[FAQs] How to File for Compounding of Offences Under the New CBDT Guidelines

Compounding of offences is a process by which a person can avoid prosecution for certain offences under the Income-tax Act by paying a compounding fee & charge. It allows taxpayers to settle the dispute by paying the charges instead of undergoing criminal proceedings.

The CBDT issued revised guidelines on 17^th October 2024, simplifying the compounding process. These guidelines replace all earlier versions and apply to both pending and new applications.

Any taxpayer, company, or person deemed guilty of an offence under the Income Tax Act can apply for compounding, provided he meets the necessary conditions prescribed under the guidelines.

The new guidelines will apply to all applications submitted after their issuance date, 17-10-2024, and to applications submitted earlier that have not yet been disposed of.

All offences listed under Chapter XXII of the Income-tax Act, 1961 are eligible for compounding, including:

• Non-payment of TDS/TCS;
• Failure to file returns;
• Willful tax evasion;
• Filing false statements, etc.

The compounding application can be filed suo-moto at any time after the offences occur, regardless of whether it has come to the Department’s notice. It may also be submitted after prosecution proceedings have commenced.

The Pr. CCIT/CCIT/Pr. DGIT/DGIT is the Competent Authority for compounding offences. If a person commits an offence under sections 276B/276BB of the Act for non-payment of TDS/TCS for both resident and non-resident payees, jurisdiction may lie with multiple authorities. Here, the Competent Authority will be the one where the compounding application is filed.

However, if applications are filed in multiple jurisdictions, the authority with the higher TDS default amount will be the Competent Authority and other applications will be transferred accordingly. Similarly, if an applicant files a compounding application for offences under sections 276B/276BB related to multiple TANs in different jurisdictions, the authority with the higher TDS default will be the Competent Authority and other applications will be transferred.

In case of a dispute over jurisdiction, the Pr. CCIT with PAN jurisdiction will determine the Competent Authority within 30 days of receiving the reference.

An offence may be considered for compounding if all the following conditions are satisfied:

• Filing of compounding application

An application for compounding must be submitted to the jurisdictional Pr. CCIT/CCIT/Pr. DGIT/DGIT, using the prescribed format (Annexure-1) as an affidavit on Rs. 100 stamp paper.

The application can be filed for offences related to a single financial year (for taxpayers) or quarter (for tax deductors), as well as for multiple years/quarters, referred to as a ‘Consolidated Compounding Application.’ If there are multiple rejected applications under the previous guidelines, a single Consolidated Compounding Application may be submitted for all of them.

• Payment of compounding fee

The applicant must pay a non-refundable Compounding Application Fee as follows:

• Single Compounding application: Rs. 25,000 (per application)
• Consolidated Compounding application: Rs. 50,000 (per application)

This fee is non-refundable but can be adjusted against the total compounding charges determined by the Competent Authority. The fee is also applicable for applications submitted before the issuance of the new guidelines that were rejected and are now being revived under the new guidelines. However, the fee is not required for pending applications filed under the earlier guidelines.

• Payment of taxes along with interest and other sums

All outstanding tax, interest (including interest under section 220), penalties, and any other sums due related to the offences for the relevant years and/or quarters must be paid before submitting the Compounding Application.

If the Department identifies any outstanding demands upon verification, the applicant must pay these, including interest under section 220, within 30 days of intimation or within a period not exceeding 3 months as permitted by the Competent Authority. The compounding application will be deemed valid only after all demands related to the offences for the respective years/quarters have been paid.

• Submission of undertaking

The applicant shall undertake to pay the Compounding charges. determined in accordance with these guidelines by the Pr. CClT/CUT/Pr. DGIT’/DGIT concerned, within the stipulated timeframe.

Further, the applicant must undertake to withdraw any appeals related to the offences being compounded. If an appeal includes mixed grounds, he should provide an undertaking to withdraw only those grounds related to the offences in question.

• Consolidation of offences

Any application for compounding an offence under sections 276B/276BB of the Act for a specific TAN must include all defaults related to that TAN for the relevant period. To assess the quantum of TDS defaults, the total non-payment of TDS/TCS for a quarter will be calculated by aggregating the defaults from all statements filed by the TDS deductor for that quarter.

Applications that do not meet the criteria specified in FAQ 7 or have curable defects will be treated as defective and will not proceed. However, they can be revived without an additional fee if the defects are corrected within one month from the date of intimation of such defect. If the defect is not corrected within the allowed time, the defective application will be returned to the applicant.

The following offences shall be compounded by the Competent Authority only after taking approval of the chairman of CBDT:

• If the applicant has been convicted of an offence with imprisonment of two years or more, with or without a fine.
• If the offence is related to another offence under any other law, where the applicant has been convicted with imprisonment of two years or more, with or without a fine.
• If the applicant is involved in anti-national or terrorist activities, as determined by a Central or State Agency. In such cases, the Authority will consult the relevant Agency for inputs before seeking approval.
• If the applicant, though not the main accused, facilitated tax evasion through activities like money laundering, issuing bogus invoices, or providing accommodation entries, as per section 277A of the Act;
• If the offence is directly related to offences under the following Acts:
• The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015;
• The Prohibition of Benami Property Transactions Act, 1988;
• For offences under sections 275A and/or 275B of the Act.

