INCOME TAX REVIEW

1. Sections 275A to 280 deals with various types of offences for which the Income Tax Department can prosecute an assessee in the Court of Law. The prosecution can be launched only at the instance of the Commissioner of Income Tax or Commissioner of Income Tax (Appeals) or the Appropriate Authority.

2. The sections under which prosecution can be launched against an assessee are briefly enumerated hereunder.

3. Once a case is filed in the Court of Law, the authority filing the case has no power to withdraw the same except as specifically provided in the Act. There are certain circumstances under which the prosecution can get abatted. The Act provides first relief in Section 278AA. The provisions of section 278AA lays down that if an assessee can show a reasonable cause for his failure to comply with the provision of the Act for which prosecution could be launched u/s. 276A [failure to comply with sections 178(1) and 178(3)], 276AB (failure to comply with sections 269UC, UE and UL) and 276B (failure to pay tax deducted at source)] then no punishment can be imposed. This section provides for an inbuilt defence to an assessee against the prosection u/ss. 276A, 276AB and 276B. Further section 279(1A) provides that prosecution for offences u/ss. 276C and 277 cannot be initiated if the penalty imposed or imposable for concealment of income has been reduced or waived by the Commissioner u/s. 273A.

4. Apart from the above, sub-section (2) of section 279 gives powers to the Chief Commissioner/Director General to compound offences under Chapter XXII of the Income Tax Act, 1961. Such compounding can be done either before or after the institution of prosecution proceedings.

5. CBDT Instructions : The Central Board of Direct Taxes has been issuing instructions and guidelines to its officers, to be followed before compounding any offence. However, there was a lot of debate over the Board’s powers to fetter the discretion of the tax authorities by issuing instructions or directions, particularly in the wake of Delhi High Court’s judgment in the case of M.P. Tiwari vs. Y. P. Chawla ITO 187 ITR 506 (M.P.), wherein it was held that instructions issued are invalid and ultra vires. This led to a retrospective insertion of explanation to section 279 consequent to which the Hon’ble Supreme Court reversed the Delhi High Court’s decision. The Supreme Court’s decision is reported in 195 ITR 607 (SC). Subsequently, in September 1994, the Central Board of Direct Taxes, after reviewing the earlier guidelines, has issued revised guidelines. These guidelines have also been amended vide CBDT’s F No.265/26/2002 IT(INV) dated 29-7-2000 [263 ITR(St.)3] The salient features of these guidelines are as under:

1. The guidelines have reintroduced the concept of distinction between technical and non-technical offences. Offences u/ss. 276B, 276BB, and 276E are regarded as technical. All other offences are regarded non-technical.

2. The technical offences can be compounded even before filing complaint.

3. The restriction on compounding of offences by large and monopoly industrial houses has been removed.

4. The powers of compounding have been delegated to the Chief Commissioners of Income-tax and the requirement of CBDT’s consent has been reduced to the minimum.

5. The revised guidelines have been made applicable to all pending applications and even the cases rejected under the old guidelines can be considered.

6. The following conditions should be satisfied for compounding an offence.

1. There should be a written request from the assessee.

2. The amount of undisputed tax, interest and penalties relating to the default should have been paid.

3. The assessee should express his willingness to pay both the prescribed compounding fees as well as establishment expenses.

7. A technical offence may be compounded by Chief Commissioner of Income Tax or Director General of Income Tax if the following conditions are satisfied cumulatively.

1. The offence is the first one by the assessee.

2. The compounding charges do not exceed Rs.10 lakhs.

3. The complaint should not have been filed.

In all other cases, the offence can be compounded only with the previous approval of the Board. In this regard, it has now been prescribed that

1. All types of cases relating to technical offences are to be compounded by CCIT/DGIT.

2. Distinction between first offence and subsequent offence is removed and

3. CCIT/DGIT shall not reject an application for compounding of a technical offence, if all conditions prescribed in the guidelines are satisfied.

8. A non-technical offence can be compounded with the approval of the Board subject to satisfaction of the following conditions cumulatively in addition to conditions mentioned in para 6 above.

1. The offence is the first one by the assessee.

2. The Board’s prior approval is obtained. However, if the amount involved exceeds Rs.1 lakh, approval can be granted only after seeking advice from Ministry of Law. This requirement of referring the matter to Ministry of Law has not been done away with vide amendment dated 29-7-2003 referred above.

9. The guidelines also provides that in suitable and deserving case, the offence may be compounded after seeking approval from F.M.

10. The composition fees for compounding of various offences are as under:

No composition fees is prescribed for other offences. However, it has been provided that the Board can consider the same on a case to case basis. The compounding charges shall also include prosecution establishment expenses which will be charged @ 10% of the composition fee subject to a maximum of
Rs. 50,000/-.

