BACKGROUND

The Central Board of Direct Taxes (CBDT) had issued various guidelines for compounding of offences under section 279(2)¹ of the Income-tax Act, 1961 (IT Act). In line with the Hon’ble Finance Minister’s budget announcement in July 2024 and with an overall objective to simplify and rationalise the compounding procedure for stakeholders, recently, the CBDT issued revised guidelines on compounding of offences². The revised guidelines, aim to reduce complexities arising out of existing multiple guidelines and it supersede all existing guidelines on the subject. Furthermore, it would apply to pending as well as new applications, from the date of its issue. We, at BDO in India, have analysed and summarised the key aspects of the said guidelines and provided our comments on its impact hereunder:

• What is the scope of revised guidelines to prosecution under the IT Act?
  • The guidelines come into effect from the date of issuance i.e.17 October 2024 and applies to all applications filed after the date of its issuance and those filed earlier but had not been disposed.

  • For applications pending on the date of issuance of revised guidelines, if compounding charges have already been determined and communicated but not fully paid, those charges will be re-determined, provided they are lower as per the new guidelines. However, if higher compounding charges determined as per the previous guidelines have already been paid, there will be no refund or adjustment against other dues.

• Can applications be filed again if they were previously rejected?

  • Applications can be resubmitted if they were rejected due to correctable/curable defects. Defects include non-payment of outstanding tax, interest, penalty or any other sum related to the offence, filing application in incorrect proforma or mention of incorrect section under which offence has been committed or incorrect Assessment Year or Fiscal Year, non-payment or short payment of compounding charges non-submission of undertaking regarding withdrawal of appeals etc. Credit for payments already made will be allowed against the compounding charges paid under the revised guidelines.

  • Further, applications previously rejected on merits will not be considered under the revised guidelines.

• What are the conditions for offences to be considered for compounding?
  Conditions that needs to be considered while filing Compounding Application are as below:

1. Application Submission

• Application must be made to the specified authority having jurisdiction over the case, in a prescribed format and submitted as an affidavit on a stamp paper of INR 100/-

• Application can be filed for offence pertaining to one Fiscal Year (in case of taxpayers) or quarter (in case of tax deductors), or for multiple years/quarters, referred to as a ‘Consolidated Compounding Application’

2. Time of filing

• Applications can be filed suo-moto at any time after the offence(s) is committed, irrespective of whether it comes to the notice of tax authorities or not. The application can also be filed after the initiation of prosecution proceedings.

3. Compounding Application Fee

• The applicant is required to deposit non-refundable fee of INR 25,000/- for a single application (per application) and INR 50,000/- for a consolidated application (per such application).

• Fee can be adjusted against applicable total compounding charges determined by the Competent Authority, if any

• The above fee shall also be payable for previously rejected applications that are proposed to be revived. However, it shall not be applicable to applications pending as on the date of issuance of revised guidelines.

4. Payment of Dues:

• All outstanding taxes, interest, penalties, and any other sum due relating to the offence(s) for which compounding has been sought must be paid before making the application.

• If any related demand is found outstanding, it must be settled (along with interest under section 220³ of the IT Act) within 30 days of intimating the applicant, or a maximum period of three months as allowed by the Competent Authority.

5. Undertaking by Applicant:

• The applicant must undertake to pay the compounding charges within the stipulated timeframe

6. Withdrawal of Appeals:

• The applicant must undertake to withdraw appeals filed by him, (if any), related to the offence(s) sought to be compounded. If such an appeal has mixed grounds not related to the offence(s) under consideration, an undertaking shall be given for withdrawal of such grounds as are related to the offence to be compounded.

7. Consolidation of Offences

• Any application for compounding of offence under sections 276B/276BB⁴ of the IT Act by an applicant for any period for a particular Tax Deduction and Collection Account Number (TAN) should cover all defaults constituting offence in respect of that TAN for such period.

• The total default on account of non-payment of Tax deducted and tax collected at source (TDS/TCS) for a quarter shall be considered by combining the defaults in all the statements filed by the TDS deductor, in respect of the relevant quarter.

• How to revive defective applications?

  • Applications which do not fulfil any of the specified conditions for offences to be considered for compounding (as mentioned above) or are not acceptable due to curable defects shall be treated as ‘defective’ under these guidelines and shall not be proceeded.

  • However, such applications can be revived without additional payment of Compounding Application Fee, provided the defects are cured within a period of one month from the date of intimation of the defect(s). In case, the defect is not cured within time allowed, defective application shall be returned back to the applicant.

  • Any further application filed for the same purpose, will be considered as subsequent compounding application and charges (as mentioned above) will be applicable.

• Which offences are compoundable with the approval of higher authority?

  • Certain offences such as imprisonment for 2 years or more, involvement in anti-national or terrorist activity, facilitating tax evasion, an offence under the Black Money Act, 2015 or Benami Property Transaction Act, 1998 or offence under section 275A/275B⁵ of the IT Act may be compounded only with the approval of Chairman, CBDT.

• Taxpayers, especially Non-Resident taxpayers, hesitate to opt for compounding due to the misconception that it constitutes an admission of offences. What measure has been taken to address this misconception?

  • Many taxpayers avoid compounding due to the misconception that it constitutes an admission of offences, which could impact their reporting obligations at various statutory and international forums. To clarify this issue and encourage taxpayers to seek compounding, the Competent Authority shall include a specific paragraph which clarifies that the compounding order is intended solely to resolve the offence and should not be interpreted as an admission of guilt by the applicant.

• What change has been made regarding the compounding procedure for offences by companies and Hindu Undivided Family (HUFs)?

  • The requirement for the main accused (i.e. the companies and HUFs) to file the application for compounding has been dispensed with. The application may be filed separately or conjointly by the main accused and/or any of the person(s) deemed to be guilty of the offence under section 278B or 278C⁶ of the IT Act, to be referred as co-accused.

  • On payment of compounding charges for the offence by the main accused and/or any of the co-accused, the Competent Authority shall compound the offences vide an order. 

  • In case liability of a company for an offence committed prior to the commencement of the corporate insolvency resolution process ceases due to the provisions of the Insolvency Bankruptcy Code (IBC), it is clarified that prosecution proceedings against the co-accused can still continue.   

• What are the changes regarding interest rates on delayed payments as per the new guidelines?

  • Interest chargeable on delayed payment of compounding charges have been abolished thereby reducing financial burdens on taxpayers.

BDO IN INDIA COMMENTS

The revised guidelines for the compounding of offences under the Income Tax Act, 1961, issued by the CBDT on 17 October 2024, represent a significant step towards simplifying the compounding process for taxpayers. By removing unnecessary complexities such as eliminating the categorisation of offences, removing the limit for filing applications, reducing rates for various offences such as for TDS defaults to single rate, abolishing interest on delayed payments, and consolidating various fee structures, the revised guidelines aim to enhance compliance and accessibility for various stakeholders. The clarifications regarding the non-admission of guilt further encourage taxpayers, including non-resident taxpayers to utilize the compounding mechanism without any fear of adverse implications. Overall, these changes are designed to foster a more efficient and user-friendly environment for resolving tax-related offences, promoting transparency and cooperation between taxpayers and tax authorities.