CBDT Issues Revised Guidelines for Compounding Tax Offences
The Central Board of Direct Taxes (CBDT) has issued new, simplified guidelines for the compounding of offences under the Income-tax Act, 1961, effective from October 17, 2024. Compounding is a procedure where a person who has committed an offence seeks to avoid prosecution by admitting the default and paying a specified charge. These new guidelines supersede all previous instructions and apply to all fresh and pending applications, with the caveat that pending cases where charges were already determined will be recalculated only if the new charges are lower. Critically, while compounding applications are generally accepted if all conditions are met, it remains a discretionary power of the competent authority, which may reject an application in exceptional cases, such as those involving habitual offences or issues of serious gravity. The guidelines allow for the re-filing of applications previously rejected only on the grounds of “curable defects,” such as non-payment of outstanding dues, incorrect proforma, or non-submission of appeal withdrawal undertakings. Applications rejected on merits, however, will not be reconsidered.
Eligibility, Fees, and Compounding Charge Structure
Eligibility for compounding is subject to several mandatory requirements. The applicant must file the request in the prescribed format (Annexure-I affidavit) to the jurisdictional Principal Chief Commissioner or Principal Director General. A non-refundable application fee of $\text{Rs. }25,000$ (or $\text{Rs.}50,000$ for a consolidated application) is required, which may be adjusted against the final compounding charges. Most importantly, the applicant must clear all outstanding tax, interest, penalty, and related dues concerning the offence before filing the application. Compounding is time-bound: if a prosecution complaint is already filed in court, the application must be submitted within 12 months from the end of that month. Late applications are permitted but incur a 1.5 times the normal compounding charges. The compounding charges are detailed and linked to the gravity of the offence. For example, a wilful attempt to evade tax (Section 276C(1)) attracts a charge of 125% of the tax sought to be evaded, while failure to pay TDS/TCS (Sections 276B/276BB) is charged at $1.5\%$ per month of the defaulted amount, capped at the actual amount of default. The guidelines also prescribe a progressive multiplier for repeat offences (e.g., $1.2$ times for the second offence, $1.4$ times for the third, and so on).
Offences Requiring Higher Approval and Related Legal Matters
The CBDT has designated certain serious offences that require the prior approval of the Chairman, CBDT, for compounding. These include cases where the applicant has been convicted with two years or more of imprisonment under the Income-tax Act or any other law, involvement in anti-national or terrorist activity, or offences related to the Black Money Act or the Prohibition of Benami Property Transactions Act. Compounding may also be allowed for co-accused (like directors of a company) even if the company’s liability ceases under the Insolvency and Bankruptcy Code (IBC). A significant clarification addresses concurrent prosecutions under the Income-tax Act and the Indian Penal Code (IPC) or the Bhartiya Nyay Sanhita, 2023. While compounding under the Income-tax Act guidelines cannot directly compound IPC offences, the Income Tax Authority must initiate the withdrawal of the related prosecution under the IPC provisions if the tax offence is compounded. This framework outlines a strict yet systematic process for the department to handle criminal proceedings by allowing defaulters to normalise their status through adherence to compliance requirements and payment of specified charges.
Compounding of offence under the Income-tax Act, 1961
Compounding of offence is a process whereby the person/entity committing default files an application to the competent authority accepting that it has committed an offence and so that same should be compounded.
The Finance Minister in her Budget Speech 2024 made an announcement to simplify and rationalize the compounding procedure. Consequently, the CBDT has issued new guidelines [Letter F. No. 285/08/2014-IT(Inv. V)/163, dated 17-10-2024] for compounding of offences superseding all existing guidelines.
The new guidelines on compounding of offences, effective from 17-10-2024, will apply to all applications filed thereafter or pending disposal. For pending cases where charges were determined but not fully paid, charges will be recalculated if lower under the new guidelines. However, if higher charges under the old guidelines were already paid, no refund or adjustment will be allowed.
Re-filing of the rejected compounding application
Application for compounding can be filed again, in case application under earlier guidelines was rejected only on account of curable defects such as-
a) non-payment of outstanding tax, interest, penalty, or any other sum related to the offence,
b) filing of the application in the incorrect proforma,
c) mention of incorrect assessment year/financial year or section under which the offence has been committed,
d) non-payment or short payment of compounding charges,
e) non-submission of an undertaking regarding withdrawal of appeals, etc.
