Statutory fiction in penalty computation requires all incidental deductions to be carried through when fixing the tax base.

For penalty computation under section 271(1)(a), a registered firm deemed to be an unregistered firm under section 271(2) had to be assessed on the tax payable in that assumed character, and the statutory fiction carried all necessary incidents of that status. The Karnataka HC noted that the annuity deposit under Chapter 22A was allowable as a deduction in computing total income, and the law then in force did not require actual payment of the deposit as a condition for the deduction. The assessee was therefore entitled to that deduction when determining the tax base for penalty purposes, and the Commissioner's contrary view was erroneous.

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Issues: Whether, for computing penalty under section 271(1)(a), the assessee, a registered firm deemed to be an unregistered firm under section 271(2), was entitled to deduction of the annuity deposit required under Chapter 22A while determining the tax payable.

Analysis: Section 271(2) requires a registered firm to be treated as an unregistered firm for the purpose of penalty, and the amount of penalty is to be computed on the basis of the tax payable by it in that assumed character. Under section 280-O, the annuity deposit required to be made under Chapter 22A had to be allowed as a deduction in computing the total income, and the law then in force did not make actual payment of the deposit a condition precedent to the allowance of the deduction. Once the statutory fiction under section 271(2) is applied, its necessary incidents must also be given full effect for determining the tax base on which penalty is computed.

Conclusion: The assessee was entitled to deduction of the annuity deposit in computing the tax for penalty purposes, and the contrary view taken by the Commissioner was erroneous.

Ratio Decidendi: When a statute creates a deeming fiction for penalty computation, all necessary consequences of the assumed legal status must be carried through, including deductions otherwise available for computing the tax base.

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