CBDT Guidelines Clarified: HC Nullifies Extra 5% Compounding Demand

The writ petition was filed to challenge the Income Tax Department’s communication dated 08th February 2019, demanding additional compounding charges at 5% in respect of the delay in deposit of TDS for FY 2009-10. The petitioner, a former director of the company, was prosecuted under Sections 276B and 278B of the Income Tax Act. His first compounding application was rejected on February 16, 2016, due to non-payment. A fresh application filed on 05th June 2017 was accepted vide Letter of Acceptance dated 29th January 2018, and the petitioner deposited Rs. 18,99,388, including tax, interest, and compounding charges at 3%.

The dispute arose when the department later treated the case as a “second application” and sought higher charges at 5% on the ground that the petitioner had answered “No” to a query about prior applications in Column 10 of the form. The petitioner contended that since the earlier application was rejected outright, no offence was compounded, and hence the higher rate could not apply.

Issue Raised: Whether the department could levy 5% compounding charges when the petitioner’s earlier compounding plea had been rejected and no offence was actually compounded.

HC’s Judgment: The Court observed that the CBDT’s 2014 Guidelines provide for a 5% rate only when a prior offence has been compounded by order and complied with. Since the petitioner’s earlier application was rejected, it could not be treated as a prior compounding. Referring to its earlier decision in Maspar Industries Pvt. Ltd. v. CCIT (TDS), the Court held that the applicable rate was 3%, not 5%. Therefore, the impugned communication dated 08th February 2019 was quashed.

The Court directed the respondents to proceed strictly in terms of the Letter of Acceptance dated 29th January 2018 at the 3% rate. The writ petition was disposed of, and pending applications were dismissed as infructuous.

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