Penalty deletion under the Income-tax Act can defeat prosecution for wilful tax evasion when the criminal case rests on the same default.

A prosecution for wilful attempt to evade tax under the Income-tax Act cannot be sustained when the penalty imposed on the same alleged default has been vacated in appeal and that deletion has been affirmed by the Tribunal. The Madhya Pradesh High Court noted that, once the foundation penalty under section 271(1)(c) was erased, the criminal conviction under section 276C read with section 278B lost its basis. The revision was allowed, the applicants were acquitted, and any fine already realised was ordered to be refunded.

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Issues: Whether a conviction under section 276C read with section 278B of the Income-tax Act, 1961 could be sustained when the penalty imposed on the same ground under section 271(1)(c) had been vacated in appeal.

Analysis: The assessment year concerned was 1988-89. The penalty proceedings based on the same alleged default were set aside by the appellate authority and affirmed by the Tribunal. In view of the settled principle that a prosecution for wilful attempt to evade tax cannot stand when the very basis of the penalty has been erased, the criminal conviction lost its foundation.

Conclusion: The conviction was not sustainable and the revision was allowed. The applicants were acquitted and the fine, if realised, was directed to be refunded.

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