BACKGROUND

The Central Board of Direct Taxes (CBDT) had issued revised guidelines for Compounding of offences (guidelines) under the Income Tax Act, 1961 (IT Act) on 17 October 2024. The revised guidelines superseded all existing guidelines and are applicable to pending as well as new applications from the date of their issuance. The revised guidelines have eliminated the categorisation of offences, removed the limit on the number of occasions for filing applications, allowed fresh application upon curing of defects, allowed compounding of offences under section 275A¹  and 276B²  of the IT Act, removed the existing time limit for filing application. Please click on to read our detailed alert.

In order to enhance awareness and understanding among the stakeholders about the revised guidelines, recently, the CBDT issued a circular³  in the form of frequently asked questions (FAQs). We, at BDO in India, have analysed and summarised the key provisions of the FAQs hereunder:

1. What is compounding of offence?

Compounding of an offence is a mechanism whereby major legal consequences of the defaulter are reprieved by affording him an opportunity to pay certain sum of money to escape prosecution.

2. Are there any offences under IT Act which are not compoundable?

All offences under the IT Act have been made compoundable.

3.Is compounding application fee adjustable against cross application?

No, cross application adjustment is not allowed. 

4.If the compounding application is rejected, is the application fee refundable?

No, the application fees shall neither be refundable nor adjustable against any subsequent application.

5.Whether compounding is allowed if the application for such an offence was previously rejected? If so, whether separate applications need to be filed for more than one application rejected under the previous guidelines? How will the compounding application fees be charged?

Yes, an applicant may apply for compounding of offences through a single consolidated application, if one or more applications had been rejected under previous guidelines. However, the fresh application can only be filed if such rejections were on account of curable defects and no application is allowed to be filed for any of the rejections, made by the Competent Authority, on merits with those particulars i.e., offence and relevant financial year. Compounding application fees chargeable for a ‘consolidated compounding application’ would be charged in this case.

6. Are applicants whose applications were pending on 17 October 2024 required to file fresh application?

The applicants whose applications were pending as on 17 October 2024 are neither required to file a fresh application nor required to pay any fresh application fees.

7. Whether applicant can withdraw a compounding application and file a new application?

The applicant can file a new single application or consolidated application after withdrawal of earlier application(s). However, such new application shall be treated as a subsequent application, and higher compounding charges shall be applicable.

8. Whether applicant is required to file compounding application for all the offences together, for which prosecution proceedings has been initiated?

No, the applicant may apply for one or multiple offences in an application. His application
cannot be rejected on the ground that he has not applied for particular offence for which notice for prosecution has been issued and proceedings are in progress.

9. Is there any limitation as to the number of times compounding applications can be filed by a person?

No, there is no limitation on the number of times a person can file compounding application. However, the Competent Authority may reject an application filed by a person on the grounds of him being a ‘habitual offender’.

10. Whether the applicant whose application was rejected in earlier guidelines on the ground of being convicted is eligible to re-apply for compounding as per revised guidelines?

Yes, in case the rejection was solely on account of conviction, without examination of merits, as per any of the earlier guidelines, such applicant can reapply in accordance with the  revised guidelines.

11. If compounding application is made beyond 12 months from the end of the month in which prosecution complaint is filed, what will be the date of application in case of carried forwarded applications - original date of application or date of issue of new Guidelines?

The application pending as on 17 October 2024 shall be governed under new guidelines. However, date of such pending application shall be the original date of application for any
purpose.

12. Whether the applicant whose application was rejected on account of not being filed in time as provided for in the earlier guidelines, i.e. within expiry of 12/ 24/ 36 months from the end of the month of filing of complaint, is eligible to file fresh compounding application?

The limitation of 12/ 24/ 36 months has been eliminated in revised guidelines and all such
applicants whose applications were rejected earlier on limitation grounds, may file fresh applications for compounding of offences, which shall be treated as subsequent applications for the purpose of determination of compounding charges.

13. Whether an applicant who has filed a Writ Petition for rejection of his application being not filed within stipulated period of 12/ 24/ 36 months from filing of complaint as per earlier guidelines and is still to be decided by the Hon’ble Court, can again file a compounding application and how shall this application be treated?

Yes, after submission of an undertaking to withdraw the Writ Petition from the Hon'ble Court along with the application, the applicant can again file the compounding application, which shall be treated as a subsequent application for the purpose of determination of compounding charges.

14. How shall the compounding charges be calculated for the application(s) rejected under earlier guidelines and for which fresh allowable application has been filed?

