Delayed Tax Returns and 'First Offence': Supreme Court Clarifies Compounding Rules, emphasizing the need for balanced application and voluntary disclosure to encourage compliance

Court: Supreme Court of India.

Case Name: VINUBHAI MOHANLAL DOBARIA vs. CHIEF COMMISSIONER OF INCOME TAX.

Citation: 2025 INSC 155 (Reportable)

Factual Matrix

The case involves an appeal by Vinubhai Mohanlal Dobaria against a Gujarat High Court judgment. The appellant, a businessman in chemicals, faced prosecution for delayed filing of income tax returns under Section 276CC of the Income Tax Act, 1961 (the Act). Dobaria sought to compound (settle) these offenses, but his application was rejected. The core dispute revolves around the interpretation of "first offence" as defined in the "Guidelines for Compounding of Offences under Direct Tax Laws, 2014" (2014 guidelines).

Dobaria filed income tax returns for the Assessment Years (AY) 2011-12 and 2013-14 with delays. For AY 2011-12, the return was due on September 30, 2011 but was filed on March 4, 2013, for an income of Rs 49,79,700. For AY 2013-14, the return was due on October 31, 2013 but was filed on November 29, 2014, for an income of Rs 31,87,420.

Show Cause Notices (SCN) were issued for both AYs. For AY 2011-12, the SCN was issued on October 27, 2014, and for AY 2013-14, on March 12, 2015. Initially, compounding for AY 2011-12 was allowed, however, the application for AY 2013-14 was rejected on the ground that an SCN for prosecution under Section 276CC was already issued for AY 2011-12. The High Court upheld this rejection.

Appellant's Arguments

Dobaria argued that an offense under Section 276CC is committed on or before the date when prosecution proceedings are initiated. He contended that any offenses committed before an assessee is "put to notice" should be treated as a "first offence" and therefore, should be compoundable. The appellant submitted that the offense for AY 2013-14 should be considered a "first offense," as the return was filed before the SCN was issued for that year. He also submitted that the 2014 guidelines are general and should not be construed as a strict law.

Respondents' Arguments

The Revenue argued that an offense under a specific provision is committed only once for a given assessment year. They stated that the 2014 guidelines do not intend to compound the same offense repeatedly. Citing Clause 8 of the guidelines, they argued that Category B offenses, like those under Section 276CC, are generally not compoundable after the "first offence". The Revenue interpreted "first offence" as any offense committed before the first SCN, and since the SCN for 2011-12 came first, the 2013-14 offense could not be considered the "first offence". The respondents emphasized that compounding is not a right, but a discretionary power. They also argued that the appellant's interpretation of “first offence” was erroneous.

Key Issues

The Supreme Court considered the following key questions:

  • When is an offence under Section 276CC committed? Is it on the date of filing the return or immediately after the due date?
  • How should the term "first offence" in Clause 8 of the 2014 guidelines be interpreted?
  • What constitutes voluntary disclosure under Clause 8 of the 2014 guidelines?
  • Are the 2014 guidelines mandatory or directory in nature?

Analysis and Findings

Section 276CC

The Court referred to Prakash Nath Khanna v. CIT (2004) to clarify that an offense under Section 276CC is committed when the return is not filed within the due date specified under Section 139(1) of the Act. Belated filing under section 139(4) will not absolve the assessee of non-compliance. The Court determined that the offense for AY 2011-12 was committed on October 1, 2011, and for AY 2013-14 on November 1, 2013.

Compounding of Offenses (Section 279)

The Court emphasized that compounding is not a right, but a discretionary power of the Principal Chief Commissioner/Chief Commissioner under Section 279(2) of the Act. The guidelines are framed to guide the compounding power under Section 279(2). The court clarified that the guidelines were subordinate legislation.

Meaning of "First Offence"

The Court disagreed with the respondent’s interpretation. It stated that "first offence" includes offenses committed before any show-cause notice for prosecution is issued, or offenses that are voluntarily disclosed by the assessee before detection by the department. The court observed that the latter part of the definition of “first offence” expands its scope to include cases where the assessee voluntarily discloses the offense. The court also held that the two parts of the definition of “first offence” are mutually exclusive.

Voluntary Disclosure

The Court clarified that "voluntary disclosure" must be interpreted to ensure it saves the department from having to detect offenses, while encouraging tax compliance and deterring tax evasion. It observed that when an assessee voluntarily discloses an offense, they cannot be said to have the intention of evading payment of taxes.