11. It has also been prescribed that all the existing guidelines as well as the amendments shall be applicable only to future as well as pending cases. In other words, the offences already compounded shall not be reconsidered.

12. Thus, compounding of an offence could only be made if a written request by way of an application is made by an assessee bringing out in the application following points.

1. The nature of offence for which prosecution is launched or proposed to be launched;

2. The reasons and circumstances under which the offence was committed;

3. The applicant’s willingness to pay the compounding fees including the part of litigation expenses incurred by the Department till the date of compounding of the offence;

4. Whether the applicant satisfies the requisite conditions or not.

5. Lastly there should be a prayer to compound the offence by accepting the compounding fees on getting the approval about the compounding fees by the compounding authority.

Keeping in view the above, two draft applications are given below. One for compounding offence u/s. 276B and second a general application.

The Chief Commissioner of Income Tax,
Mumbai,

Sir,

1. The applicant is assessed to income-tax with the I.T.O., … ....../A.C.I.T.,…. ......../Dy. C.I.T., …........../Jt. C.I.T………... Range ..........., Mumbai.

2. The applicant is being prosecuted for non-payment of following taxes deducted at source from the salary of the employees within the time stipulated under section 200 read with Rule 30 of the I.T. Rules, 1962 for the Assessment Year written hereunder:

3. The applicant states that the following factors have contributed for the alleged failure in payment of the tax deducted at source within the stipulated time under the Acts and Rules.

1. The appellant is doing business of .............................. for last ............ years. In the initial stages, it was having a monopoly in this business. However, due to passage of time competition increased and in the accounting years relevant to the Assessment Years referred to above the applicant found it extremely difficult to face the stiff competition. As a result of this stiff competition, the sales has shown regular downward trend and has gone down from ............................... in the year ................ to Rs.................... in the year ...............................

2. The applicant had also experienced labour problems from ................. to ................. There was a strike for a period of ................... days by the workers of ........................ The workers after calling off the strike, after the period of ................. days had adopted ‘go slow’ tactics with the result that the applicant suffered heavy financial losses and disruption of office work.

3. The applicant is regular in payment of tax deducted at source and filing the returns thereof up to the A.Y. ..................... i.e., immediate previous A.Y. relevant to the A.Y. for which the proceeding u/s. 276B are initiated for the first time and a complaint is lodged in the Presidency Magistrate Court, Bombay.

4. In the accounting year relevant to the years for which prosecution proceedings are commenced, due to strike as explained above, the office work was completely disturbed/disrupted. The applicant was, therefore, not in a position to comply with the requirement of the I.T. Law in the absence of the books of account.

5. Due to fire in the factory premises in the month of ................... 199... the applicant had lost almost all the record for the period up to ......................... date and therefore had to reconstruct the record. The reconstruction of record was delayed as the factory and the office premises were totally closed for a period ................... years.

6. The applicant for the above Assessment Years has suffered losses and these losses are accepted by the Department.

7. Considering the above facts as reasonable cause and as nominal penalties as detailed below were levied u/s. 201 for the alleged default in non-compliance with the provisions of section 200 as detailed below, were cancelled by the CIT(A).

A.Y. Amount of Penalty

4. The applicant is prepared to pay the Compounding Fees as prescribed. The applicant understands that as per the present norms, the Compounding Fees, payable may work out Rs. .......................... which the applicant is prepared to pay.

5. The amount of tax involved is small and the applicant has discharged all its obligation under the Act. There are no taxes outstanding as far as the Assessment Years referred to above are concerned.

6. The applicant in the above circumstances, requests the Hon’ble Chief Commissioner to kindly consider the applicant’s case for compounding the above offence in terms of section 279(2) of the I.T. Act, 1961 and the prosecution may kindly be waived/the case filed in the Court of the Presidency Magistrate may kindly be withdrawn.

Thanking you,

Yours faithfully,

13.2 General Application

The Chief Commissioner of Income Tax,
Mumbai

Sir,

1. The applicant is assessed to income-tax with the I.T.O., … ....../A.C.I.T.,… ...../Dy. C.I.T., .../Jt. C.I.T…………. Range ........., Mumbai.

2. The applicant is being prosecuted u/ss. 276C, 277 and 278 for alleged concealment of income of Rs. ................... for the A.Y. ................ Briefly the facts of the case are as under.

