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Sreeram Viswanath

Expert

Published on: Sep 25, 2026

Guidelines for Compounding of Offences

Compounding of an offence refers to the process where charges against an assessee are withdrawn in exchange for the payment of a penalty. The guidelines for compounding offences under the Income Tax Act were introduced by the Central Board of Direct Taxes (CBDT) with effect from 17.06.2019. These guidelines apply to all compounding applications submitted to the CBDT. This article provides a concise overview of the guidelines set by the CBDT for compounding offences.

Power to Compound Offences

  • The authority to compound offences is granted to the following officers in the CBDT:
    • Principal Chief Commissioner of Income Tax (Pr. CCIT)
    • Chief Commissioner of Income Tax (CCIT)
    • Principal Director General of Income Tax (Pr. DGIT)
    • Director-General of Income Tax (DGIT)
  • Compounding can occur before, during, or after proceedings under the Income Tax Act have been initiated. However, the process must be initiated by a request from the assessee. Without such a request, officers of the CBDT are not allowed to initiate compounding proceedings on their own.

Compounding not to be Matter of Right

Assessees are not entitled to compounding as a matter of right. It is at the discretion of the CBDT officers who assess whether eligibility conditions are met. These conditions include:

  • Frequency of the offence committed—whether it is regular or sporadic.
  • Nature and magnitude of the offence, especially in the context of its circumstances.
  • Whether the offence might encourage others to bypass provisions of the Act.

Compounding for IPC Prosecutions

Prosecutions initiated under the Indian Penal Code (IPC) cannot be compounded. Even if a complaint is based on the same facts under both the IPC and the Income Tax Act, the approval for compounding under the Income Tax Act does not extend to the IPC and vice versa. However, compounding of an offence under one legislation may serve as a contributory factor for the other.

Classification of Offences

Offences under the Income Tax Act are classified into two categories—Category ‘A’ and Category ‘B’—for the exclusive purpose of compounding.

Category A

Offences in this category include:

  • Failure to remit Income Tax payments on time.
  • Refusal to allow the inspection of books of accounts.
  • Failure to deduct or remit tax deducted at source (TDS) by the due date.
  • Failure to remit tax collected at source.
  • Failure to furnish income tax returns under self-assessment.
  • Failure to comply with Section 269SS or Section 269T.
  • Abatement of a false return.

Category B

Offences in this category include:

  • Failure to comply with Sections 178, 269AB, or 269I.
  • Willful attempt to avoid paying Income Tax.
  • Producing falsified books of accounts or documents.

Eligibility for Compounding

An offence is eligible for compounding only if the following conditions are met:

  • The applicant must file a request to the Pr. CCIT/CCIT/Pr. DGIT/DGIT having jurisdiction over the case in affidavit form.
  • The application can be filed anytime after the offence is committed and before twelve months from when the prosecution complaint is lodged. Applications filed after 12 months but before 24 months are considered if the delay is due to uncontrollable circumstances.
  • The assessee must have paid all outstanding taxes, penalties, and related sums before seeking compounding.
  • The responsibility to withdraw any appeals related to the offence must be accepted by the assessee.

Offences Debarred from Compounding

Compounding is not permitted for:

  • Category A offences committed more than three times.
  • Category B offences associated with willful default.
  • Offences for which the court has convicted the assessee.
  • Offences where the compounding application was previously rejected.
  • Any offence that might impact another case under investigation or related to undisclosed foreign assets.
  • Any other offence deemed unsuitable for compounding due to its nature or magnitude.

Compounding Charges

Compounding charges comprise the compounding fee, prosecution establishment expenses, and litigation expenses. The compounding fee varies based on the offence, whereas prosecution expenses are 10% of the compounding fee (minimum Rs. 25,000). Litigation expenses, including Counsel fees payable by the CBDT, must be covered by the assessee.

Notification from the Ministry of Finance

The Ministry of Finance, via notification dated 09.09.2019, extended the submission deadline for compounding requests to 31.12.2019. Refer to the official notification below:

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Frequently Asked Questions

Common questions about Compounding of Offences under Income Tax Act Guidelines.

Compounding of an offence means that the charges against an assessee would be dropped in return for the payment of penalty. It is a process by which the assessee can avoid prosecution for an offence committed under the Income Tax Act by paying a compounding fee and other prescribed charges.
The power to compound offences is vested in the Principal Chief Commissioner of Income Tax (Pr. CCIT), Chief Commissioner of Income Tax (CCIT), Principal Director General of Income Tax (Pr. DGIT), and Director-General of Income Tax (DGIT) of the Central Board of Direct Taxes (CBDT).
No, compounding of an offence is not a matter of right for the assessee. The competent officer of the CBDT has the discretion to compound offences based on certain eligibility conditions, such as the nature and magnitude of the offence, and whether it is a repeated offence or not.
Offences under the Income Tax Act are classified into two categories, Category 'A' and Category 'B', for the purpose of compounding. Category A offences include failure to remit taxes, failure to furnish returns, and non-compliance with certain sections of the Act, while Category B offences include willful attempts to evade tax, falsification of books, and non-compliance with certain other sections.
No, prosecutions initiated under the Indian Penal Code (IPC) cannot be compounded. If a complaint leads to prosecution under both the IPC and the Income Tax Act, compounding under one legislation does not automatically confer compounding under the other.
The charges for compounding include compounding fee, prosecution establishment expenses (at the rate of 10% of the compounding fee, subject to a minimum of Rs. 25,000), and litigation expenses, including Counsel fees payable by the CBDT.
Yes, there is a time limit for filing an application for compounding an offence. The application must be filed within 12 months from the month in which the prosecution complaint has been filed in the court. Applications filed between 12 and 24 months may be accepted if the delay is caused by reasons beyond the applicant's control.
No, an offence committed by a convict for any offence, other than under the Income Tax Act, for which the period of punishment was two years or more, cannot be compounded.
No, an offence that may potentially impact an offence relating to undisclosed foreign bank accounts or assets, or any offence under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, cannot be compounded.
No, an offence committed by a person who has enabled other assessees to evade tax cannot be compounded.