Stay of penalty proceedings linked to assessment orders can be granted in income-tax appeals using appellate and inherent powers.

In an appeal under section 260A of the Income-tax Act, 1961, the High Court may stay penalty proceedings initiated pursuant to the assessment order because the appeal provision attracts the Code of Civil Procedure through section 260A(7). The Court treated the penalty notice as connected to the assessment order rather than wholly independent, and therefore held that Order 41, Rule 5 could support a stay of such proceedings. Even if that rule did not strictly apply, the Court said it could act under its inherent powers under section 151 CPC. The scheme of section 275 was also noted as recognising exclusion of time when penalty proceedings remain stayed by court order.

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Issues: Whether the High Court, in an appeal under section 260A of the Income-tax Act, 1961, had power to stay penalty proceedings initiated pursuant to the assessment order and whether such stay should be granted pending disposal of the appeal.

Analysis: Section 260A(7) makes the Code of Civil Procedure applicable to appeals under that provision. The Court held that, by virtue of Order 41, Rule 5 of the Code of Civil Procedure, 1908, the appellate court can stay proceedings arising from the assessment order. The penalty notice had been issued pursuant to the assessment order itself, so the penalty proceeding was not treated as wholly independent of the appeal. Even assuming Order 41, Rule 5 did not strictly apply, the Court held that it could invoke its inherent powers under section 151 of the Code of Civil Procedure, 1908. The Court also relied on the scheme of section 275, which contemplates exclusion of the period during which penalty proceedings remain stayed by an order or injunction of a court.

Conclusion: The High Court had power to stay the penalty proceedings, and the stay was granted till disposal of the appeal.

Ratio Decidendi: In an appeal under section 260A of the Income-tax Act, 1961, the High Court may stay penalty proceedings initiated pursuant to the assessment order by applying Order 41, Rule 5 of the Code of Civil Procedure, 1908, and, where necessary, by exercising its inherent powers under section 151 of the Code of Civil Procedure, 1908.

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