Compounding Fees under Guidelines of 2014 and 2019

By: Mr. Deepak Gupta - 12th August, 2019

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RECENT GUIDELINES FOR COMPOUNDING OF OFFENCE RELATING TO SEC 276CC -
DISPROPORTIONATELY HARSH TO SMALL TAXPAYERS
Provision of Sec 276CC - Failure to furnish return of Income

276CC. If a person wilfully fails to furnish in due time the return of fringe benefits which he is required to furnish under sub-section (1) of section 115WD or by notice given under sub-section (2) of the said section or section 115WH or the return of income which he is required to furnish under sub-section (1) of section 139 or by notice given under clause (i) of sub-section (1) of section 142 or section 148 or section 153A, he shall be punishable,-

  • in a case where the amount of tax, which would have been evaded if the failure had not been discovered, exceeds twenty-five hundred thousand rupees, with rigorous imprisonment for a term which shall not be less than six months but which may extend to seven years and with fine;
  • in any other case, with imprisonment for a term which shall not be less than three months but which may extend to two years and with fine:

Provided that a person shall not be proceeded against under this section for failure to furnish in due time the return of fringe benefits under sub-section (1) of section 115WD or return of income under sub-section

  • of section 139-
    • for any assessment year commencing prior to the 1st day of April, 1975; or
    • for any assessment year commencing on or after the 1st day of April, 1975, if-
      • the return is furnished by him before the expiry of the assessment year; or
      • he 60[tax payable by such person, not being a company,] on the total income determined on regular assessment, as reduced by the advance tax, if any, paid, and any tax deducted at source, does not exceed three thousand rupee

Nature of offence - 276CC

Sec 276CC provides that failure to furnish routine income tax return is an offence, punishable with a minimum rigorous imprisonment of 6months if the resulting evasion or deferment of tax amount is more than Rs 25000/-

What this means is any person who is aware of his obligation to file income tax return fails to do so within the prescribed time limits (including time limits of late filing) commits a statutory offence and may face a jail term of minimum 6 months to 7 years of rigorous imprisonment.

The defaulter is exposed to the risk of the said prosecution even after he has paid all past dues of taxed interest and penalties. The tax authorities may decide not to pursue prosecution without any consideration or for consideration of a compounding fee.

What is compounding of offence?

Compounding of offense means a person aggrieved of a criminal act agrees not to report the occurrence of a crime or not to prosecute a criminal offender in exchange for money or other consideration.

For compounding of tax offences CBDT issues guidelines from time to time instructing the field offices of the offences which may be compounded, the fees and procedure thereof.

Compounding fees for failure to furnish return

The table below gives a comparative analysis of the compounding fees under guidelines issued by CBDT in 2014 as superseded by guidelines issued in 2019

Compounding Fees under Guidelines of 2014 and 2019

Prosecution Section 276C (1) 276C (2) 276CC
Nature of alleged offence Willful attempt to evade taxes Willful attempt to evade payment of taxes Failure to furnish return of Income
Min Imprisonment 6 Months RI 6 Months RI 6 Months RI
Max Imprisionment 7 Years RI 7 Years RI 7 Years RI
Min Fine Not defined Not defined Not defined
Max Fine Not defined Not defined Not defined
Compounding Guidelines 2014 Alleged evasion between 1L and 25L 100% of taxes alleged to be evaded 3% per month of the taxes alleged to be evaded for the period of default 2% per month of the taxes alleged to be evaded for the period of default
Alleged evasion > 25L 100% of taxes alleged to be evaded 3% per month of the taxes alleged to be evaded for the period of default 2% per month of the taxes alleged to be evaded for the period of default
Compounding Guidelines 2019 Alleged evasion between 1L and 25L 125% of taxes alleged to be evaded 3% per month of the taxes alleged to be evaded for the period of default Rs 2000 per day for the period of default
Alleged evasion > 25L 150% of taxes alleged to be evaded 3% per month of the taxes alleged to be evaded for the period of default Rs 4000 per day for the period of default

