2023 (10) TMI 706 - HC - Income Tax

Compounding of offence(s) - determination of compounding fee - first occasion - 5% or 3% of the amount of tax in default - petitioner-company, informs us that the additional amount, albeit at the rate of 3% of the amount of tax in default by taking into account the offence(s) committed by all four Directors concerning the three Financial Years i.e. 2016-17, 2017-18 and 2018-19, has been deposited. HELD THAT - Since a common application had been filed for the aforementioned FYs for the first time, it would fall within the expression first occasion , as indicated in the guidelines for compounding of offences under Direct Tax Laws, 2019. Therefore, in our view, the compounding fee should have been calculated at the rate of 3%, and not at 5%. Given this position, we are inclined to set aside the impugned communication. Respondents will thus pass the necessary orders compounding the offences, in view of the fact that the entire compounding fee has been paid.

Summary

Issues involved:
The case involves the calculation of compounding fee for a petitioner-company under the Guidelines for Compounding of Offences under Direct Tax Laws, 2019. The key issues include the correct rate of compounding fee for the offence attributed to the petitioner, the involvement of multiple directors in the offence, the application for revocation of sanction, and the interpretation of the term "first occasion" in relation to the compounding of offences for multiple financial years.

Calculation of Compounding Fee:
The petitioner challenged an order imposing a compounding fee at the rate of 5% of the tax amount in default, arguing that as per the Guidelines, the compounding fee for a category 'A' offence should be 3%. The petitioner contended that since it was the "first occasion" of applying for compounding, the fee should be at the lower rate. The court agreed with the petitioner's interpretation and set aside the impugned communication dated 19.01.2023.

Involvement of Multiple Directors:
The petitioner's counsel highlighted that one director was responsible for the company's affairs, while the others were not involved in conducting business. Despite the additional amount deposited at the 3% rate for all directors, the court noted that certain further amounts may need to be paid if the compounding fee is recalculated at the lower rate.

Application for Revocation of Sanction:
The petitioner had filed an application for the revocation of sanction under Section 2(35) of the Income Tax Act, 1961. The court acknowledged this application and considered it in the context of the overall case.

Interpretation of "First Occasion":
The court analyzed the term "first occasion" concerning the filing of a common application for compounding fees for multiple financial years. It concluded that the petitioner's case fell within the scope of the first occasion, justifying the lower 3% compounding fee rate instead of the 5% rate initially imposed.

Conclusion:
The High Court, after considering the arguments and the deposited amount, ordered the respondents to pass necessary orders for compounding the offences at the correct 3% rate. The writ petition was disposed of accordingly, and the interim order was vacated. The parties were directed to act based on the digitally signed copy of the order, bringing the matter to a close.