Should the Tax officer calculate compounding fees for offence u/s 276C on income evaded or the tax evaded?

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Case Name:

Mehta Laboratories Through Partner Kaushik Mayachand Mehta Vs The Principal Chief Commissioner of Income Tax-2 (High Court of Gujarat)

R/Special Civil Application No. 217, 221 & 222 of 2019

Date: 7th January 2020

Key Takeaways:

1. The central question raised for determination is whether 100% of the amount sought to be evaded or 100% of the tax sought to be evaded is to be paid for compounding of the offence under Section 276C(1) of the Income Tax Act, 1961.

2. The CBDT has issued guidelines for compounding of offences under the Direct Tax Laws, 2014, which provide for the eligible amount to be paid by the assessee for the compounding offence under Section 276C(1) of the Act at 100% of the amount sought to be evaded.

3. The petitioner argued that the compounding fees should be based on 100% of the tax sought to be evaded, not 100% of the amount of income sought to be evaded, citing a previous decision of the court in the case of Supernova System Pvt. Ltd. v. Chief Commissioner of Income Tax.

4. The court ruled in favor of the petitioner, stating that for compounding of the offence under Section 276C(1) of the Income Tax Act, 1961, it would be permissible on payment of 100% of the tax sought to be evaded and not 100% of the amount sought to be evaded.

Case Synopsis:

This judgment is related to the compounding of offenses under Section 276C(1) of the Income Tax Act, 1961.

Section 276C provides for imprisonment of persons wilfully attempting to evade any tax, penalty or interest chargeable or imposable, or under reports his income, under the Income tax Act.

In this case, tax department conducted a search on the assessee and found incriminating material. Later on in the scrutiny assessment proceedings, the assessing officer made addition addition on account of cash credit, bogus purchases etc.

In due course the tax department filed three complaints under Sections 276C(1), 271, 278B and 278 of the Act, in the Court of the Additional Chief Metropolitan Magistrate, Ahmedabad.

The assesse filed for compounding of offence.

The assessing officer computed the compounding of offence fees on the "Income sought to be evaded" and intimated the assesee after taking approval of the Chief Commissioner of Income tax.

The assessee objected. He said that compounding fees should be computed on tax evaded and not on income evaded.

And that is the main issue of this judgement.

The main issue raised in the judgment is

Whether 100% of the amount sought to be evaded or 100% of the tax sought to be evaded is to be paid for the compounding of the offense under Section 276C(1) of the Income Tax Act, 1961.

Ultimately, the judgment concludes that

For the compounding of the offense under Section 276C(1) of the Income Tax Act, 1961, the petitioner is required to pay 100% of the tax sought to be evaded. The rule is made absolute to that extent, and no order as to costs is mentioned.

1. Rule returnable forthwith. Mr. Karn Sanghani, the learned counsel appearing for Mrs. Mauna Bhatt, the learned Senior Standing Counsel waives service of notice of rule for and on behalf of the respondents.

2. Since the issues raised in all the captioned writ­ applications are the same, those were heard analogously and are being disposed of by this common judgment and order.

3. The short question raised for determination of this Court as to whether 100% of the amount sought to evaded or 100% of tax sought to be evaded is to be paid for compounding of offence under Section 276C(1) of the Income Tax Act, 1961 [for short 'The Act, 1961'], when offence pertains to willful attempt to evade tax, etc.

4. The Central Board of Direct Taxes [CBDT] has issued guidelines for compounding of offences under the Direct Tax Laws, 2014. In the Paragraph­12.2 of the said guidelines provides for eligible amount to be paid by the assessee for the compounding offence under section 276C(1) of the Act at 100% of the amount sought to be evaded, whether 100% of the amount of tax sought to be evaded.

5. The short facts of the case are that the petitioner was a partnership firm and dealing in the business of lubricating oil and petroleum products. The search was conducted on various premises of the petitioner on 11th October 1984. During the course of search, incriminating material such as books of accounts, written loose papers etc. and 503 grams of gold ornaments were seized and were retained under section 132(5) of the Act. In the scrutiny assessment proceedings, an assessment order was passed for the period from A.Y. 1983­-84 to A.Y.1985-­86 by the Assessing Officer making addition on account of cash credit, bogus purchases etc.

6. Being aggrieved by the assessment order, an appeal was preferred before the Commissioner of Income Tax (Appeals) and then before the Income Tax Appellate Tribunal, which were partly allowed.

7. In the year 1987, three complaints under Sections 276C(1), 271, 278B and 278 of the Act, 1961 were filed being Criminal Case No.57 of 1987 for A.Y. 1983­84; Criminal Case No.54 of 1987 for A.Y.1984­-85 and Criminal Case No.56 of 1987 for A.Y. 1985­-86 in the Court of the Additional Chief Metropolitan Magistrate, Ahmedabad by the respondents against the petitioner.

8. The petitioner filed an application for compounding of offences as per the guidelines issued by the Central Board of Direct Taxes for compounding of offences under Direct Tax Laws, 2014 on 1st June 2017. The Assessing Officer intimated working of compounding fees by letter dated 8th August 2018 on the basis of amount of concealed income and communicated the approval of the Chief Commissioner of Income Tax­2, Ahmedabad for compounding fees directing the petitioner ­assessee to pay the amount worked out within 60 days on receipt of the intimation.

