Penalty ceiling under Income-tax law for registered firms was capped at 50% of assessed tax for pre-April 1976 defaults.

For penalty under section 271(1)(a) of the Income-tax Act, 1961, where the default was committed before 1 April 1976, the applicable statutory ceiling for a registered firm was 50% of the assessed tax. The liability to penalty arose when the default occurred, so the maximum penalty had to be determined by the limit in force on that date. The Tribunal was therefore correct in restricting the penalty to that cap in favour of the assessee.

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Issues: Whether, for penalty under section 271(1)(a) of the Income-tax Act, 1961, the maximum penalty in the case of a registered firm could exceed 50% of the assessed tax.

Analysis: The relevant assessment year was 1974-75, and the default occurred before 1 April 1976. For defaults committed during the relevant period, the statutory maximum penalty was calculated at 2% of the assessed tax for each month of default, but it was capped at 50% of the assessed tax. Since the liability for penalty arose when the default was committed, the prescribed upper limit applicable on that date controlled the quantum of penalty.

Conclusion: The maximum penalty could not exceed 50% of the assessed tax, and the Tribunal was right in restricting the penalty accordingly, in favour of the assessee.

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