If more than one application was rejected under the previous Guidelines, one Consolidated Compounding Application may be filed for all such previous applications under the new guidelines.
Credit for the payment already made shall be given against the compounding charges to be paid under these new Guidelines. Further, it is clarified that those applications which were rejected in the past on merits by the Competent Authority shall not be reconsidered, under this provision.
Note:
- Prosecutions under IPC (or Bhartiya Nyay Sanhita 2023) cannot be compounded as per Income-tax Act guidelines but may be withdrawn under IPC provisions.
- If prosecution is launched under both Acts on the same facts and is compounded under the Income-tax Act, the authority shall initiate withdrawal under IPC or Bhartiya Nyay Sanhita 2023.
- Compounding applications are generally accepted if guideline conditions are met. However, compounding is not a right. The authority may reject it in exceptional cases with recorded reasons, such as habitual offences or serious gravity based on facts.
Eligibility Requirements for Compounding
An offence can be considered for compounding subject to the fulfilment of the following conditions:
(1) Filing of application
The compounding application must be filed to the Jurisdictional Principal Chief Commissioner/Chief Commissioner or Principal Director General/Director General in the format given in Annexure-I, as an affidavit on Rs. 100 stamp paper.
It may be filed for offences relating to a single financial year (for taxpayers), a quarter (for deductors), or multiple periods (as a Consolidated Application).
In case of offences by a Company or HUF, the application can be filed by the main accused (Company/HUF) and/or co-accused under Sections 278B/278C (e.g., director, manager, etc.), either jointly or separately. The Competent Authority may compound the offence of both main and co-accused if compounding charges are paid by any of them.
If a company’s liability ceases under Section 32A of IBC, prosecution may still continue against co-accused. In such cases, either the co-accused or the company can file the compounding application and pay the charges.
The application can be filed by the assessee at any time after the offence, regardless of whether it has come to the Department’s notice. If a prosecution complaint is already filed in court, the application must be filed within 12 months from the end of the month of such filing.
If filed after 12 months, compounding is still allowed, but charges will be 1.5 times the normal rate.
Thus, the compounding charges shall depend upon the time of filing of compounding application as under:
| Time of filing of compounding application | Compounding charges |
| Within 12 months | Normal compounding charges |
| Beyond 12 months | 1.5 times of normal compounding charges |
(2) Payment of compounding application fee
The applicant is required to pay a non-refundable fee of Rs. 25,000 per application, or Rs. 50,000 for a consolidated application. This fee may be adjusted against the final compounding charges.
The fee also applies to applications earlier rejected under old guidelines but now revived under the new ones. However, no fee is required for applications pending as of 17-10-2024 and filed under the previous guidelines.
(3) Payment of outstanding dues
The applicant is required to pay all outstanding tax, interest, penalty, and related dues for the offence(s) before filing the compounding application.
If any dues are found pending, the department will notify the applicant. The application will be treated as valid only if the demand is paid within 30 days of such intimation or within the extended period (not exceeding 3 months) granted by the Competent Authority.
(4) Undertaking to pay compounding charges
The person shall undertake to pay the compounding charges, determined and communicated by the Principal Chief Commissioner or Chief Commissioner or Principal Director-General or Director-General concerned, within the prescribed time limit.
a. What are the compounding charges for different offences?
The person is required to pay the following compounding charges for offences under various sections of the Income-tax Act:
The person is required to pay the following compounding charges for offences under various sections of the Income-tax Act:
| Section | Offence | Compounding charge |
| 275A | Contravention of authority’s order to not deal with the goods that could not be seized | 10% of the highest of total income declared or assessed, in the last 7 financial years including year of search, subject to a minimum of Rs. 5 crore. |
| 275B | Failure to provide access to books of account and other documents to the authorized officer during the search and seizure | 10% of the highest of total income declared or assessed, in the last 7 financial years including year of search, subject to a minimum of Rs. 5 crore. |
| 276 | Removing, concealing, transferring or delivering property to thwart tax recovery | 75% of the outstanding tax or the recovery amount sought to be thwarted through the removal/concealment/transfer/delivery of property, whichever is lower. |
| 276A[1] | If a liquidator:
(a) does not intimate the tax authorities about his appointment; (b) parts with the assets of the company without prior approval or without setting aside the amount of tax demand (Prior to 01.04.2023) |
Rs. 10,000 for each such offence.
