The Central Board of Direct Taxes (CBDT) revised guidelines for ‘compounding of offences’ under the Income-tax Act, 1961 on Sunday. 

The government has introduced a provision allowing cases related to tax offences exceeding ₹50 lakh to be compounded. This provision enables taxpayers to avoid imprisonment by paying the due tax.

What is compounding of offence?

Compounding of an offence is a mechanism whereby the defaulter gets reprieve from significant legal consequences by allowing him to pay a certain sum of money to escape prosecution. The specified offences can be compounded by the competent authority either before or after the initiation of proceedings. 

Previously, cases initiated by the Enforcement Directorate (ED) and Central Bureau of Investigation (CBI) could not be merged with income tax cases. 

This means cases filed by ED or CBI can be settled (compounded) if the applicant is not involved in anti-national or terrorist activities. However, if the person is found to be involved in such serious crimes, their case will not be eligible for compounding.

According to tax expert Pramod Popat, this new provision allows all offences under income tax law to be considered compoundable and merged with other cases. If tax liability exceeds ₹50 lakh, there is a possibility of court proceedings and imprisonment. However, under the new provision, taxpayers can avoid these penalties by paying the specified amount of tax. Once the required tax amount is paid, the taxpayer will be exempt from imprisonment or legal proceedings.

CBDT has released a Frequently Asked Questions (FAQs) on Guidelines for Compounding of Offences under the Income-Tax Act, 1961.