Conditions for Compounding

While compounding is beneficial, it is not guaranteed. The CBDT officers will assess the following factors when considering a request for compounding:

• Periodic Nature of Offence: Whether the offence was committed sporadically or repeatedly.
• Magnitude and Nature of the Offence: The context of the offence and its impact.
• Public Interest: Whether the offence could encourage others to evade tax obligations.

Exclusions from Compounding

Certain offences cannot be compounded, including:

• Offences leading to IPC prosecutions.
• Multiple offences of Category A if committed more than three times.
• Offences committed willfully to avoid tax liabilities.

Classification of Offences

To streamline the compounding process, offences under the Income Tax Act are classified into two categories: Category A and Category B.

Category A Offences

This category includes offences that are generally considered less severe, such as:

• Failure to remit income tax payments by the due date.
• Refusal to allow inspection of books of accounts.
• Failure to deduct or remit Tax Deducted at Source (TDS) on time.
• Failure to file income tax returns.

Category B Offences

Offences in this category are more serious and include:

• Failure to comply with specific sections of the Income Tax Act.
• Willful attempts to evade tax.
• Falsification of books of accounts

Eligibility for Compounding

To be eligible for compounding, an assessee must fulfill several requirements:

1. Application Submission: An application must be filed in affidavit form to the relevant CBDT officer.
2. Timeframe: Applications can be made at any time after the offence is committed but must be submitted within twelve months from when the prosecution complaint is filed. Late applications may be accepted if valid reasons are provided.
3. Payment of Dues: The assessee must have cleared all outstanding tax, interest, and penalties related to the offence before the application.
4. Responsibility Acceptance: The assessee must accept responsibility for compounding charges and withdraw any appeals related to the offence

Compounding Charges

Compounding involves several fees, which may include:

• Compounding Fee: Varies based on the nature of the offence.
• Prosecution Establishment Expenses: Typically 10% of the compounding fee, with a minimum of ?25,000.
• Litigation Expenses: Any legal fees incurred by the CBDT, which must be borne by the assessee.