Directory Nature of Guidelines

The Court held that while the guidelines are to be generally followed, they are not mandatory. The competent authority can make exceptions and allow compounding if the facts and circumstances warrant such a course of action. The court also noted the change in CBDT's policy as seen in the 2019 and 2022 guidelines which now categorize the offense under section 276CC as category “A” offence, compoundable up to three times.

Rationale

The Supreme Court provided the following rationale for its decision:

  1. Date of Offence: The offense under Section 276CC is committed on the day immediately following the due date for filing the return as per Section 139(1), not the actual date of filing. This is supported by the ruling in Prakash Nath Khanna v. CIT and Section 139(8) of the Act.
  2. Interpretation of "First Offence": The term "first offense" in the 2014 guidelines includes offenses committed before any show cause notice for prosecution or those that are voluntarily disclosed before detection by the department. The two parts of this definition are mutually exclusive, meaning an offense can be a "first offence" if it satisfies either part of the definition.
  3. Voluntary Disclosure: Voluntary disclosure is meant to encourage taxpayers to come forward before the tax department detects an offense, saving the department resources and time. The late filing of a tax return does not qualify as voluntary disclosure in this context.
  4. Directory Nature of Guidelines: While guidelines are meant to be followed, they are not mandatory and the competent authority has the discretion to allow compounding based on the specific circumstances of a case.
  5. Change in Policy: The CBDT guidelines of 2019 and 2022 have recategorized Section 276CC offenses to category A, allowing for compounding up to three times, indicating a shift towards a more flexible and liberal compounding regime.

Excerpt

“What is discernable from the aforesaid decision is that an offence under Section 276CC could be said to have been committed as soon as there is a failure on the part of the assessee in furnishing the return of income within the due time as prescribed under Section 139(1) of the Act.”

“The scheme that permeates Paragraph 8 of the 2014 guidelines allows only those offences to be treated as the “first offence” which are committed by the assessee either prior to a notice that he is liable to prosecution under the Act for the commission of such offences or those offences which are voluntarily disclosed by the assessee to the Department before they come to be detected.”

“The latter part of the definition of the expression “first offence” is not to curtail the scope of the first half but to expand its ambit by including those cases where the assessee comes forward on his own initiative and discloses the commission of the offence.”

“While the conditions as laid down in Paragraph 8 of the guidelines are although required to be generally followed, the guidelines do not exclude the possibility that in a peculiar case where the facts and circumstances so require, the competent authority cannot make an exception and allow the compounding application.”

Points to Remember

  1. An offense under Section 276CC of the Income Tax Act is considered to be committed on the day immediately following the due date for filing returns as prescribed under Section 139(1) of the Act.
  2. A "first offense" under the 2014 guidelines is defined as either (a) an offense committed before the issuance of a show-cause notice for prosecution or (b) an offense voluntarily disclosed by the taxpayer before it is detected by the department.
  3. The term "voluntary disclosure" means that the assessee proactively informs the tax department about an offense before the department independently identifies it.
  4. The 2014 guidelines for compounding offenses are directory, not mandatory, allowing competent authorities some discretion in their application.
  5. Compounding of offenses is not a matter of right, but a discretionary power of the tax authorities under Section 279(2) of the Income Tax Act.
  6. The guidelines for compounding are framed to guide the authorities who can compound offenses under section 279(2) of the Act.
  7. The definition of first offence is mutually exclusive.
  8. The relevant date for computing compounding fee under section 276CC is the day immediately after the due date for filing of the return.
  9. The 2019 & 2022 guidelines treat offences under section 276CC as Category ‘A’ offences.

Conclusion

The Supreme Court found merit in the appellant's appeal and set aside the High Court's order. The Court clarified that since both offenses under Section 276CC were committed before the issuance of show cause notices for each assessment year, respectively, and neither offense was voluntarily disclosed, the offense for AY 2013-14 qualifies as a "first offense". The matter was remitted back to the competent authority to reconsider the compounding application for AY 2013-14 based on the judgment's interpretations. The court directed the competent authority to reconsider the application within four weeks of receiving it. The trial court proceedings will remain stayed until a decision is taken by the competent authority. If the compounding application is accepted, the proceedings before the trial court will be abated. This judgment provides a more balanced approach towards compounding, emphasizing the directory nature of guidelines and encouraging taxpayers to disclose their offenses while clarifying the definition of "first offence".

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