Compounding fee under tax-evasion offence must be based on tax sought to be evaded, not income added.

For compounding an offence under section 276C(1) of the Income-tax Act, the basic compounding fee must be computed on the tax sought to be evaded, not on the gross income added or the income sought to be evaded. The court construed the compounding guidelines in the statutory context of section 276C(1), which links punishment to the amount sought to be evaded and therefore uses the tax component as the correct base. The departmental computation was accordingly incorrect, the compounding order was set aside, and a fresh computation on the correct basis was directed, with refund of any excess already paid.

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Issues: Whether, for compounding an offence under section 276C(1) of the Income-tax Act, 1961, the basic compounding fee is to be computed as 100% of the amount of tax sought to be evaded or 100% of the amount of income sought to be evaded.

Analysis: The compounding guidelines prescribed 100% of the amount sought to be evaded for offences under section 276C(1). The expression had to be read in the context of section 276C(1), which penalises wilful attempt to evade tax, penalty or interest and links the severity of punishment to the amount sought to be evaded. On that construction, the relevant base for compounding was the tax component arising from the addition, not the entire amount of income disallowed. The departmental computation therefore treated the income addition as the base instead of the tax sought to be evaded.

Conclusion: The basic compounding fee was required to be computed on the amount of tax sought to be evaded, and not on the amount of income sought to be evaded. The petitioner's challenge succeeded.

Final Conclusion: The impugned compounding computation was set aside and the authority was directed to make a fresh computation on the correct basis, with refund of any excess already paid.

Ratio Decidendi: Where compounding guidelines prescribe a fee as a percentage of the amount sought to be evaded for an offence under section 276C(1), the expression must be construed in the statutory context as referring to the tax sought to be evaded and not the gross amount of income added.

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