CBDT’s guidelines for compounding offenses can’t restrict AO’s powers: HC

Case Details: Footcandles Film (P.) Ltd. v. Income Tax Officer - [2023] 146 taxmann.com 304 (Bombay)

Judiciary and Counsel Details

• • Dhiraj Singh Thakur & Valmiki Sa Menezes, JJ
  • Ms Fereshte Sethna & Ms Mrunal Parekh, Advs. for the Petitioner.
  • Suresh Kumar for the Respondent.

Facts of the Case

Assessee-company deducted tax from the salaries of its employees under section 192 but failed to deposit the same to the credit of the Central Government within the prescribed time limit. However, later the company deposited the entire amount of TDS along with interest without any notice of default or demand.

Subsequent to the payment, the assessee received a show cause notice for the institution of prosecution proceedings. In response, the assessee submitted its reply stating that the delay was due to accumulated losses, cash crunch, and delay in receiving tax refunds. Also, it had deposited all the tax liability along with interest even before receiving any notice from the department.

Unsatisfied with the reply, Assessing Officer (AO) initiated the prosecution under which penalty and imprisonment were ordered for the company’s principal officer and penalty on the company.

Aggrieved by the order, the assessee applied compounding of offence to the Chief Commissioner of Income Tax (CCIT) which was rejected placing reliance on the CBDT’s circular, dated 14-6-2019, on the ground that the application was time-barred and the assessee was convicted under law other than Direct Taxes Law.

Guidelines for compounding of offences state that application for compounding of offences cannot be filed after 12 months or the petitioner is convicted under any offence other than Direct Taxes Law. Further, it sets out certain conditions where the time period can be extended

Aggrieved-assessee filed a writ petition to the Bombay High Court.

High Court Held

The High Court held that the directions, orders or instructions issued by the CBDT cannot limit the powers of the authority. It will not curtail the power vested in the Principal Commissioner or Chief Commissioner of Income Tax under Section 279(2) to consider the application for compounding on its own merits and decide the same.

The conditions referred to under the circular are important but they cannot be treated as the only determining factor for the disposal of an application. While exercising the jurisdiction, objective facts with respect to the application shall be considered by the authority.

Further, the reason stated by the authority for rejecting the application based upon a factual assumption that the assessee was convicted by the court for an offence other than the Direct Tax Laws was unsustainable and erroneous. The condition specified in the circular is only a guideline to the authority, not a rule of limitation while considering the application for compounding. It does not take away the jurisdiction of the authority to consider the application for compounding on its own merits and decide the same.