Comprehensive Overview of Circular No. 04/2025 on Compounding of Offences

The Central Board of Direct Taxes (CBDT) has introduced significant revisions in Circular No. 04/2025 to streamline the compounding process under the Income-Tax Act, 1961. These guidelines, applicable to both new and pending applications, remove earlier rigid deadlines and outdated categorizations. By enabling all offences to be compoundable and allowing flexible filing windows, the circular fosters greater transparency and encourages timely compliance.

Key Highlights:

1. All offences under the Income-Tax Act can now be compounded.
2. The previous 12/24/36-month time limits are eliminated.
3. Multiple offences or years may be consolidated in a single application.
4. Revised fee structures and extended payment windows are introduced.

Major Revisions and Rationale

Universal Compounding

1. Full Coverage: Every offence under the Income-Tax Act, including those previously excluded (e.g., certain sections like 275A and 276B), is now compoundable.
2. Consolidated Applications: Applicants may submit one unified application covering multiple offences and periods, reducing redundancy and administrative delays.

Removal of Rigid Timelines

• Unlimited Filing Window: Applications may be filed at any time after an offence is committed, even if prosecution has started.
• Fresh Applications for Defects: If an application is returned due to curable defects, a revised submission is permitted.
• Additional Charge for Delayed Filing: When an application is submitted more than 12 months from the end of the month of the date of prosecution complaint, an extra 50% is levied on the base compounding charge.

Payment Period and Extensions

1. 24-Month Window: Once the compounding charge is intimated, applicants have up to 1 month from the end of the month of the intimation. This window can be extended up to 24 months after required applications and approval as per revised guidelines.
2. Extension Conditions: Extensions beyond 24 months are not allowed; if missed, the application will be rejected and prosecution resumed.
3. No Additional Interest: As per the revised guidelines, no interest or extra charges are applicable on extended payment.

Compounding Charges: Escalating Rates for Repeat Filings

The revised guidelines specify that if an offence is included in multiple compounding applications, the charge escalates. The base compounding charge is determined as per the circular dated 17/10/2024. The rate increases with each subsequent filing as follows:

Application Number	Base Rate	Added Charge
First	Normal (Annexure-4)	None
Second	1.2 × Normal	+50% if filed more than 12 months after the complaint
Third	1.4 × Normal	+50% if filed later than 12 months
Fourth & Beyond	1.6 × Normal (or higher)	Higher multiples may apply as determined by the guidelines

Note: Any prior partial payment for a specific offence and financial year can be offset against the new charges, but excess amounts are neither refundable nor adjustable.

Main Accused and Co-Accused Provisions

1. Joint or Separate Applications: Both main accused and co-accused can file compounding applications independently or jointly, without incurring additional fees beyond the offence-based charge.
2. No Mandatory Appeal Withdrawal: While the guidelines state that there is no compulsion to withdraw appeals, applicants are advised to address any overlapping legal proceedings appropriately to avoid confusion during the compounding process.
3. Insolvency Considerations: Even if a company (main accused) is absolved through an approved resolution plan under the Insolvency Bankruptcy Code, the co-accused remain liable unless otherwise specified.

Application Steps and Responsibilities

1. Identify Offences: Clearly list all sections, financial years, and TDS defaults or other relevant offences to be compounded.
2. Prepare a Consolidated Application: Use the prescribed format (affidavit on a stamp paper of INR 100) to consolidate multiple offences in a single submission.
3. Pay Application Fee and Compounding Charges: Submit the non-refundable fee as required, and ensure the final compounding charges paid as per the revised guidelines.
4. Rectify Defective Applications Promptly: If notified of any defects, applicants have one month to cure them; failure to do so leads to rejection and higher charges on subsequent filings.
5. Address Overlapping Legal Proceedings: Although not mandatory, applicants should manage any concurrent appeals or writ petitions that might overlap with the compounding application to avoid potential conflicts.

Conclusion

Circular No. 04/2025 introduces a modernized approach to compounding offences under the Income-Tax Act, 1961. By eliminating inflexible deadlines, broadening the scope of compoundable offences, and streamlining the application process, the CBDT has created a framework that is both flexible and comprehensive. These changes not only simplify compliance but also encourage taxpayers to rectify past defaults without undue hardship. The revised guidelines are expected to reduce litigation, foster greater transparency, and enhance the overall efficiency of tax administration.