9. The petitioner on receiving such details, vide reply dated 4th October 2018 objected the working of the compounding fees based on the amount of income evaded instead of amount of tax evaded. It was contended that the amount for compounding offeces is required to be paid at 100% of the tax evaded. The petitioner relied on the decision of this Court in the case of Supernova System Pvt. Ltd Vs. CCIT­2 reported in [2018] 99 taxmann.com 300 (Gujarat).

10. Heard Mr. Hardik Vora, the learned counsel appearing for the petitioner and Mrs. Mauna Bhatt, the learned senior standing counsel appearing for the respondents.

11. The learned counsel appearing for the petitioner submitted that the Assessing Officer committed an error while working out the amount of compounding fees paid by the petitioner, as the compounding fees is required to be paid on the basis of 100% of tax evaded and not 100% of the amount of income sought to be evaded by relying upon the decision of this Court in the case of Supernova System (P.) Ltd. Vs. Chief Commissioner of Income Tax reported in [2018] 99 taxmann.com 300 (Gujarat).

The learned counsel appearing for the petitioner submitted that the amount as per the calculation given by the respondent – Income­ tax Officer has already been deposited by the petitioner.

12. On the other ­hand, the learned counsel appearing for the respondents referring to the affidavit ­in­ reply submitted that the respondent – department has accepted the decision of this court and the Board Circular in the case of Supernova System (P.) Ltd. and accordingly, the petitioner is required to pay 100% amount of the tax sought to be evaded not on the 100% amount of income sought to be evaded.

13. Having considered the submissions made by other ­side, it is germane to refer to the decision of this Court in the case of Supernova System (P.) Ltd. [Supra], wherein, this Court has held as under:–

“9. In terms of such compounding powers, the CBDT has been issuing circulars for providing guidelines for compounding offenses under the Act. We are concerned with the latest guideline issued on 23.12.2014 issued by the CBDT. This circular contains detailed provisions and procedure for compounding offenses under the Act.

10. Para 12 of the said circular pertains to fees for compounding. In the context of section 276C(1) of the Act, para 12.2 prescribes fees for compounding as under:

“12.2 Section­ 276C(1) Wilful attempt to evade tax etc. 100% of the amount sought to be evaded.”

11. Para 12.2 of the said circular thus prescribes compounding fees for offense under section 276C(1) at 100% of the amount sought to be evaded. This para also starts with an expression “Section 276C(1) Wilful attempt to evade tax etc.”. The title of this para thus, is taken from the section itself and the compounding fee is to be computed at the rate of 100% of the amount sought to be evaded. Since this para does not contain any specification of “the amount sought to be evaded”, we may fall back on the statutory provisions in relation to which, this compounding fee is prescribed. Sub­section (1) of section 276C, as noted, prescribes punishment for a person who willfully attempts in any manner to evade any tax, penalty or interest chargeable under the Act. This could be without prejudice to any

penalty that may be imposable on him under any provisions of the Act. Under such circumstances, as per the sections stood at the relevant time, the person concerned would be punishable;

(i) In case where the amount sought to be evaded exceeds Rs.250,000/­, with rigorous imprisonment for a term which shall not be less than six months but which may extend to seven years and with fine and;

(ii) In any other case with rigorous imprisonment for a term which shall not be less than three months but which may extend to two years and with fine.

12. This provision thus while prescribing punishment for willful attempt to evade tax, penalty or interest chargeable, provides for a more severe punishment in case the amount sought to be evaded exceeds Rs.250,000/­. For the rest, punishment prescribed is lesser.

This prescription of punishments in two categories is thus linked with the amount sought to be evaded. This amount sought to be evaded is in relation with the action of a person of a willful attempt to evade tax, penalty or interest chargeable. In the prescription of punishment thus, when there is a reference to amount sought to be evaded, it must be seen in light of the willful attempt on the part of the concerned person to evade tax, penalty or interest. This provision thus, links the severity of punishment on the amount sought to be evaded and thus, in turn has relation to the attempt at evasion of tax, penalty or interest. Thus, when the CBDT circular refers to the amount sought to be evaded, it must be seen and understood in light of the provisions contained in section 276C(1) and in turn must be seen as amount sought to be evaded. 100% of tax sought to be evaded would be the basic compounding fees which in the present case would be Rs.2,71,000/­ and not Rs.8,70,000/­ as computed by the departmental authorities.

The rest of the computation is consequential and automatic. The impugned communication dated 20.03.2018 is therefore set aside. The respondent shall carry out fresh computation of the petitioner's liability to pay compounding charges in terms of this order. We are informed that, to avoid any complication, the petitioner has under protest, paid up the entire amount of Rs.10,49,000/­ as demanded by the department. Once such fresh computation is made, the excess would be refunded by the department to the petitioner latest by 31.10.2018.”

14. In view of the aforesaid decision of this Court, for compounding of offence under Section­276C(1) of the Act, 1961 would be permissible on

payment of 100% of the tax sought to be evaded and not 100% of the amount sought to be evaded by the assessee.

15. In view of the forgoing, the petitions succeed and are accordingly allowed. The petitioner is therefore required to pay 100% of the tax sought to be evaded for compounding of offence under Section­276C(1) of the Income Tax Act, 1961.

Rule is made absolute to the aforesaid extent. No order as to costs.

(J. B. PARDIWALA, J)

(BHARGAV D. KARIA, J)