Prosecution based on a void penalty cannot survive once the underlying tax penalty is struck down.

Criminal prosecution for alleged wilful attempt to evade tax and furnishing of inaccurate particulars could not survive after the penalty order forming its foundation was held bad in law from inception. Because the complaint under the Income-tax Act rested entirely on a penalty under section 271(1)(c), and that penalty was later struck down by the Tribunal, the very basis of the prosecution disappeared. The HC therefore quashed the criminal proceeding in favour of the assessee.

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Issues: Whether the criminal prosecution under sections 276C and 277 of the Income-tax Act could survive after the penalty order, on which it was based, had been set aside as bad in law.

Analysis: The complaint for prosecution rested on the allegation of wilful attempt to evade tax and furnishing of inaccurate particulars, which had resulted in a penalty order under section 271(1)(c). That penalty was later struck down by the Tribunal as bad in law from the inception. Once the very foundation of the prosecution ceased to exist, there remained no basis to continue the criminal proceeding.

Conclusion: The criminal proceeding was liable to be quashed and was quashed in favour of the assessee.

Ratio Decidendi: Where prosecution under the Income-tax Act is founded on a penalty order and that penalty is subsequently held void or unsustainable in law, the criminal proceeding cannot survive.

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