However, the Competent Authority may determine compounding charge having regard to the nature and magnitude of the offence, loss of revenue directly or indirectly attributable to such offence, subject to levy of minimum compounding charges. |
| 276AA | Failure to comply with the provisions of section 269AB or section 269I
(Prior to 01.10.1986) |
|
| 276AB | Failure to comply with the provisions of sections 269UC, 269UE and 269UL
(Prior to 01.04.2022) |
|
| 276B | Failure to pay tax deducted at source (TDS) or failure to pay dividend distribution tax or failure to pay or ensure payment of tax on winning in kind under Section 194B or failure to ensure payment of tax on winnings from online games in kind under Section 194BA or failure to ensure payment of tax on benefit or perquisite provided in kind under Section 194R or failure to ensure payment of tax under Section 194S where the consideration for transfer of VDA is in kind[2] | 1.5 % per month or part of a month of the amount of tax in default for the default period.
Note: (a) The period of default shall be calculated from the date of deduction to the date of deposit of TDS, as is done in respect of calculating interest under section 201(1A)(ii). (b) The compounding charge shall not exceed the TDS amount in default. |
| 276BB | Failure to pay the tax collected at source (TCS) | 1.5 % per month or part of a month of the amount of tax in default for the default period.
Note: (a) The period of default shall be calculated from the date of collection to the date of deposit of TCS, as is done in respect of calculating interest under section 206C(7). (b) The compounding charge shall not exceed the TCS amount in default. |
| 276C(1) | Wilful attempt to evade any tax, penalty or interest chargeable or imposable under this Act or under-reporting of income | 125% of tax amount sought to be evaded or tax on under-reported income, as the case may be. |
| 276C(2) | Wilful attempt to evade payment of any tax, penalty or interest chargeable or imposable under this Act | 1.5% per month or part of the month of the amount of tax, interest and penalty, the payment of which was sought to be evaded for the period of default.
Notes: (a) The period of default is calculated from the day after the due date of payment until the actual payment date. (b) Any period where a stay on demand is granted by the Income Tax Authority, Appellate Tribunal, or Court shall be excluded when calculating the default period. (c) The compounding charge shall not exceed the amount of tax, interest, and penalty that was attempted to be evaded. (d) For compounding under sections 276C(1) and 276C(2) for the same issue and year, only the charges under section 276C(1) will apply. |
| 276CC | Failure to furnish the return of income either under Section 139(1) or in pursuance to a notice issued by the Income-tax authorities | In case of default in filing of return pursuant to search or survey action:
• 30% of the amount of tax sought to be evaded or the amount of tax on under-reported income, as the case may be, subject to a minimum of Rs. 10 lakh. In other cases • 15% of the amount of tax sought to be evaded or the amount of tax on under-reported income subject to a minimum of Rs. 5 lakh. Note: For compounding under sections 276C(1) and 276CC for the same issue and year, only the charges under section 276C(1) will apply. |
| 276CCC | Failure to furnish return of total income in response to a notice issued by assessing officer in search or requisition cases as per Section 158BC | 30% of the amount of tax sought to be evaded or the amount of tax on under-reported income, as the case may be, subject to a minimum of Rs. 10 lakh.
Note: For compounding under sections 276C(1) and 276CCC for the same issue and year, only the charges under section 276C(1) will apply. |
| 276D | Failure to produce books of accounts or documents before the assessing officer or fails to get his accounts audited or inventory valued under Section 142(2A) | 10% of returned income or assessed income of the assessment year pertaining to the offence, whichever is higher, subject to a minimum of Rs. 5 lakh. |
| 276DD | Failure to comply with the provisions of section 269SS
(Prior to 01.10.1989) |
10% of the amount of any loan or deposit in contravention of the provisions of Section 269SS. |
| 276E | Failure to comply with the provisions of section 269T
(Prior to 01.10.1989) |
10% of the amount of deposit repaid in contravention of the provisions of Section 269T. |
| 277 | Making a false statement in any verification or delivers an account or statement which is false | 50% of the amount of tax, which would have been evaded due to offence committed |
| 277A | Making or causing to make a false statement or entry in books of account or document | 100% of the amount of tax or interest or penalty evaded on account of such false entry or statement |
| 278 | Abets or induces another person to make and deliver an account or a statement which he believes to be false or to evade any tax or interest or penalty chargeable or imposable under the act | 50% of the amount of tax, which would have been evaded or which is willfully attempted to be evaded, due to offence committed
Notes: (a) If same set of facts and circumstances attract prosecution u/s 277 as well as section 278, the compounding charge shall only be calculated by treating them as single offence. (b) If same set of facts and circumstances attract prosecution u/s 277 or 278, in addition to another offence, no separate compounding charge shall be charged for offence u/s 277 or 278. |
Notes:
- To calculate compounding charges, ‘tax’ means to the tax amount, including surcharge and cess, as applicable. However, interest is excluded from the ‘tax’ when computing the Compounding Charge.
