Protective assessment cannot support concealment penalty absent substantive assessment in the assessee's hands.

Penalty for concealment under section 271(1)(c) cannot be initiated on the basis of a merely protective assessment, because concealment must first be established through a substantive assessment of concealed income in the assessee's hands. Where the Revenue has only made a protective addition and the income remains linked to another person for assessment purposes, no valid penalty can be fastened on the assessee. The cancellation of penalty was therefore upheld in favour of the assessee.

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Issues: Whether penalty proceedings under section 271(1)(c) of the Income-tax Act, 1961, could validly be initiated where the assessment was made protectively and the income was not assessed substantively in the assessee's hands.

Analysis: A protective assessment may be made where the Revenue is uncertain in whose hands income is assessable, but penalty for concealment can arise only after the income is assessed as concealed income in a substantive assessment against the person liable. Where the addition is made only on a protective basis and the real assessability of the income remains linked to another person, no charge of concealment can properly be fastened on the assessee for penalty purposes. Penalty proceedings therefore cannot rest on a merely protective assessment.

Conclusion: The penalty proceedings were not validly initiated and the cancellation of penalty was correct, in favour of the assessee.

Ratio Decidendi: Penalty for concealment cannot be imposed on the basis of a protective assessment alone; a substantive assessment of concealed income against the person sought to be penalised is a condition precedent to valid penalty proceedings under section 271(1)(c) of the Income-tax Act, 1961.

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