1. A.The applicant had filed a return of income showing total income of Rs................... on .............................. for the A.Y. ........................... The business of the applicant is that of dealer in ................ The applicant in the course of carrying on business had taken certain loans on hundies amounting to Rs................... as per details hereunder.
   Date of Name of Amount Remarks Loan the Banker of Loan
   Besides this, the applicant had also effected purchases from following parties amounting to Rs..................... as under:
   Name Date Amount Whether register of the or unregistered seller dealer under sales tax
    

2. The A.O. in the course of the assessment proceedings had called upon the applicant to produce the evidence in support of the loans taken as well as the purchases effected by the applicant as detailed above.
    

3. The applicant had filed the confirmation of loans from all the above parties. However, as the A.O. was not satisfied about genuineness of the above loans since these loans were either in cash from these parties, who were assessed to income tax or were from the parties who were not assessed to Income-tax. The A.O. was therefore, of the view that the loans amounting to Rs.................. as detailed above were not genuine. The A.O. further observed that if the applicant was readily agreeable for certain addition on account of non-genuineness of loans and purchases, no penalty proceeding u/s. 271(1)(c) would be initiated if the assessee files a revised return disclosing additional income.
   The applicant in the circumstances and in order to avoid protracted litigation in the matter readily agreed for an addition of Rs................. as against the total loan of Rs................ referred to above on the condition that no proceedings u/s. 271(1)(c) or the prosecution for alleged concealment of income was initiated. Hereto annexed is a copy of letter dated ................. of the applicant narrating the above facts and conditions under which the return was revised for your ready reference and record.
    

4. As regards the alleged non genuineness purchases, it was submitted to the A.O. that the assessee is carrying on business in which at times it is difficult to obtain proper bills of purchase. The assessee filed with the A.O. details of purchase and sales to show that the purchases were genuine as the same were matched by corresponding sales. The A.O. did not doubt the sales as the quantity account matching the purchases and sales was also filed. It was in these circumstances submitted that simply because certain purchases were in cash and because the parties concerned had moved from their last known addresses, no adverse inference could be drawn against the applicant regarding the genuineness the purchases referred to above. The applicant had also filed sales tax order in support of the above fact. The applicant had, therefore, submitted that simply because the purchases were from unregistered dealers who were not available now at the addresses available with the applicant, no addition on account of alleged purchases could be made. The A.O. completed the assessment by making an addition of Rs.................... as non genuine purchases. The A.O. did not accept the conditions referred to above, viz. that no penalty or prosecution proceedings could be initiated. The A.O. levied a penalty of Rs................ u/s. 271(1)(c).
    

5. The applicant, as a matter of compromise, accepted the Assessment Order but has filed appeal against the said penalty order u/s. 271(1)(c) levying penalty of Rs...................... The CIT(A) confirmed the penalty order. The applicant has now filed an appeal to the Income Tax Tribunal which is pending.
    

6. In the meantime, the Department initiated proceeding u/s. 276C for wilful attempt to evade tax and also initiated proceedings u/s. 277 for false verification in the return of income.

B. The applicant, in the above circumstances, submit that the case of the applicant is fit for compounding the prosecution u/ss. 276C and 277 for following reasons.

1. The applicant had voluntarily and readily agreed for addition of Rs................. to the total income of the applicant. The Assessment Order would not show that the A.O. has given any finding that the loans of Rs................. were proved to be non genuine and represented the applicant’s income. The A.O. simply accepted the revised return disclosing additional income of Rs................. which was disclosed without specifying the exact amount of loans creditorwise considered as non genuine. Thus there is no finding in the Assessment Order that the applicant concealed income by showing specific non genuine loans.

2. Further as against the amount of Rs....................... as per details in para A(i) only Rs............. a part of the same is offered for taxation in the hands of the applicant. This fact would clearly show that the loans referred to above were not considered as non genuine but were only suspected to be non genuine and thus there was no detection of any concealed income by the Department.

3. As regards the URD purchases the sales tax order would clearly establish that the purchases were effected by the applicant. The quantity account details and the sales were accepted by the Department which would clearly show that the applicant had effectively and genuinely made the purchases. However, because of the peculiar nature of the business, the applicant was not in a position to produce the parties. Inability to produce should not be construed to mean that the purchases were not genuine. The applicant in order to avoid protracted litigation had agreed to the addition. There is no finding in the Assessment Order that the applicant did not genuinely made the purchase. Hence the charge of concealment of income cannot be substantiated.

4. The applicant had cooperated with the Department in completing the assessment and has also paid all taxes for these years.

5. The applicant is prepared to pay the prescribed compounding fees which the applicant understand works out to Rs......................

C. The applicant in the above circumstances, requests the Hon’ble Chief Commissioner to kindly consider the applicant’s case for compounding the above offence in terms of section 279(2) of the I.T. Act, 1961 and the prosecution may kindly be waived/the case filed in the Court of the Presidency Magistrate may kindly be withdrawn.

Thanking you,