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What is Compounding & its Procedure? | Bhavya Sharma & Associates

 


COMPOUNDING PROVISIONS UNDER THE COMPANIES ACT, 2013

Section 441 of the Companies Act, 2013 deals with the compounding of certain offences. “Notwithstanding anything contained in the Code of Criminal Procedure, 1973, any offence which is punishable under this Act with imprisonment only or with imprisonment and also with fine shall not be compoundable.”.

I. WHICH OFFENSES CAN BE COMPOUNDED?

Any offence punishable under this Act (whether committed by a company or any officer thereof) not being an offence punishable with imprisonment only or imprisonment and also with fine may be compounded. Thus, if the offence is punishable with a fine only or imprisonment or fine or with a fine or alone can be compounded.
II.WHICH OFFENSES CAN NOT BE COMPOUNDED?

Any offence punishable under this Act (whether committed by a company or any officer thereof) being an offence punishable with imprisonment only or imprisonment and also with a fine cannot be compounded. As per the Black’s Law Dictionary, “Compound” means “to settle a matter by a money payment, in lieu of other liability.” As per this definition, Compounding is akin to a Settlement Mechanism, a settlement by paying the penalty in lieu of facing prosecution for the offence committed. Compounding is essentially a compromise or arrangement between the administrator of the enactment and the person committing an offence.
III. WHAT ARE THE ADVANTAGES OF COMPOUNDING?

• Buy peace of mind. • Generally, the compounding amount is not treated as fine. • Speedy disposal of offences and justice • Judiciary can devote more time and concentrate on serious cases • No need to appear before prosecution authorities. It provides comfort to individuals and corporates and persons connected with it. • Amount paid as a compounding fee under the law can be claimed as a tax deduction under the Income Tax Act while a penalty paid for contravention is not eligible for deduction. • Any offence otherwise compoundable cannot also be compounded if the investigation against such a company has been initiated or is pending under this Act. • An offence committed by a company or its officer within a period of three years from the date on which a similar offence committed by it or him was compounded under this section. If the offence is not similar, this restriction to compound will not apply. It may be noted that any second or subsequent offence committed after the expiry of a period of three years from the date on which the offence was previously compounded, shall be deemed to be the first offence and is eligible to be compounded.
IV. WHEN COMPOUNDING CAN BE DONE?

Compounding can be done either before (or) after the institution of any prosecution.
V. WHO ARE THE COMPOUNDING AUTHORITIES/ WHO CAN COMPOUND THE OFFENCE?

The following are the two compounding authorities:
• Regional Director: The Regional Director is appointed by the Central Government as a Regional Director for the purposes of this Act. Where the maximum amount of fine which may be imposed for an offence does not exceed Rs.25 lakh, the Regional Director or any officer authorized by the Central Government can compound the offence.

• Tribunal: The National Company Law Tribunal is authorized to compound in all other cases. Here the maximum amount of fine means, a fine which is payable for an alleged violation of a particular section of the Act. The compounding authority has no power to impose a fine which exceeds the maximum amount of fine which may be imposed for an offence so compounded. In specifying the sum required to be paid or credited for the compounding of an offence, the sum, if any, paid by way of additional fee under sub-section (2) of section 403 shall be taken into account:

VI. WHAT IS THE PROCEDURE FOR COMPOUNDING? (a) Call for a board meeting to decide on compounding as per the CA, 2013. (b) Arrive at the amount of the fine involved as per the relevant section(s). (c) Hold the Board Meeting and pass a resolution(s) to compound and provide for the preparation and provide necessary authorization for compounding.

(d) Every application for the compounding of an offence shall be made to the Registrar who shall forward the same, together with his comments thereon, to the Tribunal or the Regional Director or any officer authorized by the Central Government, as the case may be.

The filing with ROC is done in the e-form GNL-1 prescribed for this purpose. Also, deliver a sufficient number of hard copies of the compounding application to ROC for him to forward it to RD/Tribunal based on the quantum of fee involved.

(e) There will be a personal hearing before the Regional Director or Tribunal which will decide the amount to be paid for compounding.

(f) Get the order passed by the RD/Tribunal and pay the amount stipulated within the time fixed. (g) File Order of RD/NCLT with ROC in form INC-28 and ROC will take note of the same. CONCLUSION:
• Where any offence is compounded under this section, whether before or after the institution of any prosecution, an intimation thereof shall be given by the company to the Registrar within seven days from the date on which the offence is so compounded.
• Where any offence is compounded before the institution of any prosecution, no prosecution shall be instituted in relation to such offence, either by the Registrar or by any shareholder of the company or by any person authorized by the Central Government against the offender in relation to whom the offence is so compounded.

• Where the compounding of any offence is made after the institution of any prosecution, such compounding shall be brought by the Registrar in writing, to the notice of the court in which the prosecution is pending and on such notice of the compounding of the offence being given, the company or its officer in relation to whom the offence is so compounded shall be discharged.
• The Tribunal or the Regional Director or any officer authorized by the Central Government, as the case may be, while dealing with a proposal for the compounding of an offence for default in compliance with any provision of this Act which requires a company or its officer to file or register with, or deliver or send to, the Registrar any return, account or other documents, may direct, by order, if it or he thinks fit to do so, any officer or other employee of the company to file or register with, or on payment of the fee, and the additional fee, required to be paid under section 403, such return, account or other documents within such time as may be specified in the order.
• Any officer or other employee of the company who fails to comply with any order made by the Tribunal or the Regional Director or any officer authorized by the Central Government shall be punishable with imprisonment for a term which may extend to six months, or with a fine not exceeding Rs.1 Lakh, or with both. • No penalty or prosecution after compounding: - In P P Varkey v. STO (1999) 114 STC 224 (Bom HC DB), it was held that once an offence is compounded, penalty or prosecution proceeding cannot be taken for the same offence.
• In S Viswanathan v. the State of Kerala (1993) 113 STC 182 (Ker HC DB), it was held that once the matter is compounded, neither department nor assessee can challenge the compounding order. Department cannot reopen the matter for the reason that actual suppression was much higher.
• No appeal against the order of composition: -A person who has agreed to the composition of offence is not entitled to challenge the said proceeding by filing an appeal. (S V Bagi v. the State of Karnataka (1992) 87 STC 138).

Article By: Ms Shivangi Dhanuka, Legal Associate at Bhavya Sharma and Associates located in Delhi. In case you need any assistance for corporate law compliances or advisory related services, contact us at legal@bhavyasharmaandassociates.com or for more details you can visit: www.bhavyasharmaandassociates.com

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