TIME LIMIT FOR FILING COMPOUNDING APPLICATION UNDER INCOME TAX ACT, 1961.

[Mr. M. GOVINDARAJAN]

Compounding of offence

Section 279 of the Income Tax Act, 1961 (‘Act’ for short) provides for the prosecution under the Act is to be initiated at the instance of Principal Chief Commissioner, Chief Commissioner, or Joint Commissioner (Appeals) or Commissioner (Appeals) or appropriate Authority. Section 279(2) of the Act provides that any offence under this Chapter may, either before or after the institution of proceedings, be compounded by the Principal Chief Commissioner or Chief Commissioner or a Principal Director General or Director General.

Limitation for filing compounding

Circular No. F.No. 285/08/2014-1T(Inv.V)/196, dated 16.09.2022 provides the time limitation for filing applications for compounding. Earlier this period is 24 months and the circular provides the limitation as 36 months.

Rejection

If the compounding application is not filed within the limitation period as prescribed in the circular it will be rejected.

In ‘Photon Khataas Private Limited v. Director General (Investigation) and others’ - 2024 (1) TMI 1137 - MADRAS HIGH COURT, the petitioner challenges an order dated 18.11.2022 of the Department rejecting the compounding application of the petitioner. The petitioner contended that it is a subsidiary of Photon Kathaas Production Limited, Singapore. Its return of income could not be filed in time because there was a difference of opinion between the auditors in India and Singapore. Such return of income was eventually filed on 14.05.2018. In those circumstances, prosecution was launched by the sixth respondent before the Additional Chief Metropolitan Magistrate, Egmore for belated filing of returns. The said prosecution was on the basis of complaint dated 03.01.2019. Summons was issued in such proceedings on 09.11.2021. After receipt thereof, on 19.05.2022, the petitioner filed a compounding application. The said application was rejected by the order impugned on the ground that the application was filed beyond the time limit specified in guidelines issued by the Central Board of Direct Taxes on 14.06.2019. The present writ petition arises in the above facts and circumstances.

The High Court held that neither 279(2) nor any of the other sub-sections of Section 279 prescribe a period of limitation with regard to compounding of offences. By taking note of this aspect, the guidelines issued by the Central Board of Direct Taxes on 14.06.2019 were quashed by the Madras Court. At this point of time, the said judgment holds the field. Even otherwise, the complaint was lodged on 03.01.2019. A period of about 15 months lapsed between the date of complaint and the onset of the Covid-19 pandemic. If the period excluded under orders of the Hon'ble Supreme Court, i.e. the period running from 15.03.2020 to 28.02.2022, is excluded the compounding application filed on 19.05.2022 would be within the period prescribed in the guidelines of the Central Board of Direct Taxes.

The High Court set aside the impugned order rejecting the application for compounding. The High Court further directed the department to dispose of the compounding application within a maximum period of one month from the date of receipt of a copy of this order after providing a reasonable opportunity to the petitioner.

In ‘Eyebal Media Private Limited v. Chief Commissioner of Income Tax (TDS), Chennai’ – 2024 (9) TMI 293 – Madras High Court, the present writ petition was filed by the petitioner company against the respondent rejected the application of the appellant for compounding of offences. The said application was rejected on the ground that the application was filed beyond the period of limitation i.e., beyond 36 months.

 The petitioner submitted the following before the High Court-

• There is no time limit for filing of the compounding application and as per Section 279(2) of the Income Tax Act, any offence may, either before or after the institution of proceedings, be compounded by the Principal Chief Commissioner of Chief Commissioner or a Principal Director General of Director General.
• there is no period of limitation prescribed under Section 279(2) of the Act.
• Therefore, the order rejecting the application for compounding is to be set aside.
• In ‘Jeyashree v. CBDT and others’ - 2023 (11) TMI 1110 - MADRAS HIGH COURT, the High Court held that since the idea of the Legislation was that the compounding of offences is permissible either before or after the institution of the proceedings, the CBDT cannot issue a circular contrary to the object of the said provisions. The explanation, which empowers the CBDT to issue circular, is only for the purpose of implementation of the provisions of the Act with regard to the compounding of offences and not for the purpose of fixing time limit for filing the application for compounding of offences and the same is contrary to the provisions of the Act and hence, it is not permissible in terms of Section 279(2) of the Act.

The Revenue contended the following before the High Court-

• The Madras High Cour by virtue of the aforesaid judgment had struck down clause 7(ii) of the circular holding that it is beyond the scope of the Act.
• However, the Department filed a writ appeal against the said order, however, no interim order has been passed so far.
• by virtue of the judgment of Madras High Court in Jayshree's (supra), the Department prayed that appropriate orders may be passed.

The High Court considered the submissions of the petitioner and the Department. The High Court was of the view that once the nature of offence is compoundable by virtue of the provisions of the Act, it cannot be taken away by fixing a time limit for filing the compounding application. The judgment in ‘Jeyashree’ is squarely applicable to the facts of the present case. Hence, the impugned order is liable to be set aside and it is accordingly set aside.

The High Court allowed the present petition and set aside the order rejecting the application for compounding. The High Court further directed the department to take up the application for compounding of offences on record and pass orders on merits and in accordance with law. It is made clear that this order is passed only for the respondent to take up the compounding application on record and pass appropriate orders, but not for compounding of any criminal proceedings already lodged or to be lodged against the petitioner.