding of offences is not a matter of right but offences may be compounded by the competent authority on his satisfaction of the eligibility conditions prescribed in these guidelines keeping in view factors such as conduct of the person; nature and magnitude of the offence and facts and circumstances of each case.
ABCAUS Case Law Citation:
ABCAUS 2177 (2018) (01) HC
The petitioner in the instant case had challenged the imposition, legality and validity of compounding fee charged under the Income Tax Act, 1961 (the Act). Challenging the legality of the quantum of compounding fee, as prescribed in the guidelines, the Petitioner sought quashing of the guidelines as being arbitrary and unfair. The petitioner also prayed for quashing of the compounding fee imposed upon him.
It was contended that that the quantum of compounding charges is exorbitant and constitutes a tax or a levy without the sanction of law. The guidelines which also prescribe the manner of calculation of compounding charges is ultra vires, inasmuch as the power to issue orders, instructions or directions for composition of offences under Section 279 of the Act cannot be deemed to include the power to impose amounts which are astronomical and have no proportionality to the tax and interest which was to be paid.
The petitioner submitted that the compounding charges are in the nature of a tax and penalty which do not have any sanction under the Act. It was argued that since the guidelines takes away the discretion vested in the authorities, the same is ultra vires Section 119 (1) of the Act as it seeks to prescribe a method to calculate the compounding fee. the compounding fee charged has no statutory basis and the exorbitant nature of the same renders it discriminatory and illegal, as also unconstitutional
The Hon’ble High Court observed that the concept of compounding of offences in taxation laws is not unique to India and most of the countries provide for such measures under the respective laws.
The Hon’ble High Court also observed that usually, offences are categorized depending on the gravity of the violation. Some offences are held to be non-compoundable, whereas, some are compoundable. Even for those offences which are compoundable, the amount to be charged as compounding fee depends upon the nature of the offence, the conduct of the party, loss suffered, gain of the accused, restitution and such other such factors. In some countries, offences are not compoundable at all whereas specific laws have been enacted in other countries to permit compounding of only a few classes of offences.
It was observed that in a case, the Division Bench of the Hon’ble High Court had quashed CBDT instructions to the extent that they curtailed the power of the Commissioner to compound offences. It was observed that the Commissioner exercises judicial or quasijudicial functions and the same cannot be controlled by means of circulars and guidelines. However, the Hon’ble Supreme Court reversed the decision reiterating that the circulars issued by CBDT are binding on all officers and persons employed in the execution of the Act.
The Supreme Court upheld the validity of guidelines issued by the CBDT under Section 119(1) of the Act in the exercise of powers under Section 279(2) of the Act. It was noted that the Finance Act (2) of 1991 introduced an explanation with retrospective effect. It was observed that the Explanation is in the nature of a proviso to Section 279(2) of the Act with the result that the exercise of power by the Commissioner under the said section has to be subject to the instructions issued by the CBDT. The Explanation empowers the Board to issue orders, instruction or directions for the proper composition of the offences under Section 279(2) of the Act and further specifically provides that directions for obtaining previous approval of the Board can also be issued.
The Apex Court held that a combined reading of Section 279(2) along with the Explanation, leaves no doubt the Commissioner has to exercise the discretion under Section 279(2) of the act in conformity with the instructions issued by the Board from time to time.
The Hon’ble High Court opined that compounding of offences cannot be taken as a matter of right. It is for the law and authorities to determine as to what kind of offences should be compounded, if at all, and under what conditions. The power to compound cannot be completely unbridled inasmuch as the same could give rise to enormous discretionary power, which could also lead to arbitrariness, discrimination, abuse etc. For this reason, and in order to maintain uniformity and consistency, circulars and guidelines are required to be issued for compounding of offences. Such guidelines and circulars ensure a degree of objectivity.
Referring to the guidelines in detail, the Hon’ble High Court held that it does not suffer from any illegality or reflect any exercise of power which is arbitrary or illegal inasmuch as such guidelines are issued by authorities for compounding of various kinds of offences.
The Hon’ble High Court opined that the petitioner’s case was examined by the Income Tax Authorities and compounding fee was imposed as per the guidelines issued. The Hon’ble High Court rejected the ground that the power of the Adjudicating Officer has been curtailed by the issuance of the said guidelines as the issue is no longer res integra and is fully covered by the judgment of the Supreme Court.
Regarding the that allegation of the Petitioner that the compounding charges are exorbitant and extraordinary and there was no proportionality with the principal amount, the Hon’ble High Court opined that there is no element of quid pro quo required, inasmuch as, the compounding fee charged was 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 would not apply inasmuch as, compounding fee was in the nature of a payment made to avoid punishment for a criminal offence.
The Hon’ble High Court held that the categorization or the classification of different types of offences and different compounding charges for different offences was not arbitrary or irrational. The Petitioner was also imposed a costs of Rs.50,000/-
