Statutory fiction in penalty computation requires notional annuity deposit deduction when a registered firm is treated as unregistered.

Section 271(2) applies a statutory fiction that a registered firm is to be treated as an unregistered firm for penalty computation, and that fiction must be carried through to the normal tax consequences of that status. The tax base therefore includes the deduction that would have been available to an unregistered firm for annuity deposit under section 280-O, even if the registered firm did not actually make such a payment. The analysis treats the assumed status and its statutory incidents as inseparable for computing penalty, and supports deduction of the notional annuity deposit in the penalty base.

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Issues: Whether, in computing penalty on a registered firm under section 271(2) of the Income-tax Act, 1961, the tax base should be reduced by the annuity deposit which the firm would have been required to pay if it were an unregistered firm, even though no such deposit was actually paid.

Analysis: Section 271(2) creates a legal fiction that, for penalty purposes, a registered firm is to be treated as an unregistered firm. The computation of penalty therefore has to proceed on the basis of the tax that would have been payable in that character. Since an unregistered firm would have been liable to annuity deposit and section 280-O allowed deduction of the annuity deposit required to be made under the Chapter, the fiction cannot be restricted only to the status of the firm while denying the statutory consequences attached to that status. The deduction was held to extend to the annuity deposit that would have been payable had the assessee been an unregistered firm, notwithstanding that no actual payment was made by the registered firm. The reasoning was supported by prior High Court decisions adopting the same approach.

Conclusion: The deduction of the notional annuity deposit was permissible and the question was answered in the affirmative, in favour of the assessee.

Ratio Decidendi: Where a statutory fiction requires a registered firm to be treated as an unregistered firm for penalty computation, the fiction must be carried to its logical conclusion and the tax base must reflect deductions that would statutorily have been available in that assumed status.

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