Delhi High Court Upholds Order Of Revenue Department Imposing Enhanced Compounding Charges On Subsequent Offences

The Bench, consisting of Justices Manmohan and Dinesh Kumar Sharma, held that compounding of offences cannot be taken as a matter of right and it is for the law and authorities to determine as to what kind of offences should be compounded and under what conditions. The Court added that there is a rationale behind imposing a higher rate for subsequent offences as the revenue department wants to incentivize compliance.

The Chief Commissioner of Income Tax (TDS) had compounded the offence pertaining to late deposit of Tax Deducted at Source (TDS) committed by the petitioner M/s Maspar Industries Private Limited. The petitioner filed a writ petition in the Delhi High Court challenging the order passed by the Chief Commissioner.

The petitioner Maspar Industries contended before the High Court that the Chief Commissioner had compounded the offences relating to late deposit of Tax Deducted at Source (TDS) under Section 279(2) of the Income Tax Act, 1961 at the rate of five per cent instead of the usual rate of three per cent, and therefore there was a contravention of the CBDT Circular dated 23rd December, 2014.

The petitioner averred that the Chief Commissioner had imposed a higher rate by treating the proceedings as a second compounding application, which was unsustainable since the petitioner had preferred only a single compounding application in respect of each of the different financial years.

The petitioner submitted that a higher rate of five per cent could be levied only if the petitioner did not comply with the conditions mentioned in the compounding order and had filed a second compounding application with regard to the same financial year.

The revenue department submitted before the High Court that as per the 'Guidelines for Compounding of Offences under Direct Tax Laws, 2014' issued by the revenue department, since the petitioner's first application for compounding of offence was allowed at the rate of three per cent, the subsequent applications for compounding the same offence with respect to other financial years were allowed at the rate of five per cent.

As per Clause 12.1 of the 'Guidelines for Compounding of Offences under Direct Tax Laws, 2014' issued by the CBDT, an offence of failure to pay the tax deducted at source under Section 276B is compoundable at the rate of 3% per month of the amount of tax in default. Also, after compounding of the said offence, if the same person comes forward for compounding of such offence through any subsequent application, the offence shall be compoundable at the rate of 5% per month of the amount of tax in default.

The High Court ruled that compounding of offences cannot be taken as a matter of right. The court added that it is for the law and authorities to determine as to what kind of offences should be compounded and under what conditions.

The Court ruled that as per the guidelines issued by the CBDT, after the compounding of the first offence if the same person comes forward for compounding of another offence through any subsequent application, the applicable rate will be five per cent instead of three per cent. The Court held that the expression "after compounding of the said offence" means when the offence has been compounded, i.e., after the conditions stipulated in the compounding order have been complied with along with the specified payments, and not just the stage of passing the compounding order.

The Court held that there is a rationale behind imposing a higher rate for subsequent offences as the revenue department wants to incentivize compliance and wants the public to deduct TDS and pay to the Government.

The Court thus ruled that since the petitioner company was a 'repeat offender', the revenue department was entitled in law to impose a higher compounding fee i.e., a fee of five per cent instead of three per cent.

The Court thus directed the petitioners to pay the compounding charges as mentioned in the order passed by the Chief Commissioner of Income Tax (TDS).

Case Title: M/s Maspar Industries Private Limited & Ors. versus Chief Commissioner of Income Tax TDS & Anr.

Citation: 2022 LiveLaw (Del) 411

Counsel for the Petitioners: Mr. Ramesh Singh, Sr. Advocate with Mr. Saurabh Chaudhary and Ms. Anne, Advocates.

Counsel for the Respondents: Mr. Zoheb Hossain, Sr. Standing Counsel with Mr. Vipul Agarwal and Mr. Parth Semwal, Advocates.

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