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    Compounding Of Offences Under Companies Act, 1956 & 2013
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    To err is human: 

    It is very human, to make a mistake or to do something which should have not been done or not doing something which should have been done in time, so as to be compliant with the law of the land. 

    But, Ignorantia juris non excusat/ignorantia Legis non excusat!!! 

    Which simply means, ignorance of any law/legislation is no excuse, and if ignorance is considered an excuse, a person responsible of doing a particular thing or not doing a particular thing under a law/legislation, would merely claim that he was not aware of the law or provision in question to avoid liability thereunder. 

    The act of doing something wrong or not doing something which ought to have been done, under a particular law constitut es an offence under the law. 

    Let us see the definition of the word Offence: 

    Definition of the word Offence: 

    “Offence” shall mean any act or omission made punishable by any law for the time being in force. [Section 3(38) of General Clauses Act, 1897]; 

    "Offence" means any act or omission made punishable by any law for the time being in force and includes any act in respect of which a complaint may be made under section 20 of the Cattle-trespass Act, 1871( 1 of 1871); [As per Section 2(n) of the Code of Criminal Procedure, 1973]; 

    So, a person guilty of commit ting an offence is liable to be prosecuted under the relevant provisions of law. 

    Now, is getting prosecuted under the relevant provision is the lone remedy available to the person guilty of committing an offence or is there an alternate resolution available to him, is where the concept of Compounding comes in the picture. [the scope of this article is restricted to the provisions of the Companies Act] 

    As per Black’s Law Dictionary “Compounding” means to settle a matter by money payment in lieu of other payments. 

    Further, it is to noted that not all the offences under the Companies Act, are compoundable and some are non-compoundable offences. The types of offences that are eligible for composition under the act, are discussed in the Article. 

    What is Compounding of an Offence ? 

    Having seen the words “Offence” and “Compounding ”, now we need to understand as what is ”Compounding of an Offence(s)”.

    The concept of “Compounding of an offence(s)” in legal parlance generally means, a process to settle the matter(charge/ offence) amicably before the respective adjudicating authority, by paying the fine as imposed by the respective authority, thereby avoiding prosecution under the relevant provision, attending court hearing and undergoing mental tensions/pressure. 

    Provisions under Companies Act, 1956 and 2013. Under Companies Act, 1956:

    Section 621 A of the Companies Act, 1956 deals with Compounding of offences under the Act. Vide the Companies (Second Amendment) Act, 2002, the effective date of which is not yet notified, some changes to the section were proposed. Since the said changes are not notified, the provisions of Section 621-A, as inserted by the Companies (Amendment) Act, 1988, and amended by the Companies (Amendment) Act, 2000, are still in force. 

    Based on the language used in Section 621-A, offences under the Act, may be classified as below: 

    Offences Punishable: 

    (I) with Fine only;

    • with imprisonment or with Fine;
    • with imprisonment or with Fine or both;
    • with imprisonment only;
    • with imprisonment and also with 

    Compoundable offences: 

    Of the list above, an Offences punishable 

    • with Fine only, and
    • with Imprisonment or with Fine 

    CAN be compounded. 

    Offences punishable with Imprisonment or with Fine or both, can also be compounded with the permission of the Court.

     

    Non-compoundable offences:

    Offences punishable 

    • with Imprisonment only, and
    • with Imprisonment and also with

    CANNOT be compounded.

    Compounding Authority: 

    The Authority for Compounding offences under Section 621-A of the Companies Act, 1956, depends upon the maximum amount of fine which may be imposed for such offence under the relevant provisions of the Act, as below:

    Compounding Authority

    Maximum aamount of fine which may be imposed for such offence, as mentionedin the Section/provision

    Hon’ble Company Law Board

    Exceeding Rs.50,000/-

    Regional Director concerned

    Not exceeding Rs.50,000/-

    Compounding Procedure:

    • A Company and or any officer of the company who has committed

      a offence

      , may either before or after the institution of any prosecution under the relevant section, can apply for compounding;

    • The compounding authority shall impose amounts

      t o

      be paid for compounding of the offence, and the amount directed by the authority to be paid by the Company or any officer of the company, shall not exceed the maximum fine payable under the relevant section for

      offence

      under composition;

    • The fees for compounding of offences as per the directions of the compounding authority, are to be paid by the respective applicant i.e., in case of Company, then from the funds of the company, and in case of Directors, the fees

      is

      to be paid by the Directors from their own pocket and not from the company funds; 

    • Any amounts paid as additional fees under section 611(2) shall be deducted from the amount specified for compounding of

      offence

      ; 

