Delhi High Court Clarifies Applicability of Higher Compounding Charges for TDS Offences

Delhi High Court Clarifies Applicability of Higher Compounding Charges for TDS Offences

Introduction

The Delhi High Court has held that the higher rate of 5% interest to be paid when an assessee moves a second plea for compounding the offence of failure to pay Tax Deductible at Source (TDS) is not applicable if their first plea was simply rejected. The Court observed that the higher rate of interest is only chargeable when the earlier offence has been compounded, and not when the first application is rejected.

Factual Background

The petitioner had filed a compounding application for the offence of failure to pay TDS, which was rejected by the authorities. The petitioner then filed a second application, which was accepted subject to payment of 5% fees. The petitioner contended that since their first application was rejected and no compounding had taken place, the Department could not have claimed compounding charges at 5%.

Procedural Background

The petitioner approached the Delhi High Court challenging the demand for 5% compounding charges for the second application. The Department contended that the compounding charges would be calculated at 5% because the petitioner had applied for compounding for the second time.

Issues

1. Compounding Charges: Whether the higher rate of 5% interest is applicable for the second compounding application if the first application was rejected.

2. Interpretation of Guidelines: Whether the expression "after compounding of the said offence" in the guidelines means when the offence has been compounded, or merely when a second application is filed.

Reasoning & Analysis

The Court relied on its earlier judgment in Maspar Industries Private Limited and Ors Vs. Chief Commissioner of Income Tax TDS and Ors (2023), where it was held that the expression "after compounding of the said offence" in the guidelines means when the offence has been compounded, meaning thereby, not only the stage after the compounding order has been passed but also after the conditions stipulated in the said order have been complied with like payments. The division bench of Justices V. Kameswar Rao and Vinod Kumar observed that the rationale behind imposing a higher rate for subsequent offences is to incentivize compliance and encourage the public to deduct TDS and make payments.

Decision

The Court directed the Department to proceed in accordance with law and allowed the plea, holding that the higher rate of 5% interest is not applicable if the first application was simply rejected.

Implications

The Delhi High Court's decision clarifies the interpretation of the guidelines for compounding of offences under Direct Tax Law. The ruling ensures that assessees are not penalized with higher interest rates if their first application is rejected, and not compounded.

Conclusion

The Court's judgment in this case emphasizes the need for a fair and reasonable interpretation of the guidelines for compounding of offences. The decision is a significant relief for assessees who may face similar situations in the future.

In this case the appellant was represented by Mr. Imran Ali with Ms. Aanchal, Advocates. Meanwhile the respondent was represented by Mr. Sanjay Kumar, Ms. Monica Benjamin and Ms. Easha Kadian, Advocates.