2022 (2) TMI 648 - HC - Income Tax

Compounding of offence - Criminal case u/s 276C(1) read with Section 277 and 278B of the Income Tax Act, 1961 against the petitioner on 29.3.2000 praying that the accused opposite parties may be summoned, tried and punished in accordance with law - limitation for compounding guidelines - THAT - From a bare perusal of sub-section (2) of Section 279, it is evident that any offence under Chapter XXII of the Act, 1961 may be compounded by the authorized officer either before or after the institution of the proceedings. No limitation for submission or consideration of compounding application has been provided under sub-section (2) of Section 279 of the Act, 1961. Therefore, the Central Board of Direct Taxes by a circular can neither provide limitation for the purposes of sub-section (2) nor can restrict the operation of sub-section (2) of Section 279 of the Act, 1961, in purported exercise of its power to issue circular under the second Explanation appended to Section 279 of the Act, 1961. It has not been disputed before us by the learned counsel for the respondent or in the impugned show cause notice that the criminal case in question is still pending. A circular is subordinate to the principle Act or Rules, it cannot override or restrict the application of specific provision enacted by legislature. A circular cannot travel beyond the scope of the powers conferred by the Act or the Rules. Circulars containing instructions or directions cannot curtail a statutory provision as aforesaid by prescribing a period of limitation where none has been provided by either the Act, 1961 or the Rules. The authority to issue instructions or directions by the Board stems from the second Explanation appended to Section 279 of the Act, 1961. It is well settled that the Explanation merely explains the main section and is not meant to carve out a particular exception to the contents of the main section. In the present case a specific limitation has been provided by para 7(ii) of the compounding guidelines contained in the circular dated 14.6.2019 in purported exercise of power under the second Explanation to Section 279(2) of the Act, 1961. The second Explanation merely enables the Board to issue instructions or directions to other Income Tax authorities for the proper composition of offences under that Section. That is to say the instructions or directions may prescribe the methodology and manner of composition of offences to clarify any obscurity or vagueness in the main provisions to make it consistent with the dominant object of bringing closure to such cases which may be pending interminably in our Court system. Such instructions or directions that are prescribed by the Explanation cannot take away a statutory right with which an assessee has been clothed, or set at naught the working of the provision of compounding of offences. Considering the facts and circumstances of the case and the provisions of sub-section (2) of Section 279 of the Act, 1961, the writ petition is allowed to the extent that compounding application of the petitioner cannot be rejected by the Income Tax Authority concerned on the ground of delay in filing the application

Issues Involved:
1. Legality of the show cause notice dated 16.11.2021.
2. Authority of the Central Board of Direct Taxes (CBDT) to prescribe a limitation period for compounding applications.
3. Interpretation and application of Section 279 of the Income Tax Act, 1961.
4. Validity of the CBDT circular dated 14.06.2019 regarding the limitation period for compounding applications.

Issue-wise Detailed Analysis:

1. Legality of the Show Cause Notice Dated 16.11.2021:
The petitioner challenged the show cause notice dated 16.11.2021 issued by the Chief Commissioner of Income Tax, alleging it was illegal and without authority of law. The petitioner argued that the notice relied on a CBDT circular dated 14.06.2019, which was not binding and could not override statutory provisions. The court observed that the show cause notice aimed to reject the compounding application based on a delay of more than 20 years, citing the CBDT circular which restricted the filing period to 12 months from the end of the month in which the prosecution complaint was filed.

2. Authority of the CBDT to Prescribe a Limitation Period for Compounding Applications:
The court scrutinized whether the CBDT had the authority to prescribe a limitation period for compounding applications through its circulars. The court referred to Section 279(2) of the Income Tax Act, 1961, which does not provide any limitation for submitting or considering compounding applications. It was held that the CBDT, through its circulars, cannot impose a limitation period that is not contemplated by the statute itself. Circulars are subordinate to the principal Act and cannot override or restrict statutory provisions.

3. Interpretation and Application of Section 279 of the Income Tax Act, 1961:
Section 279 of the Income Tax Act, 1961, deals with the prosecution and compounding of offences. Sub-section (2) allows for the compounding of offences either before or after the institution of proceedings without specifying any limitation period. The court emphasized that the CBDT's authority to issue instructions or directions under the second Explanation to Section 279 does not extend to prescribing a limitation period for compounding applications. The court cited precedents, including the Supreme Court's interpretation of statutory provisions and explanations, to support its view that explanations cannot curtail statutory rights or impose new limitations.

4. Validity of the CBDT Circular Dated 14.06.2019:
The court examined the validity of the CBDT circular dated 14.06.2019, which restricted the filing period for compounding applications to 12 months. The court referred to the case of Vikram Singh Vs. Union of India & Ors., where the Delhi High Court held that the CBDT could not prescribe a limitation period for compounding applications through its circulars. The court concluded that the circular dated 14.06.2019 was ultra vires Section 279 of the Income Tax Act, 1961, as it imposed a limitation period not provided by the statute.

Conclusion:
The court allowed the writ petition to the extent that the compounding application of the petitioner could not be rejected on the ground of delay. The court directed the Income Tax Authority to consider the compounding application in accordance with the law, emphasizing that the CBDT's circular could not override the statutory provisions of Section 279 of the Income Tax Act, 1961.

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