Penalty under Section 271(1)(c) fails when the underlying income addition is deleted and its legal foundation disappears.

Penalty under Section 271(1)(c) could not survive once the underlying addition was held not includible in the assessee's income, because the basis for the penalty ceased to exist. The Rajasthan HC noted that when the amount forming the foundation of penalty proceedings is deleted, the penalty loses its legal footing and cannot be sustained. As the foundation had disappeared, the referred question became unnecessary and the reference was disposed of without an answer.

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Issues: Whether the penalty under Section 271(1)(c) of the Income-tax Act, 1961 could survive after the amount on which it was founded was held not to be includible in the assessee's income.

Analysis: The amount of Rs. 1,00,000, which formed the basis of the penalty proceedings, had already been held not liable to be included in the assessee's income. Once that addition disappeared, the foundation for the penalty under Section 271(1)(c) ceased to exist. In that situation, the answer to the referred question became unnecessary.

Conclusion: The penalty could not be sustained, as its very basis had become non-existent, and the reference was disposed of without answering the question.

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