Penalty cannot survive after quantum additions are finally deleted, so no reference was warranted on the penalty issue.

Penalty under section 271(1)(c) could not survive once the quantum additions had already been finally deleted and the deletion had attained finality. The court noted that the penalty was ancillary to the tax liability, so when no surviving addition remained, there was no basis to sustain the penalty. On that reasoning, it held that this was not a fit case for directing a reference under section 256(2) on the penalty question, and the reference application was dismissed.

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Issues: Whether a reference under section 256(2) of the Income-tax Act, 1961 could be directed on the question whether penalty under section 271(1)(c) was rightly cancelled after the quantum additions had already been finally deleted.

Analysis: The additions made in the quantum proceedings had already been deleted and that order had attained finality. Once the tax additions no longer survived, the basis for sustaining penalty also disappeared. Penalty being ancillary to tax liability, no penalty could be levied when there was no surviving tax liability. In these circumstances, it was not a fit case for directing a reference on the penalty question.

Conclusion: The reference application failed and was dismissed.

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