You COULD fill and prep the paneling with joint compound and tape etc. but you would probably end up with a huge mess eventually because the paneling could flex and shrink and swell etc and the compound would come right off. What is under the paneling? If there isn't a solid backing that the paneling is glued to then if someone leaned against it it could bend and the compound would crack right off. I would either rip off the paneling or not and put 1/4" drywall right over the whole mess. (if there isn't drywall behind the paneling then you may want to rip it off and install your standard 1/2" drywall. Or, you could buy some prefinished paneling that you like and apply it over the area. I think it comes in smooth panels in regular colors (I think).
You would run into trouble eventually if you do what you propose, unless you use high performance fillers etc. like bondo and the paneling has a strong surface beneath it like drywall and the area is small enough to make the tricky bondo work worth doing. If you are good at bondo and the area is small then do that.