All application(s) rejected under earlier guidelines shall be deemed to be the first compounding application. The fresh consolidated application will, accordingly, be considered as the second application and compounding charges will be calculated as per para 10⁴  of the revised guidelines.

15. How shall the compounding charges be calculated for applications pending before issuance of these guidelines?

The compounding charges for pending applications are subject to re-determination as per para 10 of the revised guidelines. All pending applications, whether for single or multiple years/quarters, shall be treated as first compounding applications and compounding charges shall be re-computed for each offence disclosed in the application as given in Annexure-4 of the guidelines.

16. Whether credit of payment shall be allowed while re-computing compounding charge for pending applications? If yes, whether the excess payment shall be refundable or adjustable?

Yes, credit of the amount already paid for particular offence pertaining to particular year shall be allowed for such particular offence and year only, during re-computation of compounding charge for pending application. However, any excess payment shall not be refundable or adjustable.

17. If a new consolidated application includes a year for which application was filed earlier and then withdrawn, whether partial compounding charges paid for such year for which application is withdrawn can be adjusted against total compounding charges towards consolidated application?

No. Partial compounding charges paid for the year for which application is withdrawn can be adjusted in new consolidated application only towards the offence and particular year for which payment was made.

18. An applicant has filed compounding applications under earlier guidelines, two of which were rejected on account of curable defects, two were compounded and three are pending as on issuance of this guideline. How should the applicant file a compounding application after issuance of these guidelines and how shall the new application be treated?

No action is pending for the applications which have been compounded. A consolidated application may be filed for all applications which were rejected (on account of curable defects), and no fresh application is required to be filed for pending applications. All pending applications, whether for single or multiple years/ quarters, shall be treated as first compounding application and compounding charges shall be re-computed for each offence disclosed in the application as given in Annexure-4 of the guidelines. The fresh consolidated application for rejected applications will be considered as second application, and compounding charges shall be re-computed in terms of para 10 of the revised guidelines.

19. How shall the compounding charge be determined if the application is filed suo-moto?

The compounding charge depends on sequence of application as well as offence applied for and is independent of whether application is filed suo-moto or in compliance with the notice of department.

20. How the compounding charge will be determined where compounding application is be filed after launch of the prosecution?  

If application is filed within 12 months from end of the month in which prosecution complaint is filed, the compounding charge will be determined as per para 10.2 to 10.5 of guidelines as illustrated in Question no. 30 above. For applications filed after 12 months, the compounding charges so calculated shall be increased by 50% as per para 10 of the guidelines.

21. Whether compounding charges include Prosecution Establishment Expenses and Litigation Expenses?

No. Such expense has been removed in revised guidelines.

22. Whether the compounding charge can be made under PAN in case the applicant being a deductor?

The compounding charge shall be made under TAN of the deductor. However, if the applicant is the co-accused then compounding fees may be made under PAN of co-accused as the co-accused may not have access to the TAN of main accused.

23. Whether time for payment of compounding charges may be extended beyond 24 months?

Extension beyond 24 months is not allowable, and the application shall be rejected, followed by initiation of prosecution proceedings, if not already initiated. However, the applicant can file new application for the same particulars which shall be treated as a subsequent application for the purpose of determination of compounding charges.

24. For pending applications where the payment initiation was made before the issuance of the revised guidelines but not fully paid, how will the period of 24 months be calculated?

For applications pending as on 17 October 2024, wherein compounding charges were not fully paid within time allowed as per earlier Guidelines or wherein time allowed had not elapsed, the period of 24 months will commence from the end of the month of issuance of these guidelines, viz October 2024.

25.Is extension for payment of compounding charges subject to interest or additional charges?

No, interest or additional charges are not applicable on extension allowable under para 9.4⁵  of the guidelines. Further, for cases pending as on date of issuance of revised guidelines, additional compounding charges (chargeable under previous guidelines) shall not be applicable and compounding charges shall be determined as per para 10 of the guidelines.

26. Where the compounding application of the co-accused was rejected earlier on the ground that the main accused has not filed for compounding, whether such applicants will be eligible for filing again? If yes, whether such application shall be a subsequent application?

Yes, other than the case where application was rejected in past on merit, any of the co-accused applicants are eligible to file compounding application again separately or conjointly. Such an application shall be treated as a subsequent application for the purpose of determination of compounding charges.

27. Similarly, where the compounding application of the main accused was rejected earlier on the ground that the co-accused has not filed for compounding or given undertaking, whether such applicants will be eligible for filing again? If yes, whether such application shall be a subsequent application?

