CBDT Issues Clarificatory FAQs for the 2024 Guidelines on Compounding of Offences Under the Income-tax Act, 1961

Introduction

Compounding of an offence is a process that enables a defaulter to avoid serious legal consequences and escape prosecution by paying a prescribed monetary amount. This mechanism offers an opportunity to settle specific offences through payment, either before or after the initiation of legal proceedings, as permitted by the competent authority (‘CA’). As part of a major reform aimed at simplifying tax dispute resolution, the Central Board of Direct Taxes (‘CBDT’), in 2024, issued the revised ‘Guidelines for Compounding of Offences’ (‘new guidelines’)[i] under the Income-tax Act, 1961 (‘Act’).

The new guidelines supersede all earlier guidelines issued in 2008, 2014, 2019, and 2022[ii] (‘earlier guidelines’). The new guidelines introduce several structural reforms, including: elimination of offence categorisation, removal of rigid limits on the number of times an application can be filed, permitting compounding of offences under ss. 275A and 275B of the Act, allowing fresh applications after curing defects, removal of the existing 36-month time limit for filing an application from the date of filing of the complaint, rationalisation of compounding fees, etc.

However, to increase awareness and understanding of the new guidelines among stakeholders, the CBDT issued a circular[iii] providing detailed clarifications in the form of Frequently Asked Questions (‘FAQs’). These FAQs address various procedural, jurisdictional, and administrative aspects of the new guidelines.

Brief Overview of the New Guidelines – Scope and Objective

The new guidelines represent a forward-looking step toward simplifying procedures and promoting ease of compliance under the Act. These guidelines took effect from their date of issuance and apply to all compounding applications filed thereafter, as well as those filed earlier but pending disposal. For pending applications where compounding charges had already been determined and communicated to the applicant but remained unpaid, the charges are to be recalculated under the new guidelines, but only if the revised amount is lower. However, no refunds or adjustments will be provided in cases where higher compounding charges were already paid under the earlier guidelines.

Applicants whose earlier applications for compounding of offences under the Act were rejected due to curable defects may reapply under the new guidelines. Only those applications that were rejected by the CA on merit are not eligible for reconsideration.

Although the new guidelines simplify the application process for compounding offences under the Act, stakeholders continued to face challenges in understanding provisions related to multi-jurisdictional filings, curability of earlier rejections, co-accused filings, and fee treatment. The FAQs aim to address these gaps by providing clear guidance. This dual-layer structure of principle-based guidelines and process-oriented FAQs ensures that the legislative intent is effectively realised in administrative practice.

Key Takeaways from the Clarifications Provided by FAQs

A. Compounding of Offence – The clarifications provided in the FAQs are based on the new guidelines and do not introduce any fresh provision to the overall mechanism for compounding offences under the Act. The FAQs clarify that applying for compounding does not amount to an admission of the offences alleged against the applicant. Furthermore, they confirm that under the new guidelines, all offences under the Act have been made compoundable.

B. CA – As per paragraph 8.1[iv] of the new guidelines, the Jurisdictional Principal/Chief Commissioner of Income Tax (‘CCIT’) or Principal/Directorate General of Income Tax (‘DGIT’) is the CA for compounding of offences. In cases involving TDS-related offences where the applicant falls under multiple jurisdictions, the CCIT or DGIT with whom the application is filed will be considered the CA. If multiple applications are involved, the CA will be the one under whose jurisdiction the higher quantum of TDS[v] default arises. This rule also applies in cases involving more than one TAN[vi] jurisdiction.

C. Compounding Application and Fee – The FAQs clarify that there is no time limit for filing a compounding application. It can be filed at any time after the offence, including after prosecution has been initiated. The new guidelines also apply to applications that were pending at the time of their issuance. Applicants in such cases are not required to file a new application or pay fresh application fees. An applicant may withdraw earlier applications and file a new single or consolidated application. However, such a new filing will be treated as a subsequent application and will attract a higher rate of compounding charges. Additionally, an applicant may apply for one or multiple offences in a single application, and there is no limit on the number of times a person can file for compounding. That said, the CA may reject an application if the person is considered a ‘habitual offender’.

The FAQs also clarify that where an earlier application was rejected solely due to conviction, without a merit-based evaluation, the applicant may reapply under the new guidelines. The previous time limits of 12, 24, or 36 months have been eliminated. Therefore, all such applicants whose applications were earlier rejected due to time limitations may now file fresh applications. However, these will be treated as subsequent applications for the purpose of determining compounding charges.

D. Terms for Compounding – An applicant is not required to withdraw an appeal related to the offence sought to be compounded prior to filing a compounding application. However, the applicant must undertake to withdraw such appeals, including any writ petitions, if they pertain to the offence being compounded. In cases where the appeal involves mixed grounds, the applicant is required to withdraw only those grounds that relate specifically to the offence being compounded.

