Carried-back deficiency under tax fiction controls penalty exposure where ultimate liability is nil.

For penalty under section 16 of the Excess Profits Tax Act, the relevant amount of tax payable or avoided had to be computed by reference to the assessee's ultimate liability after giving effect to section 7. The statutory fiction in section 7, which carried a later deficiency back to reduce the excess profits tax of earlier chargeable accounting periods, had to be applied fully in the penalty context as well. Because that carried-back deficiency extinguished the assessee's liability for the earlier periods, there was no excess profits tax that could be treated as avoided. On that basis, no penalty could be sustained.

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Issues: Whether, for the purpose of penalty under section 16 of the Excess Profits Tax Act, the amount of excess profits tax payable or avoided had to be computed only with reference to the assessment for the relevant chargeable accounting period, or with reference to the assessee's ultimate liability after giving effect to section 7 of the Act.

Analysis: Section 7 created a statutory fiction by which a later deficiency reduced the profits and the excess profits tax of earlier chargeable accounting periods, and that fiction had to be carried to its logical conclusion. Section 16 fixed the maximum penalty by reference to the amount of excess profits tax payable or the amount that would have been avoided if the return had been accepted as correct. The expressions in section 16 had to be read with section 7, because the legislative scheme showed that penalty was meant to depend on the ultimate tax liability, not merely on a transitory figure reached in the assessment for one period. Since the later assessment and carried-back deficiency eliminated the assessee's excess profits tax liability for the earlier periods, there was no amount of tax that could be treated as avoided for the purpose of section 16.

Conclusion: The amount relevant for penalty under section 16 had to be determined on the basis of the assessee's ultimate liability after giving effect to section 7, and on that basis no penalty could be sustained.

Ratio Decidendi: Where a taxing statute creates a fiction reducing earlier liability by reason of a later deficiency, the fiction must be fully applied while computing any penalty that is expressly capped by the tax payable or tax avoided.

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