Tax prosecution cannot be quashed on an unproven compromise, and no pre-prosecution compounding notice is required under Section 279(2).

An alleged compromise or understanding with tax authorities could not defeat prosecution for wilful attempt to evade tax because the record did not establish any binding assurance against penal action, and that factual claim could not justify quashing proceedings at the threshold. Section 279(2) of the Income-tax Act, 1961 was held to be an enabling provision that allows compounding before or after institution of proceedings at the competent authority's discretion, but it does not confer a right to prior show-cause notice or a pre-prosecution opportunity to compound. The prosecution was restored and the application under Section 482 was dismissed.

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Issues: (i) Whether the prosecution for wilful attempt to evade tax could be quashed on the basis of an alleged compromise or understanding with the tax authorities that no penal action would be taken. (ii) Whether Section 279(2) of the Income-tax Act, 1961 required a prior show-cause notice or an opportunity to compound the offence before launching prosecution.

Issue (i): Whether the prosecution for wilful attempt to evade tax could be quashed on the basis of an alleged compromise or understanding with the tax authorities that no penal action would be taken.

Analysis: The returns were filed belatedly after search and seizure, and prosecution had been launched for the offence of wilful attempt to evade tax. The record did not support the existence of any binding understanding that no penal action would follow, nor did the materials show that the assessed income was merely the result of a compromise assessment. Any such alleged understanding, even if asserted, was a matter of fact requiring proof at trial and could not justify quashing the prosecution at the threshold.

Conclusion: The alleged compromise or understanding furnished no legal basis to quash the prosecution.

Issue (ii): Whether Section 279(2) of the Income-tax Act, 1961 required a prior show-cause notice or an opportunity to compound the offence before launching prosecution.

Analysis: Section 279(2) is an enabling provision empowering the Chief Commissioner or the Director General to compound an offence either before or after institution of proceedings. It does not create a corresponding right in the assessee to insist that prosecution must be preceded by a notice or an offer of compounding. The statutory scheme permits compounding at the discretion of the competent authority, and absence of a prior opportunity to compound does not invalidate the prosecution.

Conclusion: No prior notice or pre-prosecution opportunity to compound was required under Section 279(2).

Final Conclusion: The High Court's order was unsustainable, the prosecution was restored, and the application under Section 482 stood dismissed.

Ratio Decidendi: An alleged compromise or understanding not established on the record cannot defeat a tax prosecution, and Section 279(2) of the Income-tax Act, 1961 confers only a discretionary power to compound without creating any right to pre-prosecution notice or compounding opportunity.

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