- The Compounding charges shall be increased by 50% of sum computed if the application is made beyond 12 months from the end of the month in which the prosecution complaint is filed.
- Any application for compounding an offence under sections 276B/276BBfor a specific TAN must include all defaults related to that TAN for the relevant period. To assess the quantum of TDS/TCS 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 or TCS collector for that quarter.
- The compounding charges mentioned above apply to the ‘first’ compounding application or a consolidated application for each offence disclosed by a person. Compounding applications filed under previous guidelines, whether pending, rejected, or compounded, will be treated as the “first” compounding application under the new guidelines.
- Any subsequent applications will be considered as second, third, fourth, etc. If new offences are included in subsequent applications, charges will follow as specified above. However, for repeat offences in the subsequent application, compounding charges will be as follows:
| Offences | Compounding Charges |
| 1st Offence | Compounding charges as specified above |
| 2nd Offence | 1.2 times of the compounding charges |
| 3rd Offence | 1.4 times of the compounding charges |
| 4th Offence | 1.6 times of the compounding charges |
| Subsequent Offences | Continue increasing by 0.2 times per offence |
| The Compounding charges shall be increased by 50% of sum computed if the application is made beyond 12 months from the end of the month in which the prosecution complaint is filed. | |
b. What if compounding charges were determined under earlier guidelines?
For applications pending as on 17-10-2024, if charges were determined under the old guidelines but not fully paid, they will be recalculated under the new Guidelines if the revised charges are lower. However, if the earlier, higher charges have already been paid, no refund or adjustment will be allowed.
(5) Undertaking to withdraw appeal
The person shall undertake to withdraw appeals related to the offence sought to be compounded. If an appeal contains mixed grounds, the undertaking should cover only those grounds related to the compounding offence.
(6) Revival of defective application
An application that does not meet the eligibility conditions or contains curable defects will be treated as defective and not processed further. Defects include:
-
- Non-payment of tax, interest, penalty, or other dues related to the offence;
- Incorrect proforma;
- Wrong financial year, assessment year, or section cited.
Such an application may be revived without extra compounding charges if the defects are rectified within one month from the date of intimation. If not cured in time, the application will be returned, and any fresh filing will be treated as a new application with applicable charges.
(7) Offences compoundable with the approval of higher authority
The Competent Authority, in the following cases, may compound only with the approval of Chairman, CBDT.
(a) In case of an offence for which the applicant has been convicted with imprisonment for two years or more, with or without fine, by a court of law;
(b) In case of an offence which is related to another offence under any other law for which he has been convicted with imprisonment for two years or more with or without fine, by a court of law;
(c) If the applicant, as per information available on the basis of an investigation conducted by any Central or State Agency, has been found to be involved, in any manner, in anti-national or terrorist activity. In such cases, the Competent Authority shall consult with relevant Agency and seek inputs regarding the said activity and its implications, for the purpose of deciding it as a deserving case and incorporate them while seeking approval;
(d) In the case of an applicant, being a person other than the main accused, where it is proved that the applicant facilitated tax evasion through mechanisms such as use of entities for laundering of money, generation of bogus invoices of sale/purchase without actual business, by providing accommodation entries or in any other manner, as prescribed in section 277A of the Act;
(e) If the offence is directly related to an offence under the following Acts:
i. the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015; or
ii. Prohibition of Benami Property Transactions Act, 1988;
(f) In case of an offence under section 275A and/or 275B of the Act.
For more, refer: Circular no. 285/08/2014-IT(INV. V)/163, Dated 17-10-2024
[As amended by Finance Act, 2025]
(Republished with amendments)