Yes, compounding is not a matter of right. The Competent Authority may deny the application in exceptional cases, with written reasons such as the applicant being a habitual offender or the seriousness of the offence based on its facts and circumstances.

Further, prosecution instituted under the Indian Penal Code (IPC) or Bhartiya Nyaya Sanhita, 2023, cannot be compounded under the new Guidelines. If a prosecution complaint is filed under both the Income-tax Act and the IPC/BNS 2023 based on the same facts, and the offences under the Income-tax Act have been compounded, the complaint under IPC/BNS 2023 will be withdrawn by the Competent Authority as per section 321 of the Criminal Procedure Code, 1973, and/or section 360 of the Bharatiya Nagarik Suraksha Sanhita, 2023.

A person may refile an application under the new guidelines if his previous application was rejected due to curable defects, such as:

• Non-payment of outstanding tax, interest, penalty, or related sums,
• Filing the application in the incorrect format,
• Mentioning the wrong assessment year/financial year or section under which the offence has been committed,
• Non-payment or short payment of compounding charges,
• Failure to submit an undertaking regarding the withdrawal of appeals, etc.

However, applications rejected on merits by the Competent Authority in the past will not be reconsidered under the new guidelines.

The following compounding charges shall be paid by the person for compounding offences under various sections:

For applications pending as of 17-10-2024, if compounding charges have already been determined and communicated but remain unpaid in full, the charges shall be recalculated if they are lower under the new Guidelines. However, no refunds or adjustments against other dues will be provided if the higher charges determined under the previous Guidelines have already been paid.

Compounding charges must be paid online by logging into the e-filing portal and selecting:

“e-Pay Tax > New Payment > Income Tax > Minor head > Other Receipt (500) > Compounding Charges”

In cases of offences by a Company or HUF under sections 278B or 278C, a compounding application may be filed separately or jointly by the main accused (Company or HUF) and/or any person deemed guilty (“Co-accused”).

The Competent Authority will decide on the application based on the payment of compounding charges as per the guidelines. Co-accused may deposit compounding charges using his PAN for the relevant financial year related to the offence for which compounding is sought.

Once the compounding charges are paid, the Competent Authority will compound the offences for both the main accused and co-accused by issuing an order under section 279(2).

Note: If a company’s liability for an offence ceases due to provisions of Section 32A of the Insolvency Bankruptcy Code (IBC), prosecution of co-accused may still continue. In such cases, the co-accused and/or the main accused company may file the compounding application and pay the compounding charges.

The following are the procedures to be followed by the Competent Authority to compound an offence:

• Upon receiving the compounding application, the Competent Authority will request a report from the relevant Assessing Officer or Assistant/Deputy Director. This report, along with a completed checklist (Annexure-2), must be submitted promptly through the proper channel.
• If the application is deemed unacceptable, the Competent Authority will issue a speaking order in the suggested format (Annexure-3 – Part-II) within two months of the end of the month in which the application was received.
• If the application is accepted, the Competent Authority will notify the applicant of the acceptance, including the compounding charges and any outstanding liabilities. This intimation may be issued within two months from the end of the month in which the application was received.
• The Competent Authority will inform the applicant of the compounding charges, which must be paid within one month from the end of the month of receipt. If the applicant requests an extension for payment, the Competent Authority may grant up to 6 months under exceptional circumstances. Any further extension shall be granted with the approval of the following authority:

• If the compounding charge is not paid within the allowed time, the application will be rejected, and prosecution will be initiated if it hasn’t already begun.
• The complainant shall serve a copy of the prosecution complaint to each accused within 15 days of filing the complaint to allow prompt filing of the compounding application.
• The court must be informed immediately of the acceptance or rejection of the compounding application by the prosecution counsel in all cases where prosecution proceedings are pending before the Court.
• If penalty proceedings for the offence being compounded are pending when the application is filed, they should be resolved quickly, and any penalty demands must be settled before the compounding order is issued.
• If compounding charges have been paid, the Competent Authority shall issue the compounding order in the prescribed format (Annexure-3 – Part-1) within one month from the end of the month in which the total compounding charges are paid.

Taxpayers, especially NRIs, often refrain from compounding due to the misconception that it implies an admission of offences, potentially impacting their reporting obligations at various statutory and international forums. To clarify this misconception and encourage taxpayers to pursue compounding, the Competent Authority is directed to include the following paragraph in the compounding order issued under section 279(2) of the Act:

“This compounding order is intended to resolve the offence under section 279(2) of the Act and should not be construed as an admission of the offences by the applicant.”