Penalty computation for deemed unregistered firms includes annuity deposit deduction under the income-tax fiction.

Section 271(2) deems a registered firm to be an unregistered firm for penalty purposes, so the penalty base must be computed on the tax payable on that footing. Because an unregistered firm was liable to annuity deposit and section 280-O then allowed that deposit to be deducted in computing total income, the same deduction had to be reflected in determining the tax base for penalty under section 271(1)(c). The legal fiction was applied to its full consequence, and the deduction of annuity deposit was treated as necessary in computing the penalty.

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Issues: Whether, in computing penalty under section 271(1)(c) of the Income-tax Act, 1961, a registered firm deemed to be an unregistered firm under section 271(2) was entitled to deduct the annuity deposit payable under the Act while determining the amount of penalty.

Analysis: Section 271(2) creates a legal fiction that, for penalty purposes, a registered firm is to be treated as an unregistered firm. The Court applied that fiction to its logical consequence and held that the penalty has to be worked out on the basis of the tax that would be payable by such firm as if it were unregistered. Since an unregistered firm was liable to annuity deposit and section 280-O, as it then stood, permitted deduction of such deposit in computing total income, the same deduction had to be taken into account in determining the tax base for penalty. The reasoning was consistent with the view adopted by other High Courts.

Conclusion: The annuity deposit payable by the assessee-firm was required to be deducted while computing the penalty, and the question was answered in favour of the assessee and against the Revenue.

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