THE ‘CBDT’ IS NOT EMPOWERED TO FIX THE TIME LIMIT FOR FILING THE APPLICATION FOR COMPOUNDING OF OFFENCES

[Mr. M. GOVINDARAJAN]

Compounding of offence

Compounding of offence is a process whereby a person committing a default under the Income tax Act, 1961 (‘Act’ for short) files an application to the competent authority accepting that it has committed an offence and so that same should be compounded.  The compounding application may be filed suo moto at any time after the offence(s) is committed irrespective of whether it comes to the notice of the Department or not.  The Competent authority shall be Principal Chief Commissioner or Chief Commissioner or Principal Director-General or Director-General having jurisdiction over the assessee.  Filing application for compounding of offences is not a right.  The competent authority may compound the offences on being satisfied with the fulfillment of the conditions subject to which the assessee is eligible for compounding of offence.  When evaluating each case, the authority must take into account several factors, including the type and severity of the offense.

Limitation

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.  The said section does not provide limitation for filing the application for compounding of offences.  But the circular dated 14.06.2019 provides that the application for compounding shall be filed within 12 months from the date of prosecution.

The said circular on the point of limitation has been challenged in JAYSHREE VERSUS THE CENTRAL BOARD OF DIRECT TAXES, CHIEF COMMISSIONER OF INCOME TAX-1, CHENNAI, INCOME TAX OFFICER, NON-CORP. WARD 11 (3) , CHENNAI Versus 2023 (11) TMI 1110 - MADRAS HIGH COURT.  In the said case the petitioner had purchased a property in the year 2006 and sold the same in the year 2013.  In the year 2013 the petitioner purchased another property.  She did not file income tax return on the plea that she was not liable to pay income tax.  However she filed the return for the assessment year 2013 -14 belatedly on 13.06.2016.  The Department initiated prosecution against the petitioner on 14.09.2016 for delay in filing of Income Tax Returns for the assessment year 2013-14. 

The petitioner, in terms of Section 279(2) of the Act filed an application for compounding the offence before the competent authority.   The said application was rejected by the competent authority on the ground that the above said application was filed after 12 months from the date of launching of prosecution in terms of Circular issued by CBDT in  F.No. 285/08/2014-IT(Inv.V)/147 dated 14.06.2019.    Against this order the petitioner filed the present writ petition before High Court. 

The petitioner submitted the following before the High Court-

• As per Section 279(2) of the Act, there is no provision with regard to the fixation of time limit for filing the application for compounding of offences.
• The time limit of 12 months is fixed by CBDT circular only to restrain the rights of the petitioner to file the application for compounding of offences and the same is contrary to the provisions of Section 279(2) of the Act.
•  Since the said circular was issued beyond the scope of the Act, the same is liable to be quashed.
• Without considering all these aspects, the respondents had passed the impugned order dated 20.08.2022 by non-application of mind and therefore the circular is liable to be quashed.

The Department submitted the following before the High Court-

• In terms of Section 119 of the IT Act and the proviso to explanation of Section 279 of the Act, the CBDT is empowered to issue any guidelines, circular or notifications for the purpose of proper implementation of the Act.
• The Department relied on 5 case laws in which Supreme Court and High Court passed orders in which to the power of CBDT to fix the time limit of 12 months for filing of application for compounding of offences, though none of the judgment had dealt with in this regard.  It was held therein that the CBDT can pass the appropriate guidelines and issue circulars.
• The petitioner is bound to the provisions of the said circular and hence, taking all these facts into consideration, the Authorities concerned has rightly rejected the application filed by the petitioner for compounding of offences. 

The High Court considered the submissions of the petitioner and the Department.  The High Court considered the facts of the case.  The High Court also analyzed the provisions of circular 14.06.2019.

The High Court observed that on perusal of the above circular, it appears that the CBDT had fixed the time limit, to file the application for compounding of offences, as 12 months from the date of prosecution. According to the Department the compounding application ought to be filed on or before 13.09.2017.  But the petitioner filed the application on 14.09.2021 i.e., beyond the limitation period prescribed in the circular. 

For this the petitioner contended that the fixation of time limit of 12 months for filing the application for compounding of offences is not in accordance with the Section 279(2) of the Act.  The High Court analyzed the provisions of Section 279(2) of the Act which reads that any offence under this Chapter may, either before or after the institution of proceeding be compounded by the Principal Chief Commissioner or Chief Commissioner or a Principal Director General or Director General.  The High Court observed that in section 279(2) of the Act nowhere it has been mentioned with regard to the fixation of time limit for filing the application for compounding of offences.  However in the explanation to the said Section, it has been stated that the CBDT is empowered to issue orders, circulars, instructions and directions for the purpose of proper implementation of the Act.  The High Court observed that the CBDT is empowered to issue circulars, directions, instructions etc. However, the same should not be beyond the scope of the Act and it should be within the scope of the Act.

The High Court further observed that the intention of the Legislation for bringing Section 279(2) of the Act is to permit the Assessee to go for compounding of offences either before institution of proceedings or after institution of proceedings. The CBDT had brought the circular, whereby they intend to fix time limit, which almost amounts to amendment of Section 279(2) of the Act which is contrary to the provisions of the Act.  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 High Court held that he CBDT is not empowered to fix the time limit for filing the application for compounding of offences, which is contrary to the provisions of Section 279(2) of the Act.  The petitioner can file the application for compounding of offences either before or subsequent to the launching of the prosecution according to Section 279(2) of the Act.   The order passed by the respondent, rejecting the application for compounding of offences on a sole ground that it is barred by limitation, is liable to be set aside. Accordingly, the order dated 20.08.2022 is set aside.

However the Department prayed for the remitting back the case to the Authority concerned.  The High Court remitted the matter back to the Authority concerned and the respondent is directed to decide the same on its own merits and in accordance with law.