E. Approval of Higher Authority – An applicant who has been convicted and sentenced to imprisonment of two years or more for any offence under the Act, or for an offence under any other law related to an offence under the Act, may still apply for compounding. However, such an offence can be compounded only with the approval of the Chairman, CBDT. Additionally, in cases involving other investigative agencies, such as the Enforcement Directorate (ED) or the Central Bureau of Investigation (CBI), the CA may permit compounding provided the applicant is not found to be involved in anti-national or terrorist activities.

F. Compounding Charges – All applications rejected under the earlier guidelines will be deemed the first compounding application. Any fresh consolidated application filed thereafter will be treated as a second application, and the compounding charges will be calculated accordingly. The rate of compounding charges for subsequent applications is determined based on both the sequence of the application and the specific offence being compounded. If a subsequent application includes an offence that was already part of an earlier application, regardless of whether the earlier application was rejected, pending, or even compounded, a higher rate will apply. This higher rate increases progressively (e.g., 1.2 times, 1.4 times, 1.6 times, and so on), even if the offence and the assessment year remain the same.

Furthermore, a compounding application may be filed suo motu at any time after the offence is committed, irrespective of whether the offence has come to the notice of the revenue department.

G. Extension of Time – The time allowed for payment of compounding charges may be extended for a maximum period of 24 months. No extension is permitted beyond this period. If the charges remain unpaid after 24 months, the application shall be rejected, and prosecution proceedings will be initiated (if not already underway).

However, the applicant may file a new application for the same particulars. This will be treated as a subsequent application for the purpose of calculating compounding charges.

H.  Co-accused and Abettors – A co-accused may apply for compounding of the offence either separately or jointly with the main accused. No separate compounding fee is payable by the co-accused, regardless of whether the application is filed by the main accused, the co-accused, or both jointly. Only the applicable compounding charges for the offence(s) in question are required to be paid. If the application is filed by only the main accused or only the co-accused, the compounding order under s. 279(2) of the Act shall be passed in the name of the person(s) who have applied.

• If only the co-accused has applied, the order will also include the name of the main accused.

• If only the main accused has applied and the co-accused has been identified, the order shall be passed in the name of both the main accused and the co-accused.

Conclusion

The new guidelines, read in conjunction with the FAQs, represent a cohesive, principle-to-process framework for resolving tax offence prosecutions in a streamlined and equitable manner. This framework abolishes outdated barriers such as offence categorisation, rigid deadlines, and limitations on filing frequency, while preserving essential safeguards, including jurisdictional clarity, merit-based scrutiny, and the requirement for documented undertakings.

The reform acknowledges the complexities of modern organisational structures, allowing for the revival of previously rejected applications, enabling co-accused individuals to initiate compounding independently, and removing punitive financial burdens such as multiplicative charges and interest on delays. The structured set of FAQs further strengthens the framework by offering taxpayers a reliable procedural roadmap.

By reconfiguring both the legal and procedural landscape, the CBDT has signalled a shift from rigid enforcement to a more facilitative compliance regime. The new guidelines are notably more focused on the merits of applications rather than procedural time limitations, encouraging voluntary compliance and reducing unnecessary litigation, thereby moving India closer to a more responsive and taxpayer-centric administration.

However, while the guidelines and FAQs mark a positive shift, they still leave significant discretion with the CA and higher authorities. Notably, in cases involving other enforcement agencies, compounding remains contingent on obtaining approval from higher authorities, approval that may be denied if the applicant is found to be associated with anti-national or terrorist activities. Since the term ‘anti-national activities’ is broad and encompasses a wide range of offences, greater clarity on what falls within this category would have been desirable to ensure transparency and prevent arbitrary denial.

End Notes

[i] (2024, October 17). CIRCULAR F. NO. 285/08/2014-IT(INV. V)/163. CBDT, Section 279, Read With Section 2(15a) And 2(21) Of The Income-Tax Act, 1961 Prosecution To Be At Instance Of Principal Chief Commissioner Or Chief Commissioner Or Principal Commissioner Or Commissioner - Guidelines For Compounding Of Offences Under The Act.

[ii] New guidelines superseded the following guidelines:

(2008, May 16). F.No. 285/90/2008-IT(Inv.)/12.

(2014, December 23). - LETTER F.NO.285/35/2013 IT (INV.V)/108.

(2019, June 14). CIRCULAR F. NO. 285/08/2014-IT(INV.V)/147.

(2022, September 16). LETTER F.NO. 285/08/2014-IT(Inv.V)/196.

[iii] (2025, March 17). CIRCULAR NO. 4/2025 [F. NO. 285/08/2014-IT (INV. V)/281], Frequently Asked Questions (Faqs) On Guidelines For Compounding Of Offences Under The Income-Tax Act, 1961.

[iv] 8.1 The jurisdictional Pr. CCIT/CCIT/Pr. DGIT/DGIT is the Competent Authority for compounding of offences; See, Supra Note 1.

[v] TDS refers to the tax deducted at source.

[vi] TAN refers to the tax deduction and collection account number. It is a 10-digit alphanumeric number issued by the Income Tax Department of India to individuals and entities responsible for deducting tax at source (TDS) or collecting tax at source (TCS).

Authored by Shivangi Bhardwaj, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.