2022 (11) TMI 894 - HC - Income Tax

Validity of the order 278(2) - compounding of offence u/s 279(2) - prosecution u/s 276C (1) (i) - HELD THAT - Section 279 (2) provides that any offence under this Chapter either before or after the institution of the proceedings can be compounded by the Principal Chief Commissioner, Chief Commissioner, Director General or Principal Director General. In order to give the effect of Section 279(2) of the IT Category, the Government of India, Ministry of Finance issued guidelines. Clause 7 of the guidelines provides eligibility conditions for compounding and clause 8 provides a list of certain offences which are normally not be compounded. In order to become eligible for compounding clause 7(v) says that there has be to an undertaking by the assesses for withdrawal appeal filed by him, if it is related to the offence sought to be compounded. Likewise, clause 8(iii) provides that offence committed by a person for which he was convicted by a Court of law under direct taxes laws compounding cannot be done. As on today, the petitioners are convicted persons and in appeal, only the sentence has been suspended not the conviction, therefore, respondent No. 1 has rightly declined to compound the offence. By conjoint reading of section 279(2) and clauses 7(v) and 8. (iii), it is explicit that the Income Tax Authorities have the power to compound the offence either before or after the institution of the proceedings but certainly not after the conviction. Clause 4 of the policy also provides that compounding of offence is not a matter of right, however, the offence may be compounded by the competent authority on satisfaction prescribed in these guidelines. It is also important to see Clause 7.(ii) which provides that no application of compounding can be filed after the end of 12 months in which a prosecution complaint, if any, has been filed in the court of law. In view of the above, no writ/order/direction can be issued to the respondents for compounding the offence, hence the Writ Petition is dismissed.

Summary

Issues:
1. Challenge to the validity of the order rejecting compounding of offence under Section 278(2) of the Income Tax Act, 1961.
2. Conviction under Section 276 C (1) (i) of the IT Act, 1961 and subsequent legal proceedings.
3. Interpretation of guidelines for compounding of offences under Direct Tax Laws,2019.
4. Consideration of the eligibility conditions and restrictions for compounding offences under the IT Act.
5. Authority's discretion in compounding offences before or after conviction and the limitations imposed by the guidelines.

Analysis:
1. The petitioners challenged the validity of the order dated 10.12.2021, which refused to compound the offence under Section 278(2) of the Income Tax Act, 1961. The petitioners were removed from directorship of a company unlawfully, leading to an assessment order against the company. Subsequently, the petitioners were convicted under Section 276 C (1) (i) of the IT Act, 1961. The petitioners sought compounding of the offence, but the application was rejected due to the conviction.

2. The petitioners' conviction under Section 276 C (1) (i) of the IT Act, 1961 led to legal proceedings, including a pending Criminal Appeal before the Session Court. The petitioners' application for compounding was dismissed by the Session judge after conviction. The subsequent rejection of the compounding application by respondent No.1 was based on the conviction status, leading to further legal challenges.

3. The petitioners argued for their eligibility for compounding under the guidelines issued for compounding of offences under Direct Tax Laws,2019. They emphasized the pendency of a criminal appeal as a continuation of the original proceedings, citing relevant judgments to support their position. The petitioners sought reconsideration of the application based on legal precedents.

4. The Court examined the eligibility conditions and restrictions for compounding offences under the IT Act, emphasizing the provisions of Section 279(2) and the guidelines issued by the Ministry of Finance. The guidelines outlined conditions for compounding, including restrictions on convicted persons and timelines for application submission. The Court noted that as convicted persons with pending appeals, the petitioners were not eligible for compounding under the current circumstances.

5. The Court clarified that the Income Tax Authorities have the discretion to compound offences before or after the institution of proceedings but not after conviction. The guidelines specified that compounding was not a matter of right and could only be done based on satisfaction prescribed in the guidelines. The Court highlighted the limitations on filing compounding applications after prosecution complaints and concluded that no writ/order/direction could be issued for compounding the offence, leading to the dismissal of the Writ Petition.