Penalty proceedings allow evidence of real income to determine whether penalty should be imposed or reduced.

In penalty proceedings under section 28 of the Income-tax Act, 1922, evidence of the assessee's real income is admissible where it helps determine whether a penalty should be imposed and, if so, its amount. Such evidence does not alter the assessment for income-tax purposes, but it is relevant to the discretionary penalty inquiry, which must be conducted after hearing the assessee under section 28(3). The refusal to admit evidence of true income was therefore unjustified, and the referred question was answered in the negative in favour of the assessee.

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Issues: Whether, in proceedings for penalty under section 28 of the Income-tax Act, 1922, the assessee could adduce evidence of the real income for the purpose of showing that no penalty should be imposed or that the penalty should be reduced.

Analysis: Section 28 authorises a penalty where the assessee has concealed income or furnished inaccurate particulars, but the assessment of income for tax purposes is not altered by penalty proceedings. The maximum penalty is linked to the tax that would have been avoided, yet the question whether any penalty should be imposed and the amount of such penalty are matters within the Income-tax Officer's discretion, subject to the assessee being heard under section 28(3). Evidence tending to show the true income is therefore relevant and admissible in the penalty inquiry, not to vary the assessment, but to assist on the question of penalty and its quantum.

Conclusion: The refusal to admit such evidence was not justified, and the answer to the referred question was in the negative, in favour of the assessee.

Ratio Decidendi: In penalty proceedings under section 28 of the Income-tax Act, 1922, evidence of the assessee's real income is admissible for determining whether any penalty should be imposed and, if so, its amount, even though it cannot affect the assessment made for income-tax purposes.

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