How can I repair the rust penetration in my air compressor?
I highly recommend against attempting to repair a tank that handles compressed air at over 100 PSI. Failure could be impressive and catastrophic. None of the liquid repairs designed for fuel tanks or tires are in any way appropriate, and a full reconditioning is not cost-effective.

fred_dot_u is correct that the damage was caused by internal moisture. The entire tank is compromised, and the scope of the damage is likely far greater than what's indicated from the outside. The fact that the penetration is so high up seems to indicate neglect. A compressor should be drained daily after use.

Retire the compressor, or fit a new tank that's rated for the intended purpose.