Bombay High Court Reaffirms: CBDT Guidelines Cannot Override Statutory Powers in Tax Compounding Cases

Introduction

The Hon’ble Bombay High Court has, in its recent judgment titled M/s. L.T. Stock Brokers Pvt. Ltd. v. The Chief Commissioner of Income Tax – 2, Mumbai[i] reiterated that administrative guidelines cannot override statutory provisions unless explicitly authorised by law. The Court further emphasized that discretion must be exercised judiciously in circumstances warranting such consideration.

Brief Facts

• M/s. L.T. Stock Brokers Pvt. Ltd. (‘Petitioner’) sought to compound an offence under s. 279(2) of the Income-tax Act, 1961 (‘Act’).

• The Chief Commissioner of Income Tax (‘CCIT’) dismissed the Petitioner's application on 17.01.2024, citing a delay of approximately 36 months from the date of filing of the complaint.

• The Petitioner contended that the Act does not prescribe any limitation period for filing compounding applications. Although the Central Board of Direct Taxes (‘CBDT’) issued guidelines in 2022 stipulating time limits for compounding, including a conditional relaxation window for applications filed between 24 and 36 months, the CCIT applied these limits rigidly without exercising discretion.

Issue

Whether the limitation period prescribed in the CBDT guidelines is mandatory in nature, or whether it allows for discretionary relaxation based on case-specific facts.

Held

• The High Court held that the CCIT had erred in rejecting the compounding application solely on the ground that it was filed beyond the 36-month period prescribed in the CBDT guidelines. The Court emphasized that the Act itself does not prescribe any statutory limitation for filing such applications.

• Relying on  Vinubhai Mohanlal Dobaria v. Chief Commissioner of Income Tax[ii], the Court observed that even when a limitation period is outlined in administrative guidelines, the competent authority retains discretion to entertain delayed applications where justified by the facts and circumstances.

• Accordingly, the Court set aside the impugned order dated 17.01.2024 and directed the CCIT to reconsider the Petitioner’s application in light of the legal position laid down by the Supreme Court. The authority was instructed to assess all relevant facts before deciding whether the case warranted the exercise of discretion in favour of compounding.

Our Analysis

This decision underscores the fundamental legal principle that administrative guidelines are subservient to statutory law unless the latter expressly confers overriding powers. The ruling reinforces the requirement that discretionary authority must be exercised with due application of mind and fairness.

The High Court’s intervention aligns with the broader constitutional mandate of just, fair, and reasonable administrative action. It offers a vital safeguard to taxpayers, preventing the mechanical or rigid application of executive instructions to their detriment. This ruling strengthens the jurisprudential balance between tax enforcement and taxpayer rights in matters relating to compounding of offences.

End Notes

[i] 2025 SCC OnLine Bom 517 dated 04.03.2025.

[ii] [2025] 171 taxmann.com 268 (SC).

Authored by Arjun Singh Tamang, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.