Penalty cannot survive on a new footing after appellate alteration of the assessment basis.

Penalty proceedings had to be sustained on the same factual and legal foundation on which they were initiated. Where the Income-tax Officer started penalty action on the footing that a sum represented income from other sources, but the appellate authority later held it to be business income and enhanced the assessment on a different basis, the original foundation for penalty disappeared. The initiating authority could not continue or levy penalty on the fundamentally different footing introduced by the appellate order. The answer was therefore in favour of the assessee, and penalty could not lawfully be imposed on the enhanced amount.

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Issues: Whether, after the appellate authority altered the basis of the addition and enhanced the assessment, the Income-tax Officer could continue and levy penalty on the basis originally recorded in the penalty notice.

Analysis: The penalty proceedings were initiated on the footing that a sum of Rs. 1,63,000 represented income from other sources. The appellate authority later held that the amount was not income from other sources but business income, and also enhanced the business income on a different footing. Penalty jurisdiction under the Act had to be exercised on the basis on which the proceedings were initiated, and the authority commencing the penalty could not proceed on a fundamentally different basis created by the appellate finding when the original foundation had disappeared.

Conclusion: The Income-tax Officer could not lawfully levy penalty in respect of the enhancement made by the appellate authority; the answer was in the affirmative and in favour of the assessee.

Ratio Decidendi: Where penalty proceedings are initiated on one basis and the appellate authority later alters that basis, the initiating authority cannot sustain penalty on the new footing introduced by the appellate order.

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