Compounding Fee can exceed Principal Amount If Non-Payment of Tax was Wilful: Delhi HC Upholds CBDT Compounding Guidelines [Read Judgment]

While upholding the compounding guidelines issued by the Central Board of Direct Taxes (CBDT), a division bench of the Delhi High Court held that the amount of compounding fee can be more than the principal amount if there is willful default in the payment of tax on the part of the assessee.

In the instant case, The Assessee-an individual had filed his return for the relevant assessment year. In consequent to search operations, an assessment under section 158BA was carried out against the assessee for the years 1986 to 1996 on the ground that the Assessee was unable to explain the source of the loan of One Million Indian Rupees given to a resident of Sri Lanka.

In 1997, an appeal was preferred by the Assessee before the Tribunal wherein, no stay was granted and was remained pending for almost 20 years. In 2006, the Department issued a notice to the Assessee stating that the taxes due was not paid and on 22nd January 2007, only revised grounds of appeal were filed. However, the Assessee failed to prosecute his appeal. Though there was no stay granted in Assessee’s favor, he had still ignored the outstanding tax demands against him. Even after the criminal prosecution was launched, on 25th January 2010, an order for framing of charges was passed by the ACMM (Special Acts), Central Delhi, which held that there was enough material to frame charges against the Assessee for the wilful defaults.

The assessee filed his first compounding application in the year 2010. In 2015, he again filed a compounding application and paid the principal amount which was rejected by the department on the ground of non-payment of interest.

Again, the fourth application was filed by the assessee wherein, interest amount was paid but there was a balance interest amount for the period from 1st December 2014 to 31st October 2015 which remained unpaid.

In the year 2016, when he submitted a fresh application again, the department said that the same has to be Principal CIT. the application was again rejected on the ground of not satisfying the compounding guidelines issued by the CBDT.

Aggrieved by the action of the Revenue, the petitioners challenged the legality and validity of compounding fee charged under the Income Tax Act, 1961 before the High Court. The petitioner also challenged the vires of the quantum of compounding fee prescribed under the CBDT guidelines contending that the said guidelines are arbitrary and unfair.

The petitioner also prayed for quashing of the compounding fee imposed upon him.

Dismissing the petition, the bench comprising Justices Prathima M Singh and Sanjiv Khanna noted that the compounding of offenses cannot be taken as a matter of right. It is for the law and authorities to determine as to what kind of offenses should be compounded, if at all, and under what conditions.

The bench observed that the concept of compounding of offenses in taxation laws is not unique to India and most of the countries provide for such measures under the respective laws.

Diving deeply into the facts of the case, the bench observed that it is the long delay, which is attributable only to the petitioner that has resulted in the compounding charges, for the delay in payment of taxes, being what they are.

“The CBDT, in its wisdom, has issued circulars and guidelines from time to time prescribe the compounding charges leviable for compounding of various offences. Only because in a particular case, due to the delay attributable purely to the petitioner, the number of compounding charges turned out to be much higher than the principal and the interest, it does not per se render the compounding charges illegal or arbitrary,” the bench said.

Upholding the legality of the guidelines, the bench further added that “there is no element of quid pro quo required, inasmuch as, the compounding fee charged is in the nature of tax under the Act. The legislation has vested the CBDT with the 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 also would not apply in the present case, inasmuch as, compounding fee is in the nature of a payment made to avoid punishment for a criminal offence.”