Compounding under tax law remains open during a pending appeal, and adverse rejection needs prior notice and hearing.

A compounding application under section 279(2) of the Income-tax Act remains maintainable even after conviction if the appeal against conviction is pending, because an appeal is a continuation of the proceedings; the rejection on that ground was unsustainable. A further refusal based on alleged non-cooperation at the initial stage could not stand where no prior notice or opportunity of hearing was given, since a ground carrying civil consequences must be disclosed and fairly answered. The rejection order was set aside and the matter remitted for fresh decision after notice, hearing, and consideration of objections.

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Issues: (i) Whether a compounding application under section 279(2) of the Income-tax Act, 1961 could be rejected solely because it was filed after conviction, when the appeal against conviction was pending; (ii) whether denial of compounding on the ground of alleged non-cooperation at the initial stage could stand without prior notice and opportunity of hearing.

Issue (i): Whether a compounding application under section 279(2) of the Income-tax Act, 1961 could be rejected solely because it was filed after conviction, when the appeal against conviction was pending.

Analysis: Section 279(2) permits compounding of offences either before or after institution of proceedings. An appeal is a continuation of the proceedings and, therefore, a pending appeal against conviction does not by itself bar consideration of a compounding request. The administrative guideline relied upon by the respondent could not be read to exclude cases where the conviction is under challenge in appeal, especially when binding precedent had already recognized that such applications remain maintainable during pendency of the appeal.

Conclusion: The rejection on the ground that the application was filed after conviction was unsustainable.

Issue (ii): Whether denial of compounding on the ground of alleged non-cooperation at the initial stage could stand without prior notice and opportunity of hearing.

Analysis: A ground that may lead to adverse civil consequences could not be used against the applicant without disclosure of the material relied upon and without affording an opportunity to explain. Since the impugned order did not show that the applicant was put on notice of the alleged non-cooperation or given an opportunity of personal hearing before the adverse decision was taken, the decision-making process was vitiated for breach of natural justice.

Conclusion: The rejection on the ground of alleged non-cooperation could not be sustained.

Final Conclusion: The rejection order was set aside and the matter was remitted for fresh decision after following due procedure, including notice, hearing, and consideration of the applicant's objections.

Ratio Decidendi: A compounding application under section 279(2) remains entertainable during pendency of an appeal against conviction, and any adverse ground for rejection that entails civil consequences must be put to the applicant with a fair opportunity of hearing.

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