Court deems CBDT circular imposing time limit on compounding applications illegal. Statutory provisions prevail over administrative directives.

The court held that the show cause notice based on a CBDT circular imposing a 12-month limitation for compounding applications was illegal. It ruled that the CBDT lacked authority to set such limitations, as they were not provided for in Section 279 of the Income Tax Act, 1961. The court deemed the circular ultra vires and directed the Income Tax Authority to consider the compounding application without regard to the circular's time restriction, emphasizing that statutory provisions prevail over administrative directives.

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Issues Involved:
1. Legality of the show cause notice dated 16.11.2021.
2. Authority of the Central Board of Direct Taxes (CBDT) to prescribe a limitation period for compounding applications.
3. Interpretation and application of Section 279 of the Income Tax Act, 1961.
4. Validity of the CBDT circular dated 14.06.2019 regarding the limitation period for compounding applications.

Issue-wise Detailed Analysis:

1. Legality of the Show Cause Notice Dated 16.11.2021:
The petitioner challenged the show cause notice dated 16.11.2021 issued by the Chief Commissioner of Income Tax, alleging it was illegal and without authority of law. The petitioner argued that the notice relied on a CBDT circular dated 14.06.2019, which was not binding and could not override statutory provisions. The court observed that the show cause notice aimed to reject the compounding application based on a delay of more than 20 years, citing the CBDT circular which restricted the filing period to 12 months from the end of the month in which the prosecution complaint was filed.

2. Authority of the CBDT to Prescribe a Limitation Period for Compounding Applications:
The court scrutinized whether the CBDT had the authority to prescribe a limitation period for compounding applications through its circulars. The court referred to Section 279(2) of the Income Tax Act, 1961, which does not provide any limitation for submitting or considering compounding applications. It was held that the CBDT, through its circulars, cannot impose a limitation period that is not contemplated by the statute itself. Circulars are subordinate to the principal Act and cannot override or restrict statutory provisions.

3. Interpretation and Application of Section 279 of the Income Tax Act, 1961:
Section 279 of the Income Tax Act, 1961, deals with the prosecution and compounding of offences. Sub-section (2) allows for the compounding of offences either before or after the institution of proceedings without specifying any limitation period. The court emphasized that the CBDT's authority to issue instructions or directions under the second Explanation to Section 279 does not extend to prescribing a limitation period for compounding applications. The court cited precedents, including the Supreme Court's interpretation of statutory provisions and explanations, to support its view that explanations cannot curtail statutory rights or impose new limitations.

4. Validity of the CBDT Circular Dated 14.06.2019:
The court examined the validity of the CBDT circular dated 14.06.2019, which restricted the filing period for compounding applications to 12 months. The court referred to the case of Vikram Singh Vs. Union of India & Ors., where the Delhi High Court held that the CBDT could not prescribe a limitation period for compounding applications through its circulars. The court concluded that the circular dated 14.06.2019 was ultra vires Section 279 of the Income Tax Act, 1961, as it imposed a limitation period not provided by the statute.

Conclusion:
The court allowed the writ petition to the extent that the compounding application of the petitioner could not be rejected on the ground of delay. The court directed the Income Tax Authority to consider the compounding application in accordance with the law, emphasizing that the CBDT's circular could not override the statutory provisions of Section 279 of the Income Tax Act, 1961.

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