Facts of the Case

The petitioner, Sangeet Seth, approached the Delhi High Court seeking directions to the Chief Commissioner of Income Tax to pass a compounding order under Section 279(2) of the Income-tax Act, 1961 in terms of the Letter of Acceptance dated 29.01.2018 and to compound criminal proceedings pending in CC No. 537821 of 2016 titled Income Tax Officer vs. M/s Velvet Apple Hotel Pvt. Ltd. before the ACMM (Special Acts), Central District, Tis Hazari Courts, Delhi. The petitioner had defaulted in depositing TDS of ₹6,11,820 for Financial Year 2009–10 but subsequently paid ₹18,99,388 inclusive of TDS, interest, penalty, and compounding charges calculated at 3%.

An earlier compounding application filed in 2014 had been rejected by order dated 16.02.2016 due to non-payment of compounding charges within time. A second compounding application dated 05.06.2017 was accepted by the Department vide Letter of Acceptance dated 29.01.2018 at the rate of 3%. Subsequently, by letter dated 08.02.2019, the Department demanded additional compounding charges at 5% alleging that the second application attracted a higher rate under CBDT Guidelines, 2014.

Issues Involved

Whether compounding charges at 5% are applicable merely because a second compounding application was filed, whether rejection of an earlier compounding application amounts to prior compounding for the purposes of CBDT Guidelines, 2014, and whether the Department was justified in revising the accepted compounding charges from 3% to 5%.

Petitioner’s Arguments

The petitioner contended that higher compounding charges at 5% under the CBDT Guidelines, 2014 apply only where an earlier offence has actually been compounded. It was argued that since the first application was rejected and no compounding order was passed nor any compounding charges paid pursuant thereto, the second application could not be treated as a “subsequent offence” attracting 5%. The petitioner relied on the Delhi High Court decision in Maspar Industries Pvt. Ltd. vs. CCIT (TDS) to submit that the guidelines clearly require prior compounding for higher rates to apply.

Respondent’s Arguments

The Revenue argued that the petitioner had furnished incorrect information in the compounding application by stating that no earlier compounding application existed. It was submitted that the second application should be treated as a subsequent application and, therefore, compounding charges at 5% were correctly levied under the CBDT Guidelines, 2014. The Revenue also argued that compounding is discretionary and not a matter of right.

Court Order / Findings

The Delhi High Court examined Clause 12.1 of the CBDT Guidelines, 2014 and relied on its earlier judgment in Maspar Industries Pvt. Ltd., which clarified that compounding charges at 5% apply only after an earlier offence has been compounded—meaning that a compounding order must have been passed and complied with. The Court held that mere rejection of an earlier compounding application does not amount to compounding of an offence. Since no earlier offence of the petitioner had been compounded, the demand for compounding charges at 5% was unsustainable. The Court found that the Department misread the guidelines and acted contrary to settled law.

Important Clarification

The Court clarified that higher compounding charges are intended to deter repeat offenders and incentivise compliance. Such higher rates can be invoked only where an assessee has already availed compounding for an earlier offence. Rejection of a compounding application, without compounding actually taking place, does not trigger the higher rate.

Final Outcome

The writ petition was allowed. The impugned letter dated 08.02.2019 demanding compounding charges at 5% was set aside. The respondents were directed to proceed in accordance with law on the petitioner’s compounding application and the pending criminal proceedings. All pending applications were dismissed as infructuous.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1769681384_SANGEETSETHVsCHIEFCOMMISSIONEROFINCOMETAXANDORS..pdf

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