Yes, other than the case where application was rejected in past on merit, the main accused applicant is eligible to file a compounding application again separately or conjointly with the co-accused. Such application shall be a subsequent application for the purpose of determination of compounding charges.

28.If any application filed by co-accused or accused under previous guidelines is pending, whether they are required to file a fresh application under revised guidelines?

No, all such pending applications will be clubbed together and none of the applicants (main accused and/ or co-accused) are required to file a fresh application under revised guidelines. This consolidated application shall be considered as first application for the purpose of determination of compounding charges.

29. If application is filed by main accused or co-accused or by both of them co-jointly, whether separate compounding fee shall be applicable for co-accused or not?

No separate compounding fee for co-accused shall be payable, irrespective of the fact that
application has been filed by main accused or co-accused or by both of them co-jointly. Only compounding charges for the concerned offence shall be payable, as per para 10 of the revised guidelines. 

30. Whether any person other than main accused or co-accused can file compounding application for compounding of an offence of company or HUF?

No, person other than main accused or co-accused cannot file compounding application.
The applicant is required to disclose his status as main accused or co-accused in the compounding application.

31.What will happen if co-accused has not been identified by the department for offences under section 278B⁶ ?

In cases where co-accused have not been identified or such identification is under progress under section 278B of the IT Act, either the main accused or any person who can substantiate along with supporting documents that he was in-charge or responsible for conduct of the business of the company during the time of commission of offence, to be considered as ‘deemed to be guilty’ under section 278B(1) of the IT Act, can file an application as co-accused.

32. If any person filed a compounding application as a co-accused in the scenario given at Q. No. 32, whether there is any requirement to identify other co-accused?

In such cases, there will be no requirement to identify other co-accused for the purpose of the compounding of the offence. However, if such compounding application is rejected for any reason, all co-accused shall need to be identified as per Section 278B of the IT Act to file a prosecution complaint before the concerned Court.

33. Can co-accused furnish an undertaking for withdrawal of appeals on behalf of the main accused?

No, co-accused cannot furnish undertaking for withdrawal of appeal on behalf of the main accused. Such undertaking shall be furnished by the main accused only which must be attached with the application if application has been filed by the co-accused, since offences of both main accused and co-accused are being compounded, under para 11.2⁷  of the revised guidelines.

34. If application has been filed by only main accused or co-accused, in such case against whose name the compounding order shall be passed?

The compounding order under section 279(2)⁸  of the IT Act shall be passed in the name of person who have applied for compounding. If co-accused has applied, then order shall include the name of main accused also. Further, in a case where main accused has applied and co-accused has been identified, the order shall be passed in the name of main accused and co-accused.

BDO COMMENTS

This is a welcome circular. It clarifies various aspect of the Guidelines on Compounding of Offences issued on 17 October 2024. This circular clarifies multi-party offences, re-application after rejections, appeal withdrawal requirements and compounding under insolvency cases. It is pertinent to note that this Circular permits applying for compounding in respect of matters which were rejected due to limitation of time. This is because the limitation period for filing compounding application is done away with in the revised guidelines. Hence, taxpayers who could not apply for compounding and proceedings initiated, may consider evaluating if compounding benefit can be availed by them or not. Further, one should not lose sight of the fact that in such cases, such applications will be treated as ‘subsequent application’ and thereby result in a higher compounding charge.

The circular has also clarified that not only offences under IT Act but also the cases involving Enforcement Directorate/ Central Bureau of Investigation can be compounded. It acts as an essential guide for stakeholders, ensuring a transparent, simplified, and consistent approach to compounding. By addressing practical concerns and providing clear references to the guidelines, the circular enhances compliance awareness and reduces procedural uncertainties. 


¹ Section 275A of the IT Act provides punishment for contravention of order in search and seizure cases.
² Section 276B of the IT Act provides for punishment if a person fails pay the withholding tax to the credit of Central Government.
³ Circular No 4 of 2025 dated 17 March 2025
⁴ Para 10 of the revised guidelines provide procedure for determining compounding charges
⁵ Para 9.4 provides guidelines for time limit of payment of compounding charges.  
⁶ Section 278B of the IT Act provides that where an offence under the IT Act has been committed by a company, every person who, at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company as well as the company shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.
⁷ Para 11 provide guidelines for compounding in case of offences committed by companies and Hindu Undivided Families.
⁸ Section 279 of the IT Act provides that a person shall not be proceeded against for specified offences except with the previous sanction of the prescribed authority.