Protective penalty under income-tax law is impermissible because penalty requires a conclusive finding of liability.

Penalty under the Income-tax Act is quasi-criminal in nature and depends on a conclusive finding of liability and the assessee's conduct. Because penalty is imposed only after assessment and is not automatic, the concept of protective assessment does not fit penalty proceedings. A protective penalty is therefore inconsistent with the statutory scheme and cannot be sustained in law under section 271(1)(c), with the issue answered in favour of the assessee.

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Issues: Whether penalty under section 271(1)(c) of the Income-tax Act, 1961 can be sustained on a protective basis.

Analysis: Penalty proceedings under the Income-tax Act are not mere civil sanctions and are treated as quasi-criminal in nature. The imposition of penalty depends on the nature of the breach and the conduct of the assessee, and is not automatic merely because it is lawful to levy it. The concept of protective assessment does not fit with penalty proceedings, since penalty is imposed after the assessment and rests on a definitive finding of liability. On that basis, the notion of a protective penalty is inconsistent with the statutory scheme.

Conclusion: Protective penalty under section 271(1)(c) cannot be imposed in law, and the question is answered in the negative, in favour of the assessee.

Ratio Decidendi: Penalty under the Income-tax Act cannot be levied on a protective basis because penalty is a quasi-criminal exaction requiring a conclusive determination of liability, not a provisional or contingent one.

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