    • Compounding  Application  shall  be  made  to  the  Registrar  concerned,  who  shall  forward  such compounding application along with his comments to the compounding authority; 

    • If an offence is compounded before or after the institution of prosecution, intimation  thereof is to be given to the Registrar within 7 days from the date on which the offence is so compounded;

    • If the offence under composition involves filing of any return, form by the Company or any officer of the company, then the Compounding authority, while compounding the offence, in his order may direct, the Company or the officer to file such return, form, with such fees required to be paid under the Act, within such time as may be specified in the order; and any failure on the part of the Company or any of its officer shall be punishable with imprisonment

      upto

      6 months or with fine not exceeding Rs.50,000/- or with both.

    • Any second or subsequent offence committed after the expiry of a period of 03 (Three) years from the date on which the offence was previously compounded shall be deemed to be

      a first

      offence. So, in case an offence is committed within 03 (Three)years period, then the same is not compoundable.

    Compounding Application and Prosecution: Composition of offence: 

    • before Initiation of Prosecution under the relevant section:

    In case the Compounding application is filed and the offence is compounded by the Authority, before the initiation of prosecution against an offence, then no prosecution shall be initiated either by the Registrar or any Shareholder of the Company or any person authorized by the Central Government, against the Company or any officer of the Company. 

    • after Initiation of Prosecution under the relevant section:

    In case the Compounding application is filed after the initiation of prosecution against an offence, and the offence is compounded by the Authority, then the composition shall be informed by the Registrar in writing to the concerned Court, in which the prosecution is pending, and on such notice of the composition of the offence being given, the Company or the officer, in relation to whom the offence is so compounded shall be discharged.

    Provisions under Companies Act, 2013: 

    Section 441 of the Companies Act, 2013, deals with the Compounding of offences. The said section is yet to be notified, and accordingly, the provisions of Section 621-A of the Companies Act, 1956, are applicable, till the notification of Section 441 of the Companies, 2013. 

    The structure of the Section 441 is similar to that of Section 621-A, except for some changes and limits as to authority. 

    Offences Punishable: 

    • with Fine only;

    • with imprisonment or with Fine;

    • with imprisonment or with Fine or both;

    • with imprisonment only;

    • with imprisonment and also with

     

    Compoundable offences: 

    Offences punishable with Fine only CAN be compounded. 

    Offences punishable (a) with Imprisonment or with Fine, or (b) with Imprisonment or with Fine or both, can also be compounded, but with the permission of the Special Court. 

    Non-compoundable offences:

    Offences punishable

    • with Imprisonment only, and

    (ii) with Imprisonment and also with Fine; and

    CANNOT be compounded. 

    Investigation initiated/pendingagainst an offence – Matter cannot be compounded: 

    Apart from the above, any offence by any company or its officer cannot be compounded, if any investigation against such company has been initiated or is pending under this Act. 

    Compounding Authority: 

    The Authority for Compounding offences under Section 441 of the Companies Act, 2013, depends upon the maximum amount of fine which may be imposed for such offence under the relevant provisions of the Act, as below:

    Compounding Authority

    Maximum amount of fine which may be imposed for such offence, as mentionedin the Section/provision

    National Company Law Tribunal

    Exceeding Rs.5,00,000/-

    Regional Director or any officer authorised by the Central Government

    Not exceeding Rs.5,00,000/-

    Compounding procedure: 

    The procedure for composition of offence under Section 441 of the Companies Act, 2013, is similar to that of Section 621-A of the Companies Act, 1956 

    Details of the relevant Sections/Offences under both the Acts:

    Since the aim of the article is bring out the provisions as to composition of offences, the details of the sections/ offences, both under the Companies Act, 1956 and the Companies Act, 2013, that can be/ cannot be compounded, are not being listed.

     

    Discussion Point:

     

    • The main point of discussions is that the provisions of Section 441, of Companies Act, 2013, are not yet notified, so provisions of Section 621-A of the Companies Act, 1956 will be applicable for the compounding proceedings, which again bring lot of confusion as to the following: 
    • Matters that can be compounded:

    Under Companies Act, 1956

    Under Companies Act, 2013

    With Fine only, and with Imprisonment or with Fine

    with permission of court:

    With Imprisonment or with Fine or both

    With Fine only

    With permission of Special Court:

    with Imprisonment or with Fine, or

    with Imprisonment or with Fine or with both

     

    [Offence cannot be compounded in investigations is initiated or pending against the particular offence]

    What would be the position of an offence under the Companies Act, 2013, which is punishable with Imprisonment or with Fine ?

