Revised Guidelines for Compounding Offences Under the Income Tax Act, 1961

The Income Tax Department of India has recently revised its guidelines for the compounding of offences under the Income Tax Act, 1961. This significant update aims to streamline the compounding process, making it more accessible and less burdensome for taxpayers who may have committed defaults under the Act. Compounding of offences allows individuals and entities to rectify their mistakes by accepting their defaults and paying reduced charges, thereby avoiding prosecution.

Understanding Compounding of Offences

Compounding of offences is a legal remedy available to taxpayers who have committed specific defaults under the Income Tax Act. When a taxpayer receives a show-cause notice for prosecution, they can file an application with the competent tax authority, acknowledging their offence and requesting that the case be compounded. This process often results in the dropping of the case after the payment of reduced charges.

Mihir Tanna, Associate Director of Direct Tax at S.K. Patodia & Associates LLP, explains, “In the past, we have filed compounding applications for clients when TDS was deducted but not paid to the government within the prescribed time limit.” This highlights the practical utility of the compounding mechanism for taxpayers seeking to resolve their issues with the tax authorities.

Key Changes in the Revised Guidelines

On October 17, 2024, the Central Board of Direct Taxes (CBDT) issued a press release announcing the revised guidelines, which supersede all previous guidelines on the subject. The new guidelines are designed to simplify the compounding process, reduce complexities, and lower compounding charges. Here are some of the key changes:

1. Simplification of the Compounding Process

The revised guidelines eliminate the categorization of offences, which previously complicated the application process. There is no longer a limit on the number of occasions for filing applications, allowing taxpayers greater flexibility. Additionally, fresh applications can now be submitted if defects in previous applications are cured, a provision that was not permissible under earlier guidelines.

2. Expanded Scope of Compounding

The new guidelines allow for the compounding of offences under sections 275A and 276B of the Act, which were previously excluded. This expansion is a significant step towards inclusivity in the compounding process.

3. Rationalization of Compounding Charges

The compounding charges have been rationalized, with the abolition of interest on delayed payments. The rates for various offences have been simplified from multiple rates (2%, 3%, and 5%) to a single rate of 1.5% per month. This change is expected to make it easier for taxpayers to calculate their liabilities.

4. Removal of Time Limits

The previous time limit of 36 months for filing applications from the date of complaint has been removed. This allows taxpayers more time to rectify their defaults without the pressure of strict deadlines.

5. Changes for Companies and HUFs

To facilitate compounding for companies and Hindu Undivided Families (HUFs), the requirement for the main accused to file the application has been dispensed with. This means that any co-accused can file for compounding on behalf of the main accused, provided they pay the relevant charges.

Application Process for Compounding

The application for compounding must be made to the Principal Chief Commissioner of Income Tax (Pr. CCIT), Chief Commissioner of Income Tax (CCIT), Principal Director General of Income Tax (Pr. DGIT), or Director General of Income Tax (DGIT) having jurisdiction over the case. The application must be submitted in the prescribed format, accompanied by an affidavit on a stamp paper of Rs 100.

Compounding Application Fee

The revised guidelines stipulate a non-refundable fee for compounding applications:

• Single Compounding Application: Rs 25,000 per application.
• Consolidated Compounding Application: Rs 50,000 per application.

This fee is adjustable against the total compounding charges determined by the competent authority.

Payment of Dues

Before filing a compounding application, all outstanding taxes, interest, penalties, and any other sums related to the offence must be paid. If any related demand is found outstanding upon verification by the Department, the taxpayer must pay it within 30 days of notification.

Undertakings Required

Applicants must undertake to pay the compounding charges determined by the competent authority within the stipulated timeframe. Additionally, they must withdraw any appeals related to the offences sought to be compounded.

Special Cases Requiring Higher Authority Approval

Certain offences may only be compounded with the approval of the Chairman of the CBDT. These include:

• Offences resulting in a conviction with imprisonment for two years or more.
• Offences related to anti-national or terrorist activities.
• Offences involving facilitation of tax evasion through mechanisms such as money laundering or bogus invoices.

Conclusion

The revised guidelines for compounding offences under the Income Tax Act, 1961, represent a significant shift towards a more taxpayer-friendly approach. By simplifying the process, reducing charges, and expanding the scope of compounding, the Income Tax Department aims to promote compliance and ease the burden on taxpayers. This initiative aligns with the broader goal of enhancing the efficiency and effectiveness of the tax administration system in India. For more detailed information, taxpayers are encouraged to visit the official Income Tax Department website.