Thus it is clear that the punishments prescribed for tax offences are very harsh and disproportional. This can be further highlighted by comparing these with punishment prescribed for extortion under IPC, as shown in the table below;

Particulars Failure to file Income tax Return Extortion
Defined under Sec 276CC of Income tax Act, 1961 Sec 383 of Indian Penal Code 1860
Meaning Knowingly not filing income tax return within due date of late filing Intentionally putting fear of injury to a person and dishonestly induce him to part his property or valuables
Nature of Offence Statutory Offence Common Law Offence
Criminal Intent Irrelevant Required to be proved by prosecution
Presumtion of guilt Presumed guilty till proved innocent Presumed innocent till proven guilty

Punishment

Minimum Imprisonment 6 Months Nil
Maximum Imprisonment 7 Years 3 Years
Imprisonment Type Rigorous Simple or Rigorous
Imposition of fine Mandatory Discretionary
Quantum of fine Not defined Not defined
Compounding Available Not Available

Hence in the earlier years the tax authorities were very judicious in initiating prosecution and it was used after due consideration of the context, circumstances and the background of the alleged tax defaulter.

Generally tax defaulters were not treated as criminals and tax authorities were focused on recovery of tax, interest and penalty.

Nowadays the practice and culture has changed and compounding fees is looked upon as a source of government revenues. No distinction is sought to be made on the grounds of the context and circumstances of the defaulters. The disproportionate hardship and demoralization of tax payers who are important stakeholders and players of the economy are grossly ignored

Unfairness to small tax payer in the revised guidelines of 2019

One thing worth noting in the said revised guidelines is that the basis of compounding fees for failure to file return is change from

"2% per month of the taxes alleged to be evaded for the period of default" to "Rs 4000 /2000 per day for the period of default"

This revised formula broadly charges same compounding fees to small and large taxpayers totally ignoring the amount of tax alleged to be evaded.

This is highly prejudicial and unfair to smaller tax payers as illustrated in the table below

Impact of compounding fees on alleged evasion by small and large tax payers

Amount of alleged evasion 1 L 25 L 1 CR 10 CR
100,000 1,000,000 10,000,000 100,000,000
Period of default        
in Months 12 12 12 12
in Days 365 365 365 365
Compounding fee basis
As Guidelines 2014 per month 2% 2% 2% 2%
As Guidelines 2019 per day 2,000 4,000 4,000 4,000
Total Amount of Compounding Fee
As Guidelines 2014 per month 24,000 240,000 2,400,000 24,000,000
As Guidelines 2019 per day 730,000 1,460,000 1,460,000 1,460,000
% of compounding Fee to alleged evasion
As Guidelines 2014 per month 24% 24% 24% 24%
As Guidelines 2019 per day 730% 146% 15% 1%

Thus if a small taxpayer fails to file his return and say a tax and interest of Rs. 1 lakh is missed out, then apart from interest and penalty he is made to pay a compounding fee that is 730% of the defaulted amount as against a large tax payer who does a similar default can buy peace by paying just 1% of the defaulted amount.

This is a serious anomaly which the CBDT should rectify at the earliest.

Need for tax autourities to introspect its approach

Last but not the least the tax authorities need to seriously introspect and understand distinction between notorious tax offenders and genuine but non-compliant businesspersons or tax payers.

Both these categories cannot be treated on the same scale; the genuine but non-compliant tax payer is otherwise an important player of the economy; he may need to be disciplined but definitely not crushed or completely demoralized.

Again it should be appreciated that fully compliant tax payer may also fear committing minor tax offences for which they should not become overly fearful.

If these important economic players are deeply demoralized their positive contribution to the economy including revenues of the government would be seriously jeopardized.

Let's hope that holistic and enlightened thinking triumphs the narrow, unjust, shortsighted and thoughtless target oriented mindset that seems to have possessed the income tax department.

Thanks for your time and a patient readings.

Feel free to share your thoughts.


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