    Whether the same can be directly compounded under 621-A or whether permission of Special Court, is required to be obtained[as prescribed under Section 441 of CA, 2013], is not clear. 

    • Decision of the Compounding Authority:

    As discussed in the beginning of the Article, the threshold limit of the deciding upon the Compounding Authority, as applicable under 621-A [i.e., maximum fine less than Rs.50,000/- then the concerned RD and if Maximum fine more than Rs.50,000/- then Hon’ble CLB], will be applicable for offences under the Companies Act, 2013, also, which some what seems to be improper, because everybody is aware that there are hardly any sections under Companies Act, 2013, which provide for a maximum fine of Rs.50,000/-, thereby all the offences under Companies Act, 2013, will come under the purview of the Hon’ble Company Law Board, by virtue of Section 621-A. 

    While appreciating the efforts made by all the concerned in bring the new Companies Act, in to force, the practical difficulty is that not all the provisions have come in to force, thereby, the 1956 Act, also needs to be referred, in the instant case, for an offence committed under the New act, the compounding procedure under the 1956 Act, is to be referred, thereby creating differences of opinion on interpretation of the provisions and giving way to confusions. Hope these confusions are sorted at the earliest.

    This article is contributed by Partners of SBS and Company LLP – Chartered Accountant Company You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

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    Draft Income Computation And Disclosure Standard (Icds)
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    This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” and not for the purpose of maintenance of books of accounts. 

    In the case of conflict between the provisions of the Income-tax Act, 1961 (”the Act ”) and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent. 

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    Complete Study On Works Contracts – Service Tax
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    The aim of the series of articles is to give a bird's eye view on the impact of service tax on the various transactions pertaining to the real estate industry. The complications involved in the real estate industry are myriad and often confusing for the trade as regards to the impact of service tax. The confusion prevalent is further accelerated by the stands and interpretation taken by the authorities who are always pro-revenue. Further, the other reason for the confusion is rapid amendments taking place in law pertaining to real estate industry which also makes the lives of the professionals involved in guiding the trade and industry miserable.

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    Guidelines For Compounding Of Offences Under Direct Tax Laws 2014
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    Compounding of Offences Under Income Tax:

     

    According to provisions of Section 279(2) any offence under the Chapter XXII (Offences and Prosecutions) may, either before or after institution of proceedings is compounded by the Principal Chief Commissioner or Chief Commissioner or a Principal Director General1 or Director General.

     

    Compounding of offences is not a matter of right. However, offences may be compounded by the competent authority on his satisfaction of the eligibility conditions prescribed in these guidelines keeping in view factors such as conduct of the person; nature and magnitude of the offence and facts and circumstances of each case. 

    Competent Authority for Compounding:

    The CCIT/DGIT( CCIT includes Principal CCIT and DGIT includes Principal DGIT) having jurisdiction over the person, seeking compounding of an offence, is the competent authority for compounding of all Category 'A' and Category 'B' offences. 

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    Input Service Vs Works Contract Service – A Case Study
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    The definition of 'input service' is always a mystery to the trade and business and the concept of 'works contract' is even more disturbing. This article attempts to deal with the two promising issues when they get in touch with each other, that is to say whether the credit of service tax paid towards the 'works contract' services shall be eligible for Cenvat Credit as input service. 

    Before examining the issue, it is very important for the reader to note the changes that have taken place in the definition of 'input service' as laid down vide Rule 2(l) of Cenvat Credit Rules, 2004. Earlier to 2011, the definition of 'input service' is very wide enough to cover all the services in its ambit to claim as Cenvat Credit for the service provider. This definition has led to a huge revenue loss to theexchequer and hence there was an amendment to the definition of 'input service' post 2011 which has restricted the scope of such definition, which shall be discussed in detail in the later part of the article. 

    The amended definition which was effective from 01.04.2011 has made the definition of 'input service' into 3 parts. 

    1st Part     – 100% nexus with the provision of the output services provided by service provider; 

    2nd Part     – Irrespective of the Nexus theory, the credit stand eligible; 

    3rd Part    – Specifically Excluded from the ambit of the definition.

    As laid above, the first part of the definition deals with eligibility of the credit of services, which are having nexus with the provision of output services. Hence, all services which are having intimate nexus shall be eligible vide this part of the definition except specifically excluded (vide third part of the definition). The second limb of the definition of the said input service deals with eligibility of the credit of services irrespective whether they having nexus with the provision of output services. To be more lucid, once the services procured falls in the second limb, they are eligible for availment of credit irrespective of having nexus with the output services. 

