2018 (1) TMI 1115 - HC - Income Tax

Imposition, legality and validity of compounding fee - obligations to pay the compounding charges - Held that - The guidelines do categorize between different types of offences and prescribe different compounding charges for different offences. The categorization or the classification in the guidelines do not appear to be arbitrary or irrational. Guidelines of 2014, under which the last application for compounding was made, and was accepted to be in the prescribed format, has enured to the benefit of the petitioner and the application has rightly been processed under these Guidelines. The petitioner has not raised a challenge either to the 2008 Guidelines or 2003 Guidelines. It is only after the charges were framed in the criminal proceedings and after filing the applications for compounding and after compounding charges have been determined as per the formula prescribed in the 2014 Guidelines, that the challenge has been raised by the petitioner. The petitioner having voluntarily agreed and undertaken to the department to pay the compounding charges and to withdraw his appeal, ought to be directed to be bound down by the same. It is a settlement process voluntarily invoked by the petitioner in order to escape criminal prosecution under the Act. Since an accused may have to suffer severe consequences for non-payment of tax, if he is held to be guilty, it is not open to him to challenge the reasonableness of the same. The petitioner had consciously undertaken to abide by the decision of the Committee constituted for compounding the offences. Accordingly, the petitioner has the option to deposit the compounding charges as determined within a period of four weeks from the date of this order, failing which, the authorities would be entitled to re-compute the compounding charges for the delayed payment and proceed in accordance with law. Petitioner is directed to pay costs of ₹ 50,000/- to the Respondent within a period of four weeks from the date of this order.

Issues Involved:
1. Legality and validity of the compounding fee under the Income Tax Act, 1961.
2. Quantum of the compounding fee prescribed by the CBDT guidelines dated 23rd December, 2014.
3. Whether the compounding fee constitutes a tax or a levy without the sanction of law.
4. Whether the compounding fee is disproportionate and unreasonable.
5. The power of the CBDT to issue guidelines for compounding of offences.
6. The applicability of the principle of quid pro quo to the compounding fee.

Issue-wise Detailed Analysis:

1. Legality and Validity of the Compounding Fee:
The petitioner challenged the imposition, legality, and validity of the compounding fee under the Income Tax Act, 1961, arguing that the fee is exorbitant and constitutes a tax or levy without legal sanction. The court held that the power to compound offences cannot be taken as a matter of right and must be regulated by law and guidelines to avoid arbitrariness and discrimination. The CBDT guidelines issued on 23rd December, 2014, were found to be within the legal framework and not arbitrary or illegal.

2. Quantum of the Compounding Fee:
The petitioner contended that the compounding fee of ?69,75,949/- was disproportionate to the tax demand of ?8,19,419/- and interest of ?20,23,431/-. The court noted that the quantum of the fee is determined based on the nature of the offence, the conduct of the party, and the period of default. The fee for an offence under Section 276C(1) is 100% of the amount sought to be evaded, and for Section 276C(2), it is 3% per month of the tax amount for the period of default. The court found that the long delay in payment of taxes and interest by the petitioner justified the high compounding fee.

3. Compounding Fee as a Tax or Levy:
The petitioner argued that the compounding fee is in the nature of a tax or penalty without statutory basis. The court, however, held that the compounding fee is not a tax but a regulatory fee meant to ensure compliance with the law. The fee is imposed to avoid punishment for a criminal offence and does not require a direct quid pro quo.

4. Proportionality and Reasonableness of the Compounding Fee:
The court rejected the argument that the compounding fee is disproportionate and unreasonable. It emphasized that the fee is determined based on the duration of default and the amount sought to be evaded. The court found that the petitioner's prolonged delay in paying taxes and interest justified the high compounding charges.

5. Power of the CBDT to Issue Guidelines:
The petitioner challenged the validity of the CBDT's power to issue guidelines for compounding offences. The court upheld the CBDT's authority to issue such guidelines under Section 119(1) and Section 279 of the Income Tax Act, as affirmed by the Supreme Court in Y.P. Chawla SC (1992) 2 SCC 672. The guidelines ensure uniformity and consistency in the compounding process.

6. Applicability of Quid Pro Quo:
The petitioner argued that the compounding fee lacks a quid pro quo element. The court clarified that the concept of quid pro quo is not applicable to compounding fees, which are regulatory in nature. The fee is imposed to avoid criminal prosecution and ensure compliance with tax laws, and does not require a direct service in return.

Conclusion:
The court concluded that the compounding fee imposed on the petitioner was lawful, reasonable, and justified given the prolonged delay in payment of taxes and interest. The guidelines issued by the CBDT were found to be within legal bounds and not arbitrary. The petitioner was directed to pay the compounding charges within four weeks, failing which the authorities could re-compute the charges for delayed payment. The petitioner was also ordered to pay costs of ?50,000/- to the respondent.

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