CBDT Circulars Can’t Prescribe Limitation To Decide Application For Compounding Of Offence: Bombay High Court

The bench of Justices Dhiraj Singh Thakur and Valmiki SA Menezes, took note that Section 279 (2) of the Income Tax Act, which provides for compounding of certain offences, either before or after the institution of proceedings, does not provide any rule of limitation.

Thus, the Court held that the CBDT “Guidelines for Compounding of Offences under Direct Tax Laws, 2019”, dated 14.06.2019, which create a limitation on the time within which an application under Section 279 (2) is required to be filed, is of no consequence. The said Guidelines do not take away the jurisdiction of the income tax authorities to consider an application for compounding of offence at any time during the pendency of the proceedings, the Court said.

A Show Cause Notice, seeking to initiate prosecution for offences committed under Section 276B read with Section 278B of the Income Tax Act, for failing to deposit TDS within the statutory timeframe, was served on the petitioner no. 1, Footcandles Film Pvt Ltd.

Sanction to prosecute petitioner no.1 and its Principal Officer, Nirav Dama (petitioner no. 2) was granted by the Income Tax Authority, and a Criminal Complaint was lodged against the petitioners before the Additional Chief Metropolitan Magistrate, who convicted the petitioners for the offence. On appeal, the sentence of fine and imprisonment imposed on the petitioners, was suspended by the Sessions Court. Thereafter, the petitioners filed an application seeking compounding of the offence, which was rejected by the Income Tax Authority.

Against this, the petitioners filed a writ petition before the Bombay High Court.

The revenue department submitted before the High Court that, in view of the “Guidelines for Compounding of Offences under Direct Tax Laws, 2019”, dated 14.06.2019, issued by the CBDT, the petitioners’ were ineligible for compounding of the offences.

Section 279 (2) of the Income Tax Act, which provides for compounding of certain offences, does not provide any rule of limitation, the department conceded. However, the department averred that as per paragraph 7(ii) of the said Guidelines, no application of compounding can be filed “after the end of 12 months from the end of the month in which prosecution complaint, if any, has been filed in the court of law in respect of the offence for which compounding is sought”.

Thus, the department argued that since the petitioners’ application fell outside the limitation period prescribed under the Guidelines, they were ineligible for compounding of offences.

The High Court observed that in Vikram Singh v. Union of India (2017), the Division Bench of the Delhi High Court was dealing with the provisions of the CBDT Circular, dated 23.12.2014. The said Circular contained guidelines similar to the ones contained in paragraph 7(ii) of the Guidelines dated 14.06.2019, the Court noted.

The Delhi High Court in Vikram Singh v. Union of India (2017) had concluded that the Circular dated 23.12.2014 did not stipulate a limitation period for filing the application for compounding, it merely gave a discretion to the competent authority to reject an application for compounding on certain grounds. While holding that there is no limitation period for considering the application for compounding, the High Court had ruled that the grounds on which an application for compounding may be considered, should not be confused with the limitation for filing such an application.

Referring to the CBDT Guidelines dated 14.06.2019, the Bombay High Court ruled that the provisions of para 7(ii) of the Guidelines must be read along with the provisions of para 9.1 of the said Guidelines, which provides for relaxation in cases where an application is filed beyond twelve months, especially when there is a pendency of an appeal or at any stage of the proceedings.

The bench further held that the orders, instructions or directions issued by the CBDT under Section 119 or under the Explanation to Section 279 (6) of the Income Tax Act, cannot limit the power of the income tax authorities under Section 279(2) to consider an application for compounding of offence. It further added that such orders, instructions or directions cannot place fetters on the power of such authorities by prescribing a period of limitation.

“We are, therefore, of the opinion that the guidelines contained in the CBDT Guidelines dated 14th June 2019 could not curtail the power vested in Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General under the provisions of Section 279(2) of the Income Tax Act”, the Court said.

The bench added: “In our considered view, to the extent CBDT Guidelines dated 14th June 2019 creates a limitation on the time, within which application under Section 279(2) of the Income Tax Act is required to be filed, is of no consequence and does not take away jurisdiction of respondent no.3 or the other authorities, referred to in sub-section (2) of Section 279, from entertaining an application for compounding of offence at any time during the pendency of the proceedings, be they before the Magistrate or on conviction of the petitioners, in an appeal before the Sessions Court.”

The Court concluded that the condition specified in clause 7(ii) of the 2019 Guidelines, is not a rule of limitation, but is only a guideline to the authorities while considering the application for compounding. It does not take away the jurisdiction of the authorities under Section 279(2) to consider the application for compounding on its own merits and decide the same, the Court added.

The bench thus set aside the order under which the petitioners’ application for compounding of offence was rejected, remanding the application back to the respondent no. 3/ Chief Commissioner of Income Tax (TDS), to reconsider the matter on its merits.

Case Title: Footcandles Film Pvt Ltd. & Anr. versus Income Tax Officer – TDS & Ors.

Citation - 2023 LiveLaw (Bom) 34

Dated: 28.11.2022

Counsel for the Petitioner: Ms. Fereshte Sethna, with Ms. Mrunal Parekh, i/by DMD Advocates

Counsel for the Respondent: Mr. Suresh Kumar

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