Validity of demand notices: cancellation negates default-based penalties, so penalty cannot be sustained after notice withdrawn.

A valid demand notice is a prerequisite for any penalty for default; the court analysed whether cancellation of a demand notice defeats the existence of a legally cognisable default and applied the statutory framework governing demand notices and provisional measures. The court concluded that where the demand notice is invalid or subsequently cancelled it cannot serve as the basis for imposing a penalty, and therefore the penalty imposed pursuant to the cancelled notice was quashed and the writ petition allowed.

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Issues: Whether an order imposing penalty for default in complying with a demand notice can be sustained where the demand notice itself has been subsequently cancelled.

Analysis: The Court examined whether a demand notice must be valid at the time alleged default is said to have occurred and considered the legal effect of the subsequent cancellation of that notice. The Court treated the issue under the statutory framework involving provisions authorising demand notices and provisional measures (including Section 46(5A) of the Income-tax Act and Section 73 of the Estate Duty Act, 1953) and evaluated whether a cancelled notice can give rise to a legally cognisable default. The Court found that a prerequisite for any penalty for default is the existence of a valid notice of demand; if the demand notice is invalid or is cancelled, there can be no legally sustainable default based on that notice.

Conclusion: The order imposing a penalty of Rs. 10,000 pursuant to the cancelled demand notice is quashed. The writ petition is allowed and the interim stay is discharged; parties to bear their own costs.

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