TDS Default | Higher Compounding Fees On Second Plea Not Applicable If First Application Was Rejected: Delhi High Court

The Delhi High Court has held that the higher rate of 5% interest to be paid when an assessee moves 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.A division bench of Justices V. Kameswar Rao and Vinod Kumar observed,“5% is only chargeable when the earlier offence has been compounded. This means that the compounding order should have been passed, and also the conditions stipulated in the said order should have been complied with (like payments), for the respondents to claim 5% charges on the second application, which necessarily has to be for a second offence.”Section 276B of the Income Tax Act 1961 penalizes default in payment of TDS.Section 279(2) empowers the Department to compound the offence.Clause 12.1 of the guidelines for compounding of offence under Direct Tax Law, 2014 issued by the Department of Revenue, CBDT, Ministry of Finance, Government of India, prescribes 3% TDS as the fees for first compounding application. It however stipulates 5% TDS as fees for subsequent compounding applications.In the case at hand, Petitioner's first application for compounding of offence was rejected and the subsequent was accepted, subject to payment of 5% fees.Petitioner contended that since his first compounding application had in fact been rejected and no compounding had taken place and as such, the Department could not have claimed compounding charges at 5%.The Department on the other hand contended that the compounding charges will be calculated at 5% because the Petitioner had applied for compounding for the second time.Unconvinced, the High Court observed that it is only in the eventuality that the first application had been allowed, the offence was compounded and the charges applicable @ 3% was deposited, that the 5% charge would become applicable for the purpose of second application.“It is not such a case herein,” it remarked.The Court relied on 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 High Court said the rationale behind imposing a higher rate for subsequent offences is to incentivise compliance and encourage the public to deduct TDS and make payments.As such, the Court directed the Department to proceed in accordance with law and allowed the plea.Appearance: For the Petitioner : Mr. Imran Ali with Ms. Aanchal, Advocate. For the Respondent : Mr. Sanjay Kumar, Ms. Monica Benjamin, Ms. Easha Kadian, AdvocatesCase title: Sangeet Seth v. Chief Commissioner of Income TaxCitation: 2025 LiveLaw (Del) 1065Case no.: W.P.(C) 16569/2023 Click here to read order

TDS Default | Higher Compounding Fees On Second Plea Not Applicable If First Application Was Rejected: Delhi High Court

Kapil Dhyani

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