Supreme Court Clarifies “First Offence” in Income Tax Compounding Cases: Dobaria vs. CCIT (2025)

Case Background

The appellant, Vinubhai Mohanlal Dobaria, earned income through salary and a share of profits from a partnership firm in the chemical business. He filed income tax returns for the assessment years (AY) 2011-12 and 2013-14, declaring incomes of Rs 49,79,700 and Rs 31,87,420 respectively. However, these returns were filed late, with the due dates being 30.09.2011 and 31.10.2013 respectively.

On 27.10.2014, the Commissioner of Income Tax – III, Baroda, issued a show cause notice to the appellant for violating Section 276CC of the Income Tax Act, 1961, for AY 2011-12. The notice highlighted the delayed filing and the unpaid self-assessment tax. A similar notice was issued on 12.03.2015 for AY 2013-2014, citing a delay in filing the return and an outstanding self-assessment tax of Rs. 2,78,740.

The appellant responded to these notices and applied for compounding the offences. While the application for AY 2011-12 was allowed, the application for AY 2013-14 was rejected by the Chief Commissioner of Income Tax, Vadodara, on 14.02.2017. The rejection was based on the premise that the offence for AY 2013-14 could not be considered a “first offence” under the Guidelines for Compounding of Offences, 2014, as a show cause notice for AY 2011-12 had already been issued.

The Gujarat High Court upheld this rejection, leading the appellant to appeal to the Supreme Court.

Timeline

Course of Proceedings

The appellant initially challenged the rejection of his compounding application for AY 2013-14 before the High Court of Gujarat. The High Court dismissed the appellant’s plea, agreeing with the Chief Commissioner’s assessment that the offence did not qualify as a “first offence” under the 2014 guidelines. The High Court reasoned that since the show-cause notice for AY 2011-12 was issued before the appellant filed the return for AY 2013-14, the latter could not be considered a first offence. The High Court also stated that the reasons for the delay in filing the return would be considered during the trial, not during the compounding application review.

Legal Framework

The core legal issue revolves around Section 276CC of the Income Tax Act, 1961, which deals with the failure to furnish income tax returns. The section states:

“276CC. Failure to furnish returns of income. — If a person wilfully fails to furnish in due time the return of fringe benefits which he is required to furnish under sub-section (1) of section 115WD or by notice given under sub-section (2) of the said section or section 115WH or the return of income which he is required to furnish under sub-section (1) of section 139 or by notice given under clause (i) of sub-section (1) of section 142 or section 148 or section 153A, he shall be punishable…”

The punishment includes rigorous imprisonment and a fine, with the severity depending on the amount of tax evaded. The proviso to this section provides exceptions where proceedings will not be initiated, such as when the return is furnished before the expiry of the assessment year or when the tax payable does not exceed a certain amount.

Section 139(1) of the Income Tax Act, 1961 mandates that every person, being a company or firm, or a person whose total income exceeds the maximum amount not chargeable to income-tax, shall furnish a return of income on or before the due date.

Section 139(4) allows for the filing of belated returns: “Any person who has not furnished a return within the time allowed to him under sub -section (1), may furnish the return for any previous year at any time before the end of the relevant assessment year or before the completion of the assessment, whichever is earlier.”

These provisions are crucial in determining when an offence is committed and the conditions under which it can be compounded.

Arguments

Appellant’s Submissions

• Offence Date: The offence under Section 276CC is committed the day after the due date for filing the return under Section 139(1), regardless of when the actual return is filed.
• First Offence Definition: As per the 2014 guidelines, “first offence” means an offence committed before the issuance of a show cause notice.
• High Court Error: The High Court erred by considering the actual date of filing the return for AY 2013-14 instead of the due date.

Mr. Tushar Hemani, the learned Senior Counsel appearing for the appellant, submitted that an offence as contemplated under Section 276CC of the Act is committed upon the failure of the assessee in furnishing the return of income within the due date as contemplated under Section 139(1) of the Act.

He further submitted that as per the 2014 guidelines, the expression “first offence” means offence committed prior to the issuance of show cause notice seeking to initiate prosecution as that is the earliest point in time when the assessee is put to notice about the offence alleged to have been committed by him.

Respondents’ Submissions

• Offence Limit: The 2014 guidelines do not intend to compound the same offence repeatedly.
• First Offence Prerequisite: Issuance of a show cause notice is not a prerequisite for recognizing a first offence; voluntary disclosure also counts.
• Voluntary Disclosure: The appellant disclosed the offences by filing belated returns.

Mrs. Monica Benjamin, the learned counsel appearing for the Revenue, submitted that the offence under a particular provision of the Act, for a specific assessment year, can only be committed once for that assessment year.

Referring to Clause 8 of the 2014 guidelines, she submitted that the said Clause prescribes a limit after which both category of offences, that is, A and B, are not to be generally compounded, by laying down that Category A offences will not be generally compounded after the third offence and Category B offences will not be generally compounded after the first offence.

She further submitted that the issuance of a show cause notice is not a prerequisite for recognising a first offence under the 2014 guidelines.

