CBDT Cannot Impose Limitation Period for Compounding through Guidelines when Income Tax Act does not Prescribe One: Bombay HC [Read Order]

In a recent ruling, the Bombay High Court held that the Central Board of Direct Taxes (CBDT) cannot impose a limitation period for filing compounding applications through its guidelines when the Income Tax Act, 1961, does not prescribe any such restriction. 

L. T. Stock Brokers Pvt. Ltd. filed a writ petition challenging the Chief Commissioner’s order dated 17.01.2024, which dismissed their application for compounding an offense under Section 279(2) of the Income Tax Act, 1961. The Chief Commissioner had relied on Paragraph 9.1 of the CBDT Guidelines dated 16.11.2022, which sets a maximum limitation period of 36 months from the date of filing the complaint.

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The petitioner’s counsel argued that the Income Tax Act does not prescribe a limitation period for compounding applications and that guidelines cannot override statutory provisions. They cited a previous ruling of the Bombay High Court in Sofitel Realty LLP & Ors. vs. Income-tax Officer (TDS), in which it was held that an application cannot be rejected solely on the grounds of delay. 

The Department’s counsel argued that, even in the absence of a statutory limitation, an application must be filed within a reasonable period. The department relied on the Supreme Court’s ruling in Vinubhai Mohanlal Dobaria vs. Chief Commissioner of Income Tax & Anr., which upheld the validity of the 2014 CBDT guidelines that included a limitation period for compounding applications.

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The bench comprising Justices M.S. Sonak and Jitendra Jain observed that the CBDT guidelines cannot be treated as a binding statute and that the competent authority must exercise discretion when considering a compounding application. 

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The court observed that the Supreme Court’s ruling in Vinubhai Mohanlal Dobaria recognized that, in exceptional cases, a compounding application may be considered even beyond the prescribed time limit.

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The court ruled that the Chief Commissioner had failed to exercise discretion and had instead treated the guidelines as an absolute bar. The court set aside the order dated 17.01.2024 and directed the Chief Commissioner to reconsider the compounding application, taking into account all facts and circumstances of the case. The writ petition was allowed.

To Read the full text of the Order CLICK HERE

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