CCIT order rejecting application for compounding of offence u/s 276CCC quashed by Supreme Court being covered by the expression “first offence”.
In a recent judgment, the Hon’ble Supreme Court quashed the order of the CCIT in rejecting the application for compounding of offence u/s 276CCC for belated filing of return observing that it was covered by the expression “first offence” as defined under CBDT compounding guidelines 2014. The Apex Court also observed that there is a clear shift in the policy of the Department when it comes to the compounding of offences under Section 276CC.
ABCAUS Case Law Citation:
4406 (2025) (02) abcaus.in SC
Important Case Laws relied upon by Parties:
Sports Infratech P. Ltd. & Anr. v. Deputy Commissioner of Income-tax
In the instant case, the assessee/appellant had challenged the order passed by the High Court rejecting the writ petition filed by the appellant assessee and upholding the order of the Chief Commissioner of Income Tax rejecting the application of the assessee for compounding of the offence under Section 276CC of the Income Tax Act, 1961 (“the Act”).
The appellant was an individual earning income by way of salary and also by way of share of profit of partnership firm. The assessee filed his income tax returns for two Assessment Years belatedly. The assessee was called upon to show cause as to why prosecution proceedings under Section 276CC of the Act should not be initiated against him for failure to furnish return of income for one of the two assessment years for which returns were filed belatedly.
The appellant replied to the aforesaid show cause notice along with the application for compounding in accordance with the CBDT Guidelines for Compounding of Offence, 2008 (2008 guidelines). The application, along with application for compounding which was allowed.
After approx. six months, the appellant received another show cause notice as regards launching of prosecution under Section 276CC in respect of the second assessment year. To the second SCN, the assessee also replied along with an application for compounding. It is notable that unlike the first assessment year where no tax was due, as per SCN, tax was payable by the assessee for the later AY.
In his reply to the second SCN, the assessee stated that he had filed the return of income belatedly because necessary funds were not available with him to enable him to pay the assessed amount of tax. He further stated that the delay in filing of the return of income was neither deliberate nor wilful.
However, the application for compounding was rejected this time order was passed under Section 279(2) of the Act by the Chief Commissioner of Income Tax (CCIT/the respondent) rejecting the compounding application of the appellant. The CCIT took the view that the case of the appellant was not fit for compounding.
The CCIT was of the opinion that since the assessee had filed his return of income for the second AY after the show cause notice under Section 276CC for offence for the first AY had already been issued. Therefore, the offence committed by the appellant under Section 276CC for the second AY would not be covered by the expression “first offence” as defined in the CBDT compounding guidelines of 2014.
The appellant assessee challenged the aforesaid order passed by the CCIT before the High Court on the ground that the offence alleged to have been committed by the appellant of belated filing of the return of income for second AY was not covered by the expression “first offence” as defined in the 2014 guidelines. The appellant further submitted that the show cause notice for the initiation of prosecution issued under Section 276CC of the Act for second AY was issued much after the filing of the return for the second AY, therefore it could not be said that it was not the first offence.
However, the High Court rejected the appeal vide the impugned judgment taking the view that the contention of the appellant was based on a misreading of the Clause 8(ii) of the 2014 guidelines. The High Court held that although the show-cause notice for first AY was issued, yet the appellant filed the return of income for the second AY belatedly and thus could be said to have committed the offence under Section 276CC of the Act for the second AY after the show cause notice for the first AY had already been issued.
The Hon’ble Supreme Court observed that as per paragraph 4 of 2014 guidelines, compounding is not a matter of right of the assessee and the competent authority may allow the compounding application upon being satisfied that the applicant fulfills the eligibility conditions and keeping in mind the conduct of the applicant, nature and magnitude of the offence and the facts and circumstances of each case.
The Hon’ble Supreme Court opined that while it is mandatory that the eligibility conditions prescribed are to be satisfied, the restrictions laid down have to be read along with Paragraph 4 of the Act which provides that the exercise of discretion by the competent authority is to be guided by the facts and circumstances of each case, the conduct of the appellant and nature and magnitude of offence. Thus, it becomes clear that the restrictions laid down are although required to be generally followed, the guidelines do not exclude the possibility that in a peculiar case where the facts and circumstances so require, the competent authority cannot make an exception and allow the compounding application.
The Hon’ble Supreme Court further noted that as per the Guidelines for Compounding of Offences under Direct Tax Laws, 2019 and the Guidelines for Compounding of Offences under Direct Tax Laws, 2022 issued by the CBDT, in both the said Guidelines, the offence under Section 276CC has been made a Category A offence instead of a Category B offence and is compoundable up to three occasions. This broadly indicates is that there is a clear shift in the policy of the Department when it comes to the compounding of offences under Section 276CC in particular and in making the compounding regime more flexible and liberal in particular.
Accordingly, the Hon’ble Supreme Court held that High Court fell in error in rejecting the writ petition filed by the appellant against the order passed by the CCIT rejecting the application for compounding. The offence without a doubt was covered by the expression “first offence” as defined under the 2014 guidelines and thus the compounding application preferred by the appellant could not have been rejected.
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