    The third limb of the definition of the said input service deals with exclusion category. If the services procured fit into the third limb of the definition, the credit on such services cannot be availed unless the service provider fits into the eligibility criterion laid down by such limb. To be precise, the credit of the services shall be allowed only if the service procured and service provided falls in the same category. One of the services that appear in the 3rd limb is 'works contract services' which this article aims to deal with it. 

    Let us put down the exact lines spelt out by the definition when it comes to exclusion of the credit on works contract services, so that we have a clear picture of the same. The relevant part is extracted as under:

    (l) "input service" means any service – but excludes 

    (a) construction or execution of works contract of a building or a civil structure or a part thereof; or 

    (b)laying of foundation or making ofstructures for support of capital goods, except for the provision of one or more of the specified services 

    From the above part of the definition, it is evident that the credit of service tax paid on input services pertaining to the works contract services and construction services are excluded and shall be allowed only if they are used for providing the specified services. That is to say the service provider engaged in construction or execution of works contract of a building or a civil structure or part thereof or laying of foundation or making of structures for the support of capital goods can only avail credit of service tax paid on any such services received from either sub-contractors or any other person. 

    Now with the above background of the law, the question for consideration is whether the said exclusion shall be applicable only for 'original works' in the works contract services or 'all works contract services'?

    Let us take an example of a service provider who is engaged in provision of chartered accountant services. The chartered accountant wishes to renovate/repair his office for provision of effective services and thus hires a contractor for renovating/carrying the repairs works of his office. The contract was awarded with material and labour to the account of the contractor and thus making the contract as 'works contract' services as per Section 65B (54) of the Finance Act, 1994. The contractor has provided renovation/repair services and charged service tax in his invoice. The chartered accountant has paid the same to the contractor and was in doubt whether the said service tax paid is eligible for the availment of cenvat credit and utilisation thereof against the liability towards chartered accountant services? 

    On the detailed examination of the definition of the 'input service', the second limb allows the credit of service tax pertaining to the renovation of the premises of the service provider. The relevant part of the second limb states as 'and includes services used in relation to modernisation, renovation or repairs of a 

    factory, premises of provider of output service or an office relating to such factory or premises'. As stated above, once the service falls under the second limb, there is no question of looking for nexus and stands eligible. However, the third limb specifically excludes the credit of the 'works contract' services except the service provider is a 'works contracts' service provider, which is not the fact in the instant case. Hence, there is a contradiction between the 2nd limb and 3rd limb. When 2nd limb specifically includes repair/renovation services, the 3rd limb allows such credit to only works contract service providers. 

    It can be argued that the 2nd limb only covers such services where material is not involved that is to say if the contract is purely for labour, then the credit of such services is eligible vide 2nd limb and if the contract is for both material and labour, then it does not fit into 2nd limb and gets excluded by virtue of 3rd limb since the later uses the phrase 'works contract' which means material and labour in the same contract. In my view, the above argument is not logical since the credit of services procured shall be decided to be eligible or not depending upon the definition of the 'input service' and not based on the method of agreement/contract entered in the context.

    Hence, I am of the view that when the 2nd limb specifically allows the credit of service tax paid on services pertaining to the modernisation, renovation or repairs of a premises of provider of output service provider or an office relating to such premises, there cannot be an exclusion carved out in 3rd limb. If the intention of the legislature is to exclude such services then there shall not be in any mention of the same in the 2nd limb. Hence, the credit of such services stands eligible for the chartered accountant. 

    Then that leads us to a question, what are the services that are covered under 3rd limb of the definition to stand out of the definition of the 'input services'. In my view, the 3rd limb covers services in the nature of 'original works' namely the new constructions or substantial constructions and not the petty works. Let us assume that Chartered Accountant instead of renovation/repairs to his office intends to construct a new office, in such a case whether the credit of service tax paid to the contractor is eligible? The answer is no, since the 3rd limb covers such instances and also the above reasoning is in alignment with the intention of the legislature because of the removal of phrase 'setting up' from the 2nd limb of the definition of 'input service' with effective from 01.04.2011. 

    To conclude, the 3rd limb covers contracts which are in the nature of the original works and not the petty works or other than original works which stands includible in the 2nd limb. It is very important to note that all credits of work contract services are not sprightly ineligible or eligible. It has to be carefully examined in the light of definition of 'input service' before availment and pre-utilisation.

    This article is contributed by Partners of SBS and Company LLP – Chartered Accountant Company You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

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