Table of Submissions

Issues Framed by the Supreme Court

1. Whether an offence under Section 276CC of the Income Tax Act, 1961 could be said to have been committed on the actual date of filing of return of income or on the day immediately after the due date for filing of returns as per Section 139(1) of the Act?
2. What is the meaning of the expression “first offence” appearing in Clause 8 of the 2014 guidelines?
3. What amounts to voluntary disclosure for the purpose of Clause 8 of the 2014 guidelines?
4. Whether the 2014 guidelines are mandatory or directory in nature?

Treatment of the Issue by the Court

Authorities

The court considered the following authorities:

• Prakash Nath Khanna v. CIT (2004) 9 SCC 686 (Supreme Court of India): Interpreted the scope and meaning of the expression “in due time” appearing in Section 276CC of the Act.
• Union of India v. Banwari Lal Agarwal (1998) 7 SCC 652 (Supreme Court of India): Held that Section 279(2) is enabling and does not allow the assessee to demand compounding as a matter of right.
• Y.P. Chawla v. M.P. Tiwari (1992) 2 SCC 672 (Supreme Court of India): Explained the effect and scope of the Explanation to Section 279.
• Sports Infratech P. Ltd. & Anr. v. Deputy Commissioner of Income-tax 2017 SCC OnLine Del 6543 (Delhi High Court): Observed that an application for compounding of an offence cannot be rejected without having regard to the specific facts of the case.

Table of Authorities Considered by the Court

Judgment

How Submissions Were Treated by the Court

How Authorities Were Viewed by the Court

• Prakash Nath Khanna v. CIT (2004) 9 SCC 686: The Supreme Court in Prakash Nath Khanna* laid down the dictum 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.
• Union of India v. Banwari Lal Agarwal (1998) 7 SCC 652: The Supreme Court in Union of India v. Banwari Lal Agarwal* held that sub -section (2) of the provision is enabling in nature and cannot be construed as allowing the assessee to demand compounding as a matter of right.
• Y.P. Chawla v. M.P. Tiwari (1992) 2 SCC 672: The Supreme Court in Y.P. Chawla v. M.P. Tiwari* observed therein that the Explanation serves as a proviso to Section 279(2) of the Act, meaning thereby that the exercise of power under this section by the Commissioner must adhere to the periodically issued instructions by the Board.
• Sports Infratech P. Ltd. & Anr. v. Deputy Commissioner of Income-tax 2017 SCC OnLine Del 6543: The Delhi High Court in Sports Infratech* observed that an application for compounding of an offence cannot be rejected without having regard to the specific facts of the case.

What Weighed in the Mind of the Court?

The Supreme Court’s decision was primarily influenced by the interpretation of Section 276CC and the 2014 guidelines, emphasizing the importance of adhering to the due date for filing returns and the definition of “first offence.” The court also considered the intent behind the compounding provisions, which is to encourage voluntary compliance and reduce the burden on the tax department.

Sentiment Analysis Ranking

Fact:Law Ratio

The Supreme Court’s decision was influenced by a combination of factual and legal considerations. The ratio of fact to law can be estimated as follows:

• Fact (consideration of the factual aspects of the case): 30%
• Law (consideration of legal provisions): 70%

Key Takeaways

• Timely Filing is Crucial: The judgment reinforces the importance of filing income tax returns by the due date to avoid potential penalties and prosecution.
• “First Offence” Interpretation: The Supreme Court clarified the definition of “first offence” under the compounding guidelines, providing clarity for taxpayers and tax authorities.
• Voluntary Disclosure: Filing a belated return does not automatically qualify as voluntary disclosure for the purpose of compounding offences.
• Fair Consideration: Compounding applications should be considered based on the specific facts and circumstances of each case.

Potential Future Impact: This judgment is likely to influence future decisions on compounding of offences under Section 276CC of the Income Tax Act, 1961, ensuring a fairer and more consistent approach.

Directions

The Supreme Court directed the appellant to prefer a fresh application for compounding before the competent authority within two weeks from the date of the judgment. The authority was directed to adjudicate the application within four weeks, considering the conduct of the appellant, the nature of the offence, and the facts and circumstances of the case.

The proceedings pending before the Trial Court shall remain stayed pending the decision of the competent authority on the compounding application of the appellant.

In the event the fresh compounding application of the appellant is accepted by the competent authority, the proceedings pending before the Trial Court shall stand abated. If the compounding application is rejected by the competent authority, then the trial shall continue and be brought to its logical conclusion.

Development of Law

Ratio Decidendi: The offence under Section 276CC of the Income Tax Act, 1961, is committed on the day immediately following the due date for filing the return of income. A “first offence” under the 2014 guidelines refers to an offence committed prior to the issuance of a show cause notice for prosecution, or a voluntary disclosure made *before* detection by the department.

Change in Law: This judgment clarifies the interpretation of “first offence,” ensuring that the compounding process is not unfairly restricted. It emphasizes that the intent of the law is to encourage voluntary compliance, which is undermined if merely filing a belated return is not considered for compounding.

Conclusion

In Vinubhai Mohanlal Dobaria v. Chief Commissioner of Income Tax, the Supreme Court set aside the High Court’s order, clarifying that the offence for AY 2013-14 was indeed a “first offence” under the 2014 guidelines. The court directed the competent authority to reconsider the compounding application, taking into account the specific circumstances of the case. This judgment provides crucial clarity on the interpretation of Section 276CC and the compounding guidelines, promoting a fairer and more consistent application of the law.