The income-tax officer is next only to the police officer in the matter of evoking fear in the minds of the common citizenry.

Penalties levied for tax evasion are subject to appeals and revisions. But prosecution launched by the Income-Tax department before a criminal court can lead to imprisonment. The Finance Ministry has come up with guidelines for compounding such prosecution offences. Under this, if the compounding fee is paid, the prosecution case can be withdrawn . These guidelines enable a taxpayer to have the option of avoiding prosecution or jail term by paying a fine. The discretion available with the tax authority is considerably reduced.

The guidelines have been revised from time to time for the past 10 years. The latest set of guidelines, issued in September, declares compounding of offences would depend on satisfaction of eligibility conditions prescribed in the guidelines, keeping in view the conduct of the assessee and the nature and magnitude of the offence.

Prosecution instituted under the Indian Penal Code cannot be compounded unless it involves Section 321 of the Criminal Procedure Code (CrPC), which provides for withdrawal of the prosecution. It is easier to compound a technical offence caused by an act of omission, such as failure to pay tax deducted at source.

Compounding offences

Serious offences like concealment, wilful attempt to evade tax or non payment of tax, failure to produce accounts, falsification of accounts can also be compounded on fulfilment of stringent conditions. Time limits are prescribed for applying for such compounding. The applicant should undertake to withdraw the appeals leading to prosecution.

Certain offences can never be compounded, such as failure to disclose foreign account and assets, offences under the Benami Act or by a person convicted by a court for any offence. Abetment of tax evasion can also result in prosecution (tax advisors, consultants and chartered accountants better beware). Tax investigations can also result in detection of terrorist activities, where no compounding is allowed.

Persons applying for plea, bargaining will not be entertained. Rejection of the application for compounding should be through a speaking order.

Where the tax sought to be evaded exceeds ₹25 lakh, the compounding fee can be 150 per cent of the tax sought to be evaded. In other cases the fee is 125 per cent of the tax attempted to be evaded. Attempt to evade penalty will attract only 100 per cent of such penalty for compounding. In extreme and exceptional cases of genuine financial hardship, the compounding charges maybe suitably reduced with the approval of the finance minister.

These guidelines are remarkable, but the department has rarely succeeded in launching prosecution or in securing a conviction. The Supreme Court recently, citing Adam Smith, advised the government to keep the tax regime simple, achieving maximisation of compliance. Easier said than done.

The writers are former Chief Commissioner Income Tax and an advocate, respectively